Application of Force Majeure clauses in India in reference to Covid- 19

By Anubhav Sinha and Sreemantini Mukherjee

(The authors can be contacted at anubhavsinha90@gmail.com and sreemantini97@gmail.com or at 9830161450)

 

The rapid outbreak of the Corona virus and the nationwide lockdown for efficient control of the same has posed significant challenge in the corporate world. Several projects have come to a pause due to the restriction necessitated. In such a scenario, the courts are anticipated to be flooded with contentious proceeding invoking the force majeure clause or the doctrine of frustration.

 

Force majeure: In General
The concept of force majeure is found in Civil Law. It is neither recognised under the common law nor under the Indian Law. Force majeure as a law infact reprieves a party to a contract from discharging its contractual obligations on occurrence of an unforeseen event. Force majeure can be invoked in India only if the contract specifically incorporates a force majeure clause. A force majeure clause typically spells out specific circumstances or events, which would qualify as force majeure events and conditions which would have to be fulfilled for such clause to come into effect. It is a contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event that the parties could not have anticipated or controlled.

 

Force majeure in India

Force majeure as a concept of general substantive law has not been accepted by courts in India.
In several judgements, including, Satyabrata Ghose v. Mugneeram Bangur & Co (1954 SCR 310: AIR 1954 SC 44) and Energy Watchdog v. CERC((2017) 14 SCC 80 : (2018) 1 SCC (Civ) 133), the Supreme Court has taken a restrictive understanding opining that an affected party was only entitled to remedies provided under the law of frustration as embodied under section 56 of the Indian Contract Act, 1872 or under any applicable contractual clause. This would indicate that application of a broader understanding of force majeure is subject to specific terms and definitions which may be contained in a particular contract. In the absence of a contractual provision parties have to trace their reliefs within the ambit of section 56 of the Indian Contract Act.

 

Government Force majeure Notifications
Present day commercial contracts usually contain elaborate force majeure clauses clearly indicating all probable situations in which a party may be able to take benefit. The sudden outbreak of the Corona virus has led to nationwide lockdown and several commercial projects have come to a halt due to the restrictions. The Ministry of Finance, Government of India has published a notification dated 19th February, 2020 which states

“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….”

Similar notification has been published by the Ministry of New & Renewable Energy and the Ministry of Shipping on 20th March, 2020 and 31st March, 2020 respectively.

The aforesaid notifications may not strictly apply to private contracts. However, it indicates the legislative to characterise the current situation as an emergency and to be treated as a force majeure event in general. It must be noted that the wordings used in the office memoranda and the notifications point towards force majeure clauses contained in a contract, whereby, the legislative intent not to declare a substantive law of force majeure but only provide relief in cases where a force majeure clause already exists.

 

Judicial Interpretation

The aforesaid notification of 19th February, 2020 came up for consideration in matters relating to the invocation of letters of credit and bank guarantees before the High Court at Bombay and the Delhi High Court. Curiously, the High Courts differed in their approach with regard to the application of the aforesaid notification and as such reached divergent conclusions.

The High Court at Bombay, in the case of Standard Retail Private Limited v. G. S Global Corp., refused to grant an order restraining the respondent bank from encashing letters of credit on the ground of force majeure. The sellers had already shipped the steel and steel products from South Korea. The Hon’ble Court refused to grant an injunction for inter alia, on the ground that the lockdown was for a limited period and the petitioners cannot obtain protection under the force majeure clause to resile themselves from making payment to the respondent for services already rendered. The Court further refused to grant an injunction on the ground that letters of credit are an independent transaction with the bank, and the bank are not concerned with the dispute between the buyer and the seller. Surprisingly, the court failed to appreciate that the current situation of the country amounts to a natural calamity (as per Government notification) and in such an event special equities exist under which the court could restrain the respondent bank from encashing letters of credit. In our view, the interpretation advanced by the Hon’ble Court is impractical and warrants reconsideration.

The Delhi High Court, however, granted an injunction in M/S Halliburton Offshore Services Inc v. Vedanta Limited & Anr, where the petitioner sought to restrain the respondent from encashing eight bank guarantees issued in its favour to secure the performance of obligations under a contract to drill petroleum wells. Rejecting the contention that courts could stay the invocation of bank guarantees only in exceptional circumstances, the Delhi High Court observed that in cases where special equities exist, the court is empowered, in a given set of facts and circumstances, to injunct invocation, or encashment, of a bank guarantee.

On the issue whether special equities can be said to exist during the lockdown, the Hon’ble Court observed that the countrywide lockdown is prima facie in the nature of force majeure and such event is unprecedented, and was incapable of having been predicted either by the respondent or by the petitioner. It was further held that prima facie covid 19 lockdown and its extended ramification are in the nature of special equities and the same would operates as a justification to injunct the respondent from invoking the bank guarantees.

 

Conclusion

A difference of opinion exists among the two Hon’ble High Courts in India, on the issue whether the nationwide lockdown due to the outbreak of corona virus and its extended ramifications constitute special equities. In our view the legislative intent is extremely clear that benefits of force majeure clauses should readily be granted to parties to a contract. In current economic scenario it is imperative that courts take a more liberal view in sync with Government economic policy rather than follow strict legal constructions. We do not suggest that the laws of bank guarantee and/or letters of credit injunctions need to be watered down in any manner whatsoever. However, in sync with the government policy, a departure is required during the force majeure period. We are also mindful of the fact that there are many bank guarantees which may expire during the length of the lockdown period and/or during the course to which the force majeure period extends.

It may be argued that in such circumstances it may become imperative for the court to decline an order of injunction for otherwise the beneficiary of such bank guarantee and letters of credit would loose an important monetary right. In this regard, the Hon’ble courts may borrow a jurisprudential strain which has been embodied in the COVID- 19 (Temporary Measures) Act, 2020 of Singapore. A condition precedent for any party to gain an injunction against the invocation of a bank guarantee and letter of credit is to first extend the period of such bank guarantee or letters of credit. Our civil courts have inherent power to make any order of injunction conditional.

Thereby the courts can ensure that the applicant before it would be under an obligation to extend bank guarantee and/or letters of credit for such period as may be directed by the court. This will ensure that no respondent is unduly prejudiced during the period of operation of the applicable force majeure clause. The courts, thereby, must not construe the provisions and remedies available under the law in a narrow manner at the present situation for the same will result in an unrealistic commercial approach. The courts must, on prima facie satisfaction that the default occurred due to applicable force majeure conditions should grant remedies to protect applicant parties till the restrictions imposed are lifted and the situation becomes normal.