India, and the world as a whole today is at a standstill. In light of the global pandemic, the legal industry must reach into its bag of tricks to deal with such an unforeseen and unprecedented event.
Many businesses are in the pursuit of fact-checking their contracts with their clients and hoping that there is a clause that foresees such an event and prescribes a method for it.
The clause that is so eagerly sought is the force majeure clause, which creates a line of defense for both parties, wherein an occurrence of an event makes performance of the contract impossible. Based on that impossibility, the contract isn’t performed, and therefore, no party is liable to the other for such non-performance.
Considering the vast majority of circulars and notifications issued by the government with respect to the lockdown and curfews, there can be no problem in ascertaining that COVID-19 is a force majuere event.
This article shall creates levels of defense against this argument.
The first line of defense is that application of a force majeure event becomes problematic for an essential service. Recently in a commercial arbitration conducted between petitioner companies - Standard Retail Pvt Ltd, Integral Industries Pvt Ltd, Vinayaga Marine Petro Ltd and Haryana International Pvt Ltd with Hyundai Corp and GS Global, the petitioner companies sought a direction in restraining the respondent bank Wells Fargo from encashing letters of credit.
The petitioners contended frustration under Section 56 of the Indian Contract Act, and the same argument was disallowed as distribution of steel came under the purview of essential services.
So, that is the first line of defense parties have when force majeure is invoked against them. That, whether the service itself qualifies as an essential service or not, and whether there are an embargos put by the government in pursuance of the essential service.
However, if it is not an essential service, COVID-19 shall definitely qualify as a force majeure event and that line of argumentation will not work.
Therefore, the second line of defense is in proving the causal link between performance of contract and the force majeure event. This onus shall be on the party trying to enforce a force majeure clause. They have the onus to prove that force majeure has occurred, the same has made performance of contract impossible, and if not for it, then there would be no breach. The second step in this is definitive.
It is pertinent to note that in Energy Watchdog v. CERC, it was held that
“...where performance is otherwise possible, it is clear that a mere rise in freight price would not allow one of the parties to say that the contract was discharged by impossibility of performance. Alternative modes of performance were available, albeit at a higher price. This does not lead to the contract, as a whole, being frustrated.”
Therefore, there exists an argument that say for example, work for home services being provided was the alternative method of performance, though costly, it was an alternative. The question is whether reasonable steps were taken for the same or not?
The same concept was reinforced in M/s Alopi Parshad & Sons Ltd. v. Union of India, wherein it was held that,
“The courts have no general power to absolve a party from the performance of his part of the contract merely because its performance has become onerous on account of an unforeseen turn of events.”
And the flipside was discussed in Satyabrata Ghosh v. Mugneeram Bangure, wherein it was held that
“...if the untoward event totally upsets the very foundation upon which the parties entered their agreement, the contract can be held to be frustrated.”
So, the lines of argumentation and defense in summary would be:
1. Whether the service qualifies as an essential service and whether the government has put any embargos on it?
2. Whether causality between breach and force majeure event can be proven or not.
3. Whether reasonable steps for the alternative method of performance were taken or not?
The Author is an Advocate practising at the Punjab & Haryana High Court.