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June 06, 2020

Does The Coronavirus Pandemic Count As An Act Of God Or As Force Majeure?


Akullraj-Leekha

The term Act of God can be described as an event which is not reasonably foreseeable or controllable and arises from natural causes that could not have been prevented by immediate actions or caution...

The global outbreak of COVID-19 has forced the mightiest of countries to surrender before the deadly virus and put majority of the population under lockdown provisions. In such extreme circumstances, the Government of India has invoked its power under the Epidemic Diseases Act, 1987 to enhance preparedness and containment of the COVID-19 and declared it as a ‘Notified Disaster’ under the Disaster Management Act, 2005 which has consequently led to a national lockdown impacting and prohibiting the operations of all Commercial/Private/Public establishments with certain exceptions such as Hospitals, Banks etc.

The terms “Act of God” and “Force Majeure” have exhibited purpose and applicability in contractual context today, thus making it important to determine the definition and interpretation of Act of God and Force Majeure, their differences and whether COVID-19 will be considered a part of such exemption under these terms in the contracts.

The essence of a contract arises from a conventional maxim i.e. “PACTA SUNT SERVANDA” which implies that the “Agreement must be kept”. However, the above-mentioned maxim is not an absolute and stringent rule as in certain situations it becomes impossible for the Parties to perform their obligations because of some external forces which are neither controllable nor predictable. Such external forces can be termed as “ACT OF GOD” (Vis Major/Superior Force).

The term Act of God can be described as an event which is not reasonably foreseeable or controllable and arises from natural causes that could not have been prevented by immediate actions or caution. Some Act of God events recognized by the Courts and frequently used in the contracts are tornadoes, earthquakes, death, extraordinarily high tides, violent winds, and floods.

Generally, the provision of Act of God is compulsorily mentioned in the contracts as a part of the Force Majeure clause to avoid, eliminate or limit any liability for injuries or other losses resulting from such inevitable natural events. Further, it may be identified as a defence against the non-performance of the contract by any Party arising due to such uncertain and erratic events. In India, Act of God or Force Majeure is not part of any legislation, however, this aspect of law is covered under the provisions of the Indian Contract Act, 1872 (Act) vis-à-vis Section 32 and Section 56 of the Act which states that when an obligation arising out of a contract is impossible to perform, then the contract becomes void, which is also referred to as frustration of contract.

In the Law of Torts, there is a landmark judgment namely “Ryland V. Fletcher” where the House of Lords held that any event which could have been a result of some natural cause without any human intervention, any event which could have been unforeseeable and the damage caused by such event would have been the direct result of the unforeseeable event could be defined as an event under Act of God.

Whereas the expression Force Majeure is a French translation of a Latin term “vis major” which means “superior force”. It is an event that a person cannot oversee or supervise, which comprises of acts of nature or Act of God and act of people such as riots, strikes, wars etc. It is a term of broad implication which was referred by the three-bench judge of Supreme Court of India in Dhanrajamal Gobindram Vs Shamjikalidas and Co. Force Majeure is a broader concept where the accident is not necessarily to be connected with nature and can be attributable to human agency such as change in government policies, strikes, machinery breakdown etc.

Considering the current scenario, the interruption in the supply chains due to national lockdown, will have a considerable impact on many contracts pointing to delay, interruption or cancellation of the contracts. Due to these grave circumstances, businesses have been majorly affected and consequently, the parties to various contracts are already determining its impact and are exploring different routes to delay/avoid performance of their obligations or cancel their contracts due to delay and non-performance emerging out of an unexpected event.

The Parties are articulating that the delay or non-performance of the contract is completely unintended and involuntary, making them eligible to avoid immediate performance or any other liability arising from the contractual obligations. Further, the Parties may also use COVID-19 as an opportunity to renegotiate the commercials or other key contractual components or may cancel their agreement being “non-performable” by stating COVID-19 as an Act of God and invoking the Force Majeure clause in their contracts.

For a pandemic to be included under the clause of Act of God, it has to be proved that it was originated from nature and without any human intervention. Secondly, another important characteristic for a pandemic to be included in Act of God is its un-foreseeability. In this instant case of COVID-19, a few doctors in China had speculated about COVID-19 as a deadly virus before it was declared as a Pandemic by the World Health Organisation. In the case of Chidambarakrishna Iyer Nataraja Iyer v. South India Rly. Co., it was upheld by the Court that not every inevitable accident is considered an Act of God. It was further held that in order to constitute an event as an Act of God it has to be traced back to natural causes.

The concept of Force Majeure is a broader concept and is an extension of the principle of “Act of God”. It also takes into consideration various situations/events/circumstances that emerge due to the intervention of human agency. The Force Majeure clauses need to be abundantly clarified and clearly defined under various contracts. Hence, whether COVID-19 falls under the ambit of Force Majeure has to be analysed on a case to case basis. 

The affected Party shall necessarily have to prove that the event was irresistible, unforeseeable, external and unanticipated by both the Parties and further made the performance of the contractual obligations impossible to execute or accomplish and not merely difficult or impracticable.

The affected Party specifically needs to exhibit the fundamental change in the executed contract due to an unforeseen supervening event, not within the control of the Parties making it preposterous and impassable for the affected Party to execute and discharge its contractual obligations. Hence, it is very difficult to show that a contract has been frustrated due to high threshold limits as per existing judicial precedents. Also, it has been clearly cited by various courts in different situations over the period of time that a Force Majeure clause cannot be invoked in case of mere commercial impossibility or temporary incapacity to perform or carry out the assigned obligations in a contract.

Case Studies:

Lord Russell in the case of Cricklewood Property case in the England and Wales court stated and explained that duration of the frustrating event plays a very important role in invocation of the Force Majeure clause. It was also established in this judgement that there are no reported cases under the English Law where a Lease Agreement has been held frustrated due to invocation of Force Majeure clause even when the world has gone through two world wars.

In another important judgement of Alopi Parshad & Sons Ltd. vs Union of India, 1960, the Supreme Court held: “A contract is not frustrated merely because the circumstances in which it was made are altered.”

The Supreme Court in another landmark judgment Satyabrata Ghose vs Mugneeram Bangur and Co., 1953 held that the requisition order was passed for a temporary period and could not be considered merely as a reason for the frustration of the contract. Moreover, it was elaborated that temporary aberration and temporary suspension in the circumstances could not have said to make the performance of the contract impossible, leading to frustration of the contract.

Further, in the case of Tsakiroglou & Co. Ltd. v. Noblee Thorl GmbH, 1962, the House of Lords specified that the closure of the Suez Canal (the customary route for shipping the goods from Africa) leads to a longer and more expensive route but great difficulty in carrying out the obligations of the contract cannot lead to frustration or impossibility of the contract. In this case, the contract was fundamentally modified making it strenuous to perform but as such was not frustrated. Therefore, it was held by the House of Lords that hardships cannot be considered as Force Majeure and in the existence of an alternative, the Force Majeure clause cannot be invoked, and the contract cannot be held impossible to perform.

In a recent judgement pronounced by the Supreme Court in the case of Energy Watchdogs vs CERC in 2017, the Court held that if a contract has an express or implied Force Majeure clause, it will apply over the principles determined under Section 56 of the Indian Contract Act, 1872. Further, the Force Majeure clause will not be applicable in case distinctive modes of performance.

The situation of Covid - 19 revitalizes the memories of outbreak and eruption of the SARS epidemic in Hong Kong in the year 2003. The District Court of Hong Kong in the case of Li Ching Wing vs Xuan Yi Xiong, 2004 dealt with an important question whether the epidemic could have the effect of frustrating a tenancy agreement as a result of an isolation order imposed on the residents of a Building. The Court held that the tenancy agreement was valid for a period of 2 years whereas the isolation was imposed only for 10 days, which did not adequately transform the nature or obligation of the contract and hence did not qualify the criteria for frustration of a contract.

COVID 2020 - Banks, Government of India and the Indian judiciary

Several steps have been taken during this period of crisis to support businesses and individuals which include moratorium/deferment on term loans and working capital loans, holding of Annual General Meetings through video conferencing issued by MCA, extension of completion of real estate projects by 3 months as per Maha RERA, periods of limitation prescribed under Section 29A of the Arbitration and Conciliation Act, 1996 and under Section 138 of the Negotiable Instruments Act, 1881 have been extended by the Supreme Court with effect from March 15, 2020 till further orders, to remove the difficulties faced by the litigants in approaching the courts amidst the pandemic. Several departments of the government have invoked Force Majeure provisions and have included Covid-19 incident as part of Force Majeure extending time for the performance of the contract. The commercial world is struggling as many performance guarantees and Letters of Credit related disputes will arise due to non-production / non supply and non-delivery of goods. Parties who are impacted must negotiate bilaterally before rushing to the Court and try to find a practical solution.

Recently, Hon’ble Supreme Court in the matter ofNational Agricultural Cooperative Marketing Federation vs. Alimenta SA (SC Judgment dated April 22, 2020) has observed that Section 32 of the Indian Contract Act, 1872 applies in place of Section 56 of the Indian Contract Act, 1872 when parties agree in advance on contingency which makes performance impossible. In this case principles of Force Majeure have been upheld.

Further, the Delhi High Court in the matter of Ramanand & Ors. vs. Dr. Girish Soni & Anr. (Judgement dated May 21, 2020) has stated that Section 108(B)(e) of the Transfer Property Act, 1882 shall only be applicable in the absence of a Force Majeure clause in a contract. It was concluded that principles of Section 108(B)(e) of Transfer Property Act, 1882 would not be applicable to temporary non-use of the premises due to lockdown and hence the request for waiver, suspension or exemption of rent due to lockdown was rejected.

Conclusion:

  1. To invoke Force Majeure, it is important to read the contract carefully and to analyse whether this right is available or not and if yes, to what extent and in what circumstances.
  2. In the absence of the Force Majeure clause, the aggrieved person is to see whether a case of frustration of contract is made out or not while keeping in mind the provisions of Section 32 and 56 of the Indian Contact Act.
  3. As per the existing standards set out by the English Courts, the Courts in India and Hong Kong Courts, the threshold to make out a case of frustration of contract / Force Majeure are very high and the relief is not easily available.
  4. Parties who are impacted must negotiate bilaterally before rushing to the Court and try to find a practical solution.

Covid 2020 is unprecedented and a pandemic of this scale has not been witnessed by the World ever before; so Courts may come forward to redefine this doctrine to rescue millions of people who are subjected to the lock down and not in a position to perform the contract.



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