‘COVID-19’; ‘Pandemic’; ‘Global recession’; ‘Apocalypse’; ‘Unprecedented scenario’- such oft-flashed primetime news headlines these days are a matter-of-course regular feature. Prior to this whole catastrophe, days were galloping by at their own sweet pace and we, as lawyers, were ever so busy attending court hearings and conferences. And now, everything seems to have come to a daunting halt.
The novel coronavirus continues to infect people all around the globe at a frightening pace. Inter-alia, global recession and economic crisis are the words every financial and legal pundit is uttering right now. At the same time, the Legal fraternity is forecasting a deluge of litigations, and this in our considered opinion is in-escapable.
The stock markets are crashing, savings rates are falling, number. of defaulters are going to skyrocket, companies might become insolvent, breach of contracts seems inevitable - whereas the world is at a standstill. This is an ironically visible situation which this ‘invisible’ virus has created. Amidst the current scenario, performances/obligations provided in most of the contracts are going to be interrupted, or even jettisoned altogether. People obligated under any contract whatsoever will find themselves grappling in sort of a tunnel which is closed at both ends, with this deadly pandemic-Coronavirus on one end, and their contractual obligations on the other end.
Force Majeure
There has been a lot of talk that ‘Force Majeure’ (French term for ‘Superior Force’) will be the saviour of the defaulting parties in the times of this pandemic. The Force Majeure provisions in a contract provides that a party is excused to perform its part of the obligations in the event an unforeseen detrimintal event prevents or hinders such performance.
Let us assume a scenario. In the event a party to a contract errs while invoking Force Majeure , a refusal to adhere to a contract will be considered a breach ofcontract and the contractual counterparty will press its legal rights leading to a liability of damages on the party which wrongfully invoked the Force Majeure clause.
Before you ease up a bit wondering if a PANDEMIC cannot be termed a Force Majeure by courts, what else can? Let us simply break it out to you that ‘Force Majeure’ does not explicitly find space under the Indian Contract Act, 1872 (which is the Indian Statute that governs the Law of Contracts), so it is not a statutory provision under the Indian Civil law. Hence it must be present in the covenants of the contract itself.
Again before you rush to get into the tedious drudgery of wading through the deluge of covenants in your contracts to find the ever so precious- ‘ Force Majeure’ clause, affected parties to a contract governed by Indian law can seek remedy under the doctrine of frustration, which permits contractual parties to cease the performance of contractual duties, wherever it becomes impossible to do so, and insisting upon the performance of the contract in such altered circumstances would be unjust.
The doctrine of Frustration and Impossibility of Contract, whose threshold of invocation is considerably more than the former, are duly envisaged under Section 32 and 56 of the Act.
“The law in India has been laid down in the seminal decision of Satyabrata Ghose v. Mugneeram Bangur & Co. What was held was that the word "impossible" has not been used in the Section in the sense of physical or literal impossibility. The performance of an act may not be literally impossible but it may be impracticable and useless from the point of view of the object and purpose of the parties.” 1 “This view of the law has been echoed in 'Chitty on Contracts', 31st edition. In pargraph 14-151 a rise in cost or expense has been stated not to frustrate a contract. Similarly, in 'Treitel on Frustration and Force Majeure', 3rd edition, the learned author has opined, at paragraph 12-034, that the cases provide many illustrations of the principle that a force majeure Clause will not normally be construed to apply where the contract provides for an alternative mode of performance.
It is clear that a more onerous method of performance by itself would not amount to a frustrating event. The same learned author also states that a mere rise in price rendering the contract more expensive to perform does not constitute frustration.” 2
Before applying the doctrine of frustration in any given matter’s factual matrix, the contractual parties’ expectations, contemplations, knowledge and assumption, nature of supervening occurrence, probability of performance in future inter alia, are pre-requisite considerations.
It will be much imperative to state that another mantra of successfully invoking doctrines of Force Majeure or even Frustration for that matter, is the underlying legal principle based on lego-business prudence known as ‘Mitigation’. The law requires the affected party to mitigate the effects of the supervening event/act of God and is also called “best efforts” obligation. If the affected party fails to
1 & 2 Energy Watchdog and Ors. Vs. Central Electricity Regulatory Commission and Ors. (11.04.2017 - SC) :(2017) 14 SCC 80
put its best foot forward to mitigate the losses which might occur due to the Force Majeure event, it may not be entitled in law to invoke the benefits of these equitable doctrines.
The Ministry of Finance issued an office memorandum mentioning that the novel COVID-19 coronavirus pandemic has to be treated as a natural calamity and the force majeure clause may be invoked as a consequence wherever considered appropriate. However, the matters are going to be adjudicated by assessing the situation peculiar to individual set of facts and all contracts will be put to a litmus test. Hence, a blanket defence of ‘Force Majeure’ or doctrine of Frustration/ Impossibility of a contract seems highly unlikely to decide the fate of these commercial contracts.
Indubitably, the Government has been displaying hyper-activism in policy decisions to battle the corona virus on all possibly comprehended fronts. The Central Government vide gazette notification dated 24.03.2020 raised the threshold of default under Section 4 of the Insolvency and Bankruptcy Code, 2016 by whopping hundred fold (from INR 1 lakh to INR 1 cr.) which conspicuously is a move to protect the Micro, Small & Medium Enterprises (‘MSMEs’) from the sword of insolvency. The Finance Minister went on to state that the Government might consider suspending Section 7, 9 and 10 of IBC, if the situation does not show signs of improvement till April 30 th , 2020. This move will definitely assist the smaller enterprises against falling in the trap of insolvency in these testing times.
The Reserve Bank of India has also played its part by declaring a 3 month moratorium for deferment of loan payments. This is a major reprieve for the common man as they do not have to worry about their EMIs for now.
All these far-reaching decisions come in the background of an Indian economy which is already in disarray and they might turn out to be damaging in the long run. However, we hasten to state that the need of the hour warrants short term stability, in order to see a future, if there is one,
at all.
Competition law is another imperative aspect which the Government must employ smartly while formulating policies to battle the pandemic. United Kingdom has permitted food retailers to collaborate in ways, which under normal circumstances will infringe the UK competition law, in order to meet the supply requirements for the current crisis. Similar suspension of anti-trust rules by members of the European Union is also anticipated. Indian government might pick a leaf out of UK’s book and work upon interim amends in Anti-competitive practices to curb the possibility of a food drought. At the same time, the Competition Commission of India (CCI) shall keep an eye on unscrupulous businesses that might exploit this as an opportune moment for ‘essential’ collusions.
Competition law
As this ‘invisible’ virus outbreak continues to wreak havoc, it is imperative for businesses to understand that stability is incongruous with pandemics and an unprecedented situation like this in particular, calls for unprece- dented decisions on the part of authorities and businesses.
