The Coronavirus disease, more popularly known as Covid-19, that surfaced first in China around December 2019, was declared as a pandemic by the World Health Organization on 11 March, 2020.

Just two months after its outbreak, it has already started impacting economies across the world particularly to maintain operations and fulfill existing contractual obligations in all sectors such as automobile, real estate, hospitality, aviation etc.

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Supply chains have been radically disrupted and the rights and obligations of parties under their respective contracts are surrounded by doubt.

Thus, it is likely that performances under many contracts will be deferred, suspended or even terminated. The parties to such contracts may seek to defer or avoid performance of their contractual obligations, in order to delay the performance thereof or to terminate the unfavorable contracts altogether, either legitimately or as an arm-twisting tactic.

The parties may also refer to Covid-19 as a reason for re-negotiation of price or other key contractual arrangements. In such a situation, a question may arise whether a Force Majeure clause in a particular contract excuses parties from performing their obligations.

The answer would depend on the circumstances and the drafting of the relevant contractual provisions i.e. the Force Majeure clause and the interpretation thereof. ‘Force Majeure’ is derived from the French language and literally translated means ‘a superior force’.

As per Black’s Law Dictionary, ‘force-majeure’ can be defined as “an event or an act that can be neither anticipated nor controlled; esp., an unexpected event that prevents someone from doing or completing something that he or she had agreed or officially planned to do.

The term includes both acts of nature (e.g., floods and hurricanes) and acts of people (e.g., riots, strikes and wars).”

In other words, events outside the control of the parties and which prevent one or both of the parties from performing their contractual obligations can be termed as force majeure. However, the concept of ‘forcemajeure’ may be considered differently under civil law and common law as in most of the common law countries, like India, the concept of ‘force-majeure’ is not codified and is introduced by way of contract, i.e., provided for in the agreement between parties.

It is therefore important to first identify which law is applicable to a commercial understanding between the parties. The purpose behind inserting such a clause in a contract is to save the performing party from the consequences of anything over which such party has no control.

Such a clause generally identifies the events which may lead to situations outside the control of parties, which, if found to prevent or delay the performance of obligations by any or all parties, may be excused.

Further, a continuing ‘force majeure’ event impacting performance of the contract may also lead to termination of the contract. Additionally, such a clause generally also provides the actions to be taken by an affected party in the event a ‘force majeure’ clause is triggered. In the Indian context, the Ministry of Finance, Government of India, by virtue of its Office Memorandum dated 19 February 2020, has declared that the spread of Covid-19 falls within the definition of ‘Act of God’ as a ‘natural calamity’.

The Government has clarified that for the purposes of considering disruption of the supply chains due to spread of Covid-19, in China and other countries, it should be considered as ‘natural calamity’ and force majeure clauses may accordingly be invoked.

Similarly, other ministries have issued respective notifications with respect to the invocation of the force majeure clause. However, such Office Memorandums/ notifications are applicable to Government contracts only and not to private commercial arrangements. In addition thereto, the Government of India has already invoked the provisions of the Epidemic Diseases Act, 1897 in order to effectively deal with the spread of the pandemic and has accordingly, declared Covid-19 a ‘notified disaster’ under the provisions of the disaster Management Act, 2005.

Furthermore, the Reserve Bank of India on 27 March 2020 announced that in respect of all term loans, all commercial banks, co-operative banks, all-India Financial Institutions, and NBFCs have been permitted to grant a moratorium of three months on payment of all installments falling due between 1 March and 31 May 2020.

Additionally, in respect of working capital facilities sanctioned in the form of cash credit/overdraft, lending institutions have been permitted to defer the recovery of interest applied in respect of all such facilities during the same period.

All entities, corporations, commercial and private establishments including malls, retailers etc. have been directed to cease operations until further notice.

This Lockdown Order includes all entities and businesses that are not engaged in supply of essential products/ services. Thus, all contracts, agreements including those of lease, rent, license etc., whether commercial or otherwise, are being substantially affected since the Lockdown Order issued by the Government, prima facie, appears to be a Force Majeure event.

However, in order to determine whether Covid-19 can be termed as Force Majeure event, the primary law must be examined.

Force Majeure, in India, is governed by the Indian Contract Act, 1872, more particularly, Chapter III thereof, which deals with contingent contracts. Section 32 of the Act provides for “Enforcement of Contracts contingent on an event happening”.

The event or events of that can be covered under the force majeure clause must be expressly provided for under the contract, and the non-performance of the obligations under such contract will depend on the language of such clause or the definition of the event provided under the contract. It is noteworthy to mention here that in the event where a dispute arises with respect to the scope of such clause or event, the Courts are likely to apply the common principles of interpretation to such contracts.

Accordingly, unless an event clearly falls within the ambit and scope of a ‘force majeure’ clause, the Courts may not accept such event so as to trigger the consequences of the ‘force majeure’ clause.

The primary focus, while interpreting such clauses, ought to be on whether the clause encompasses the type of event a contractual party claims is causing its non-performance.

In view of the above, there are two possible instances, which may suggest that a force majeure clause covers a pandemic:

(i) If the definition of a force majeure event in the contract expressly includes a ‘pandemic’. In such an instance, the inclusion of ‘pandemic’ to the list of events of a ‘force majeure’ clause in the contract would make it clear that the outbreak of Covid-19 would trigger a force majeure clause; or

(ii) If the given force majeure clause encompasses the extraordinary events or circumstances beyond the reasonable control of the parties. In such an instance, such ‘force majeure’ clause may be invoked if it is determined that the factual circumstances caused by the pandemic i.e. Covid-19 are beyond reasonable control of the affected party.

Thus, whether a party can be released from its obligations under the contract on account of Covid-19 being declared a pandemic can be determined on the basis of the specific facts and circumstances i.e. depending upon the nature of the obligations of the said party and the specific terms and conditions of the contract. In case the force majeure event alters the very basis of the agreement, then the parties are under no obligation to perform the same.

For instance, if the agreement or performance thereof becomes unlawful by virtue of any government notification or a change in law, which arises after the execution of the agreement, then such agreements do not have to be performed. In such cases, if the agreement contains a force majeure or similar clause, Section 32 of the Indian Contract Act will be applicable.

However, there may also arise a situation where a contract does not provide for a force majeure clause at all. In the event where the contract does not include a force majeure clause, the affected party may claim relief under the doctrine of frustration under Section 56 of the Indian Contract Act, 1872. Section 56 of the Act provides for ‘frustration of contracts’.

The Hon’ble Supreme Court in Satyabrata Ghose v. Mugneeram Bangur & Co., reported as 1954 AIR SC 44, categorically laid down the scope and meaning of the doctrine of frustration with respect to Section 56 of the Act.

More recently, the Apex Court considered Section 56 of the Act in the context of long-term contracts in its judgment titled as Energy Watchdog v. Central Electricity Regulatory Commission & Ors., reported as (2017) 14 SCC 80.

The Supreme Court observed that the word “impossible” appearing in Section 56, has not been used in the sense of physical or literal impossibility.

The performance of an act may not literally be impossible, but it may be impracticable and useless from the point of view of the object and purpose of the parties. If an untoward event or change of circumstance totally upsets the very foundation upon which the parties entered their agreement, it can be said that the promisor finds it impossible to do the act which he had promised to do.

It was further held that where the Court finds that the contract itself either impliedly or expressly contains a term according to which performance would stand discharged under certain circumstances, the dissolution of the contract would take place under the terms of the contract itself and such cases would be dealt with under Section 32 of the Act. If, however, frustration is to take place de hors the contract, it will be governed by Section 56.

A Division Bench of the Delhi High Court recently in TGV Projects and Investments Pvt. Ltd. vs. National Highways Authority of India reported as 2019 (173) DRJ 717, while following the dicta laid down by the Supreme Court as discussed above, observed that if unforeseen events occur during the performance of the contract, thereby making it impossible of performance, uprooting the fundamental basis of the contract, then such contract need not be performed since insisting upon the performance thereof in such circumstances would be unjust.

Therefore, in situations where a contract does not provide for a force majeure clause or where an event does not fall within the force majeure clause, a party may consider invoking the provisions of Section 56 of the Indian Contract Act, 1872.

However, in such a case, the party claiming relief would have to show that the event, i.e., Covid-19 in the present scenario, has changed the circumstances so drastically as to defeat the very foundation of the contract, rendering the obligations impossible to perform.

In general, the courts have no power to absolve a party from the performance of its part of the contract merely because its performance has become onerous on account of an unforeseen turn of events and therefore, mere economic difficulty or financial loss may not be sufficient for a party to invoke the provisions of Section 56 of the Act and thus, the parties may not be excused from fulfilling their obligations under a contract in such circumstances.

In view of the totality of circumstances, it is imperative that businesses and parties to the contract be mindful of developments to protect their arrangements from the global-economic slowdown that may be difficult to avoid in the present circumstances.

However, whether a party may be exempted from fulfilling its obligations in view of the pandemic is a question to be decided by reading into the contract governing the particular transaction.

In either case, the following curative actions may be taken into consideration while entering into commercial contracts:-

(i) Analyse the contract to determine the rights and obligations of the parties with respect to clauses of force majeure, termination, territorial jurisdiction etc.;

(ii) Determine whether the ‘Force Majeure’ clause is temporary and only applies for the period of time the force majeure event restrains a party from performing under the contract;

(iii) Analyse the obligations of the parties after the ‘Force Majeure’ event ceases;

(iv) Communication with the counterparty for using Covid-19 as a basis for suspending performance or for non-performance under a ‘Force Majeure’ Clause in a contract, whether by serving a Notice or otherwise;

(v) A party affected by the Covid-19 outbreak must take steps to record and document the steps it is taking to prevent or mitigate the impact of the Covid-19 outbreak on its ability to perform its obligations under the contract.

The writer is an Advocate, Supreme Court of India.