COVID-19 in India (Part 2): Invoking a force majeure clause in contracts

The World Health Organisation (WHO) has declared the outbreak of Covid-19 to be a pandemic, leading the (world) economy to come to a standstill. Further to this, the complete lockdown in India, imposed from 24th of March till the 15th of April 2020, will most likely prevent many companies and individuals from fulfilling their contractual obligations.

Force majeure

In most contracts, parties include clauses that relieve parties from performing their contractual obligations because of certain circumstances beyond their control, making performance imprudent, commercially unworkable, illegal, or impossible. This is done under a force majeure (‘unforeseeable circumstances that prevent someone from fulfilling a contract’) clause. It is important to note that a force majeure clause cannot be implied under Indian law, it has to be explicitly mentioned. For an event to qualify as force majeure, it must be unforeseeable or not reasonably foreseeable. 

Even when parties have not incorporated a force majeure clause into the contract concerned, Indian law does not allow courts to revise such contracts on behalf of the parties when neither party has defaulted (as is the case during a pandemic, an unexpected occurrence). However, a contract can be seen as ‘frustrated’ and declared as void. This would mean that it is impossible for parties to perform their obligations under the contract and the affected party can claim relief under the ‘doctrine of frustration’. 

Challenges

Now that we know that parties can invoke the force majeure clause or ask the court to declare the contract as void, let’s look at the challenges that parties may face in doing so. 

The biggest challenge for the claimants will be to prove that there were no alternatives to prevent the non-performance of obligations and that performance was outside of their control. For instance, when the Covid-19 outbreak started, the parties could not have foreseen the impact of the outbreak in India. 

However, now that the outbreak has become quite apparent, considering the increasing number of cases in India and the government having imposed a complete lockdown (starting with a partial lockdown), one could have predicted the disruption in contractual performance. Now, the claimant invoking force majeure will have the burden of proof to prove why they could not have taken pre-emptive measures to make sure the contractual obligations were duly performed. Could the claimant have avoided or mitigated the event and its effects? 

Having said that, whether a party can be excused from a contract on the basis of a pandemic, will also depend on the nature of the obligations breached and terms agreed upon in the contract. 

Remedies 

Remedies will depend on the wording of the force majeure clause. It could already have led to the termination of some contracts. Other contracts may provide that the contract will be put on hold until the force majeure event is concluded. Some contracts could also have provided for a fixed period after which either party may terminate the contract i.e. if parties cannot perform because the event has gotten prolonged or become permanent. 

In more optimistic cases, parties may have agreed that the contract will remain effective until the force majeure event is resolved. Other contracts may only have allowed for certain obligations to be suspended. 

The information above is meant to be a general guide, for specific guidance, please contact Miss Legal India.

 

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