Introduction

The draconian spread of COVID 19 around the world has plunged the human life into an unprecedented fear. The contagion outbreak has spread over 185 countries. WHO declared “COVID-19” a pandemic on March 11, 2020, thus hugely impacting people’s lives, families. Besides, serious implications for people’s health and life, COVID-19 has globally impaired businesses and economies across the world, due to the nation-wide lockdowns and social distancing imposed to contain the virus. The losses are immense and the world is still counting affected costs.

The lethal virus has disrupted people’s ability to fulfil their obligations under commercial contracts leading to incalculable damages. The United Nations has predicted that the global economy could shrink by upto 0.9 per cent in 2020, a huge setback qua the earlier forecast of 2.5% growth. The economies may contract even further if restrictions on the economic activity are further extended.

Before assessing the legal impact on contractual relations between the parties during the pandemic outreach, it is important to understand the basic concept of a ‘Contract’.

What constitutes a Contract

A ‘Contract’ is a legally binding agreement that governs the rights and obligations of the parties to the agreement. A contract is legally enforceable because it meets the requirements of law. An agreement typically involves the exchange of goods, services, money, or any other similar promise. In the event of breach of contract, the law awards the aggrieved party access to legal remedies such as damages and/or cancellation of the contract.

Each country has its own legal system governing contracts. Although the said systems of contract law might have similarities, they shall also contain significant differences. Accordingly, many contracts contain ‘choice of law’ clause and territorial jurisdiction clause for resolution of disputes. Failing any express agreement, the countries have their own rules to determine the substantive and jurisdictional law governing the contract.

Impact of COVID 19 on the Contractual Relations of the Parties

The outbreak of the pandemic has already impacted contracts across the world with still greater impact on industries including but not limiting to automobile, real estate, hospitality, aviation etc. Supply chains have been radically disrupted and the rights and obligations of parties under their respective contracts have become doubtful. It is likely that the parties to contracts seek to defer or avoid discharge of their contractual obligations, either legitimately or otherwise. The parties may also use Covid-19 for re-negotiation of contracts.

Commercial contracts often contain ‘Force Majeure’ or hardship clauses setting out hardship events preventing or impeding a party’s discharge of its contractual duties.

What is a ‘Force Majeure’ Clause

‘‘Force Majeure’’ is a French phrase/word, which means cas fortuity (French), casus fortuitous (Latin), vis major (Latin). Black's Law Dictionary, defines the word as "an event or effect that can be neither anticipated nor controlled."

There is no specific meaning expressly assigned to the term in legal parlance. Different interpretations of ’Force Majeure’ prevail across the global legal systems. It is common for contracts to include specified definitions of ‘Force Majeure’, particularly in cross border contracts. Some limit ‘Force Majeure’ to an Act of God (such as floods, earthquakes, hurricanes, etc.,) but exclude human or technical failures (such as acts of war, terrorist activities, labour disputes, or interruption or failure of electricity or communications systems), while others cast their net quite wide.

As per the principle of freedom of contract, ‘Force Majeure’ clause, generally finds place in a contract to relieve and/or protect parties from their contractual liabilities upon occurrence of an unanticipated event or prevalence of circumstance beyond the control of the affected party thereby rendering the performance of its contractual obligations impossible or impracticable resulting in suspension or even rescission of all or certain parts of the contract and the corresponding obligations of the affected party.

The international norm on the concept of ‘Force Majeure’, is usefully incorporated in the United Nation Convention on Contracts for International Sale of Goods (CISG), Article 79 viz; Impediment Excusing Party from Damages states the following:

“(1) A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.

(2) If the party's failure is due to the failure by a third person whom he has engaged to perform the whole or a part of the contract, that party is exempt from liability only if:
(a) he is exempt under the preceding paragraph; and
(b) the person whom he has so engaged would be so exempt if the provisions of that paragraph were applied to him.

(3) The exemption provided by this article has effect for the period during which the impediment exists.

(4) The party who fails to perform must give notice to the other party of the impediment and its effect on his ability to perform. If the notice is not received by the other party within a reasonable time after the party who fails to perform knew or
ought to have known of the impediment, he is liable for damages resulting from such non-receipt.

(5) Nothing in this article prevents either party from exercising any right other than to claim damages under this Convention.”

In English and Scots law, ‘Force Majeure’ is a creature of contract and not of the general common law. As interpreted by English courts, the phrase ‘Force Majeure’ has a more extensive meaning than "act of God” or vis major. The words 'Force Majeure' are not words which generally find place in an English contract. They are taken from the Code Napoleon. In the case of Hackney Borough Council v. Dore (1922) it was held that "the expression means some physical or material restraint and does not include a reasonable fear or apprehension of such a restraint".

Under the People’s Republic of China (PRC) Laws, both the General Rules of the Civil Law and the Contract Law defines ‘Force Majeure’ events’ as unforeseeable, unavoidable and unconquerable situations. China’s laws allow contracting parties to terminate a contract or excuse their performance of certain contractual obligations upon occurrence of a ‘Force Majeure’ event or a material adverse change event. Interested parties should first examine the relevant clauses in their PRC Law-governed contracts. In the absence of such clauses, the parties can consider seeking relief under China’s statutory provisions.

There is no specific definition of ‘Force Majeure’ under UAE Law. The UAE Civil Code (Federal Law No. 8 of 1985) however, includes several provisions addressing the concept of ‘Force Majeure’ and its consequences. The law also differentiates ‘Force Majeure’ from events which simply render the performance of the contract onerous.

In Indian laws, the meaning of ‘Force Majeure’ is embodied within the provisions of section 32 and 56 of the Indian Contract Act 1872. The jurisprudence on the principles of ‘Force Majeure’ suggests broad classification of cases in two categories. Firstly, where the compliance of law has been made impossible by an act of God and secondly, where the cause of impossibility is not an act of God but is a factor beyond the control of the affectedparty and without any fault of their own. There are certain pre-conditions for application of the doctrine, inter alia (i) the nature of the disability is respected by the law; and (ii) before pleading impossibility, every possible endeavour shall have been made to comply. There may be arrangements between parties without a formal written agreement with ‘Force Majeure’ clause. In such cases, parties unable to discharge their obligations under the contract may seek to renege under Section 56 of the Contract Act by invoking “Doctrine of Frustration” on account of impossibility of performance.

Thus, ‘Force Majeure’ clauses varies from contract to contract, and it is imperative to check the specifics of each contractual clause. In the absence of a ‘Force Majeure’ provision in a contract, the governing law applicable to the contract will be relevant and parties shall preferably seek legal assistance.

Whether COVID-19 is a ‘Force Majeure’

The World Health Organization (WHO) on 30 th January 2020 declared the outbreak of Novel Corona Virus as a ‘Public Health Emergency of International Concern’ and on March 11, 2020, officially declared COVID-19 a ‘Pandemic’, which is more severe than an epidemic, because of its geographical spread.

On 19 th February 2020, the Government of India through Ministry of Finance vide an Office Memorandum No. F. 18/4/2020-PPD notified that COVID-19 will be covered under the ‘Force Majeure’.

Similarly, the Singapore Government passed the COVID-19 (Temporary Measures) Act on 7 April 2020, which seeks to offer temporary relief to businesses and individuals who are likely to be hit by COVID-19, by alleviating the risks arising from inability to fulfil contractual obligations. On 14 March 2020 the Indonesian President Joko Widodo also declared COVID-19 a ‘National Non-Natural Disaster’.

The law of the contract often depends on the clause of the agreement, and if not, is decided by a statute or principles of general law applicable to contracts. Thus, COVID-19, to constitute a ‘Force Majeure’ event, will always depend on a specific assessment of the wording of the ‘Force Majeure’ clause in the contract. The exigencies captured (explicitly or impliedly) in the ‘Force Majeure’ clause shall determine whether the pandemic shall qualify as a ‘Force Majeure’ event.

If the circumstances such as health crises, epidemics or similar outbreaks, quarantines / isolations, national lock downs, social distancing imposed by public authorities, or etc are not included in the contract as a ‘Force Majeure’-situation, ‘Force Majeure’ cannot be claimed, and it will be for the courts to decide whether COVID-19 constitutes a ‘Force Majeure’ event, on a case to case basis.

Courts have generally construed “Force Majeure” clause(s) narrowly, while examining if the particular event clearly falls within the ambit of a “Force Majeure” clause.

Contract not having a ‘Force Majeure’ Clause

If the contract does not contain a ‘Force Majeure’ clause, it should be examined which country’s rules (law of choice) apply. In some countries there is a general principle of ‘Force Majeure’. For example, contracts subject to Danish law, ‘Force Majeure’ applies as a general legal principle. In Argentina, ‘Force Majeure’ (fuerza mayor and casofortuito) is defined by the Civil Code of Argentina in Article 512, and regulated in Article 513. In Indonesia the general scope of Force Majeure is provided by Articles 1244 and 1245 of the Civil Code, In Singapore, the Frustrated Contracts Act relieves parties from their duty to discharge their contractual obligations if it has become impossible to perform them.

The same may not be the case in other jurisdictions, which is why it is essential that the contract considers ‘Force Majeure’ as a ground for discharge. The choice of law can therefore play a decisive role in whether COVID-19 is a Force Majeure event.

In India, the situation may appear daunting, but the same has been well guarded by doctrine of frustration prescribed under Section 56 of the Indian Contract Act, 1872 ("Act") and views adopted by the Hon'ble Supreme Court of India since 1954. In a landmark judgement titled Energy Watchdog Vs. Central Electricity Regulatory Commission reported at 2017 (4) SCALE 580, the Supreme Court opined that an event leading to frustration which is relatable to an express or implied clause in a contract, is governed by Section 32 of the Act and if it occurs de hors the contract, it is dealt with by a rule of positive law under Section 56 of the Act. In another recent judgment of Bombay High Court passed on 08 th April 2020, in Standard Retail Pvt. Ltd. &Ors v/s G. S. Global Corp & Ors; 2020 (04) SML BOM 4, the Court held that the lockdown shall be for a limited period and the lockdown cannot come to the rescue of the Petitioners to resile from contractual obligations

The burden of proof of existence of ‘Force Majeure’ is on the party asserting its existence. The non-performance or termination of contracts by virtue of ‘Force Majeure’ does not inure automatically, and is somewhat predicated upon the drafting/existence of the relevant covenants. It will be subject to Judicial interpretation ‘Force Majeure’ as to how the contractual obligations of the parties will be adjudged in the absence of such a clause in the contract.

Notice of Contingency

Not all obligations are annulled if a contracting party wishes to claim force majeure. The party who fails to perform must give notice to the other party of the impediment and its effect on his ability to perform. If the notice is not received by the other party within a reasonable period of time after the party who fails to perform knew or ought to have known of the impediment, he is liable for damages resulting from such non-receipt. Similar provisions will generally apply in international contracts, as well.

The invocation of the clause wherever appropriate shall be subject to due procedure being followed. The clause does not ‘suo moto’ excuse a party’s non-performance entirely but only suspends it for the affected period of time; and in the course of such an extraordinary event, the entity must notify force majeure as soon as it occurs as the same cannot be claimed retrospectively.

Current Scenario

It could be impossible to as certain the quantum and extent of damage caused by the outbreak of COVID-19, it is necessary for any commercial organization to be adequately prepared to protect their business interest against potential disputes. Broadly, the following steps are expected of a cautious business house:

• Promptly notify the counterparty of the occurrence of a ‘Force Majeure’ event, in the manner provided under the contract.
• Collate all documents of the ‘Force Majeure’ event, as the same serves as a vital evidence for dispute resolution.
• Ensure a detailed evaluation of the contract and other related aspects by an expert.

While the mere existence of the virus may not constitute a force majeure event. The application of the principle underlying the maxim 'lex non cogit ad impossibilia', which means ‘law does not compel a man to do that which cannot possibly be performed’ shall aid them to avoid needless litigation despite non-performance of their obligations under the prevailing circumstances. Nevertheless, each case shall be decided by the respective judicial authorities on its own merits and factual matrix.

Similarly, for any contract concluded after the emerge of COVID-19 at the inception of 2020, following the restrictive measures imposed by various States to combat the outspread of the pandemic, presumably being assessed on the day the contract was concluded, most probably, may not be legally qualified to invoke unanticipated/unforeseen/unpredicted circumstances as the benchmark of ‘Force Majeure’ for non-performance of the obligations during the pendency of COVID 19.