1 Apr 2020, 13:54 — 7 min read
In my previous article, I shared an overview of the relief measures under Income Tax, GST, Customs and Companies Act in light of the COVID-19 outbreak. In this article I will examine the impact of COVID-19 on commercial contracts.
With the number of infections and deaths rising on a daily basis, and spreading to new areas of the globe, there is escalating global concern about Coronavirus. With countries increasingly introducing lockdown areas, restricted travel and the closure of schools, universities and workplaces, the economic impact of the virus remains difficult to gauge. But it is clear from the impact being felt by the markets that the damage will be far-reaching and significant.
For businesses, it is an alarming and uncertain time. Business contracts are inevitably being interrupted and delayed. Retailers, as well as hotels, restaurants and bars, will be hit hard, particularly in areas where restrictions on movement and close contact are put in place. We saw examples of business closures and lock downs in India, America, Italy etc.
The occurrence of a force majeure event protects a party from liability for its failure to perform a contractual obligation. Typically, force majeure events include an act of god or natural disasters, war or war-like situations, labour unrest or strikes, epidemics, pandemics, etc.
In the circumstances, businesses affected will need to carefully review their contractual rights and obligations. For contracts this may well require particular consideration of the force majeure (FM) clause, if any, as well as business continuity and/or disaster recover obligations.
The law relating to force majeure (a French phrase that means a ‘superior force’) is embodied under Sections 32 and 56 of the Indian Contract Act, 1872. The occurrence of a force majeure event protects a party from liability for its failure to perform a contractual obligation. Typically, force majeure events include an act of god or natural disasters, war or war-like situations, labour unrest or strikes, epidemics, pandemics, etc. The intention of a force majeure clause is to save the performing party from consequences of something over which it has no control. Force majeure is an exception to what would otherwise amount to a breach of contract.
It is pertinent to note that a force majeure clause does not excuse a party's performance entirely, but only suspends it for the duration of the force majeure. However, if the force majeure clause provides that where force majeure continues for more than a stipulated period then either party may at its own option terminate the contract without any financial repercussion on either side.
The provision of force majeure is provided under Section 56 of the Indian Contract Act, 1872 ('the Act'). The relevant portion of the Section 56 is reproduced as under:
"Section 56. Agreement to do impossible act.—An agreement to do an act impossible in itself is void.
Contract to do act afterwards becoming impossible or unlawful.—A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful."
The sine qua non for invocation of Section 56 is as below:
It is imperative to note that force majeure is present in common law as the doctrine of contract. In other words, Doctrine of Frustration is an inbuilt factor in Section 56 of the Act. However, it can neither be invoked in case of commercial hardship nor can be used as a device to avoid a bad bargain.
Yes, the Indian Government has considered the outbreak of COVID19 as force majeure.
The Ministry of Finance of India has issued a clarification through an office memorandum vide F.18/4/2020-PPD as below:
"A doubt has arisen if the disruption of the supply chains due to spread of corona virus in China or any other country will be covered in the Force Majeure Clause (FMC). In this regard it is clarified that it should be considered as a case of natural calamity and FMC may be invoked, wherever considered appropriate, following the due procedure as above."
Based on above clarification, Coronavirus will constitute force majeure.
Question: If an event had to be held and it cannot be held because of Coronavirus, will it be considered as force majeure?
Answer: It depends on the invocation of force majeure. Based on clarification issued by Ministry of Finance of India and further note as below, it will be considered as forece majeure
Note:-The two global events in the past which have come closest to a situation triggering crisis in an international context, similar to COVID-19 are the epidemic outbreaks of SARS and Ebola. Largely, courts in China, where SARS had the maximum impact have, at the outset, ruled that a force majeure event was adequately triggered by such outbreak. Similarly, in the case of outbreak of Ebola virus which had primarily affected the regions of West Africa, courts ruled that it is a force majeure event.
Considering the ingredients of a ‘force majeure’ event and the fact that COVID-19 has world-wide led to a situation which is far worse than SARS and Ebola, in our view it should be conclusively categorised as a ‘force majeure event’.
Image source: shutterstock.com
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