Edited by: Vaani Garg
Covid-19 is a virus which has affected not only one nation or state, but the entire world. It is considered as one of the most contagious diseases to exist. It is natural that the world is going to face a great recession. The U.S admits that it will be the biggest recession since the recession of 1930s and will affect many countries. Even the countries with no positive Covid cases will have to face problem due to the entire business becoming dull with no assistance of imports and exports.
The first step for any commerce or business is to develop contracts between the parties. The law of contracts sets down the parties’ mutual obligations. Under section 37 of the Indian Contract Act, 1872, the parties to a contract must either fulfill their respective obligations, or agree to fulfill them, unless such performance is dispensed with or excused under the provisions of this Act or any other statute. Because of this pandemic, situations are occuring in a catena of commercial contracts in which parties are unable to fulfill their part of the contract, without any fault on their own part.
“Force majeure” is very relevant during this health crisis. Force majeure is a French phrase which means a “superior force”. In India, the law relating to “force majeure” or “act of god” is embodied under section 32 and 56 of Indian Contract Act, 1872. Force majeure events are inclusive of natural disasters, war, strike, epidemic etc. Also most of the legal contracts such contracts of supply, distribution agreements, manufacturing agreements, agreement between real estate developers and home buyers contain a force majeure clause as it can save the parties from consequences of something beyond their control.When a contract does not have a force majeure clause, the parties will have to decide in terms of considerations such as the complexity of the contract, the complexity of the case and so on, whether Section 56 of the Contract Act (which deals with negotiations between the parties for an unreasonable act) and which has been addressed briefly below can be extended to the contract in order to discharge the part.
The following things will be addressed when drafting a force majeure provision:
(A) The list of events that would constitute a force majeure event, depending on a contractual agreement between the parties and the terms of the contract, may be exhaustive or non-exhaustive;
(B) Acts taken by the parties to invoke force majeure protections by providing for the issuance of a notice to the other side to inform them of force majeure.
(C) The consequence of force majeure events, including those requiring parties to the extent possible, to mitigate the consequences of force majeure events, to excuse the party concerned from performing the contract in whole or in part or to excuse a party from delay in performance or to entitle them to suspend or claim an extension of time for performance; or to give that party the right to terminate the contract in part.
Among the above, the legal teams will also have a conversation with the contracting parties to consider the field they are involved in and particular incidents if they need to be treated as part of force majeure law.
There are some cases where the definition of force majeure can not be enforceable on a given issue. This is because force majeure is not intended to excuse a party’s negligence or other malfeasance, except in situations where non-performance is induced by the ordinary and normal effects of external powers, or where special consideration is given to the intervening circumstances. It should noted that force majeure cannot be exercised simply because the contract has become more difficult to enforce financially or commercially. Force majeure is not intended to excuse negligence or other wrongdoing on the part of a party, except in cases where non-performance is caused by the usual and natural impact of external forces, or where special consideration is given to the circumstances in question.
The present situation due to corona virus outbreak, subsequent lock-downs, movement restriction as announced by the government, and a halt to economic activity, is something no fair and average contracting party could have foreseen. Based on the current jurisprudence as it stands, the aforesaid extraordinary circumstances can only result in a catena of commercial contracts being litigated. It is then a matter of court interpretation whether a contract involving force majeure provision will include these movement and lock-down restrictions imposed by the Governmet. The Hon’ble High Court of Delhi’s recent interim order in M / s Halliburton Offshore Services Inc. v. Vedanta Limited (supra) is certainly a step in evolving jurisprudence in that direction. The need of the hour, however, is that instead of getting piece meal notices, we need a codified law which exempts an affected party from fulfilling its contractual obligations during the time of such lock-downs and such lock-downs must be considered force majeure. The time has come for us to have force majeure rule, rather than simply drawing light from Section 32 of the Indian Contract Act or the contractual provisions.