Contracts and force majeure during a pandemic: An India law perspective

By Chandrasekhar Tampi, Senior Partner & Ankur Khandelwal, Partner, Kochhar & Co.

As the spread of the COVID-19 pandemic casts a large shadow over commerce and industry, contracts have become difficult or even impossible to perform. Contracts have to be reconsidered, contractual rights and obligations must be reassessed and the way in which performance can be completed has to be examined.

It is in this context that we have, hereinbelow, attempted to address questions that have been frequently raised with respect to force majeure.

What is force majeure? Is it provided for in the law of contract in India?

Force majeure is an occurrence or an event that cannot be foreseen by the parties to a contract. Such an occurrence prevents a party from completing something that they had undertaken to do under the contract. A force majeure event may be an act of nature, such as floods or hurricanes or an act of man such as riots, strikes, or wars.

When a party is prevented from carrying out its obligation under a contract on the occurrence of a force majeure event, the force majeure clause in the contract acts to relieve such party of its obligations.

Although force majeure is not statutorily defined under the Indian Contract Act, 1872 (“Act”), the law accepts that a force majeure clause is binding if agreed to between the parties to a contract. In this regard, Section 32 of the Act, which provides for contingent contracts, may be considered a statutory starting point.

Do COVID-19 and its consequences constitute a force majeure event?

 Covid-19 may be considered a force majeure event if:

• the clause defines epidemics or pandemics as such;
• the clause is merely indicative and does not provide an exhaustive list of events; or
• when the clause uses generic words or phrases such as government decision, national interest, travel restrictions, or natural calamity.

The government issued office memoranda dated 19 February and 20 March 2020 treating the spread of COVID-19 as a force majeure event applicable to contracts to which it is a party. The memoranda do not bind parties to private commercial contracts but may be of persuasive value.

Furthermore, where a pandemic is not a force majeure event provided for in the force majeure clause of a contract, parties have also relied upon ‘government action’ as an event of force majeure citing the order of the Government of India dated March 24, 2020, prescribing lockdown for containment of Covid-19 in the country.

What are the consequences of invoking a force majeure clause?

A force majeure clause, when successfully invoked, relieves the defaulting party of its obligations under the contract when a force majeure event prevents the performance of the contract.

The consequences of invoking a force majeure clause are typically set out in the clause itself and may include the suspension of contractual obligations during the currency of the force majeure event, the termination of the contract, and the suspension of contractual obligations with termination in case the force majeure event continues beyond an agreed period.

What recourse does a party have in the events as follows?

• COVID-19 is not covered under the force majeure clause of a contract; or
• Does the contract contain no force majeure clause,?

Where a contract does not include a force majeure clause or where it cannot be construed to cover COVID-19, a party unable to perform its obligations may have recourse to Section 56 of the Act, which codifies the common law doctrine of frustration. Where a contract is held to be frustrated, it shall be considered void and therefore unenforceable.

The doctrine of frustration may be invoked provided that three conditions exist:

• there is a valid and subsisting contract between the parties;
• there is some part of the contract yet to be performed, and
• impossibility of performance after it is entered into for reasons beyond the party’s control.

Accordingly, it may be contended that contracts, even those not containing a force majeure clause are considered frustrated by virtue of s 56 of the Act, due to the spread of COVID-19.

What should a party keep in mind while invoking the force majeure clause?

Whether a contracting party may invoke a force majeure or the doctrine of frustration, will depend entirely on the facts of each case and the terms of the contract. That being said, whilst invoking force majeure the party should:

• consider the consequences of invocation of the force majeure
• consider adopting mitigation measures that best serve their commercial interests.
• consider whether there are any preconditions that have to be fulfilled before invoking the force majeure clause or the doctrine of frustration.
• issue notices in the manner and by the mode prescribed in the contract. Usually, contracts contain a clause setting out the way in which the defaulting party must give notice of claiming force majeure or frustration, including the mode of service, such as email, courier or in person, and an address for service.
• consider that the burden of proof of establishing the force majeure or frustrating event is on the defaulting party.
• consider whether provisions such as price adjustment, material adverse change, etc. are incorporated in the contract and available, in addition, to force majeure.
• ensure that all communication with the other party is recorded and reduced into writing, as far as possible.