Written By: Devyanshu Sharma & Yashika Agarwal
Devyanshu Sharma and Yashika Agarwal are 3rd-year students pursuing BA LL.B. & BBA LL.B. respectively from Symbiosis Law School, Noida.
The outbreak of novel coronavirus was declared a pandemic, leading to complete lockdown in almost all countries. The supply chain was disrupted by the pandemic which impacted businesses all over the world. Thus, creating a situation where the performance of the contract has become either very difficult or impossible. Force Majeure is a French phrase that means superior force. It is a provision that is there in every contract usually agreed upon by the parties. The Intention of the provision is to save the performing party from the circumstances where it has no control over the circumstances.
In India, the law related to force majeure is governed by the Indian Contract Act, 1872. Section 32 is related to the implied or express clause and when the performance becomes impossible then section 56 comes into play.
In the case of Satyabrata ghose versus Mugneeram Bangur and Co. it was observed by the Apex court that the word impossible in section 56 is not to be used in the sense of physical or literal impossibility only, but it may be impractical or useless from the object of the agreement they agreed upon. Reliance of the courts on section 56 is a general trend.
In this article, we will analyse the recent judgement passed by Bombay High Court in standard Retail Pvt. Ltd. Versus M/S G.S. Global Corp & Ors. Holding that Lockdown cannot save the petitioners from their contractual obligation and lockdown is not a basis for repudiation or contract termination.
The petitioner is a Steel Company in Bombay, importing material from a Korean Based company and they have provided them letters of credit to be issued by Wells Fargo Bank. The Contract between both the companies was on a Cost and Freight basis. According to the petitioner, due to the government’s lockdown and protective measures, the contract between the petitioner and their supplier has been frustrated in terms of section 56 of the Indian Contract Act, 1872 Consequently, some goods were shipped by the South Korean suppliers which never reached Bombay. Hence, the petitioners refused to make the payment. The Petitioner reached the Bombay High Court under Section 9 of Arbitration and Conciliation Act to restrain Wells Frago Bank from encashing the letter of credits.
Decision by the Court
The Bombay High Court dismissed the petition and held that the force majeure clause described in Article 11 is only applicable to the suppliers and cannot save the petitioner. As the contract between them is on the basis of cost and freight basis and supplier has performed their part by shipping the good. Petitioner has not performed their part by paying back. Hence damage suffered by them cannot be a valid ground to be held against the suppliers.
A single judge bench of AA Sayed heard the matter and observed that the letters of credits is an independent transaction and the bank has nothing to do with the dispute between the buyer and seller.
The court has absorbed the opportunity to clear the ambiguity by saying that in any event, lockdown was for a limited period and making it an excuse to rescue petitioners from their contractual obligation will set an example that mere hardship to perform contract during COVID-19 is sufficient to invoke section 56 of the Indian Contract Act.
Intention of Force Majeure Clause in the Contract
Under both Indian and English law, the meaning and applicability of ‘Force Majeure‘ depend on the particular contract and verbatim used. The verbatim of the clause must anticipate the events and define the recourse that must be taken afterwards.
In order to invoke the clause of force majeure, it is an indispensable obligation that the performance must be objectively impossible. Mere economical loss or any other difficulty is not sufficient. Under the Indian Contract Law, Justice R.F.Nariman observed in Energy Watchdog versus Central Electricity Regulatory Commission that only explicitly included provisions can save the party from performance of the contract and force majeure will be strictly interpreted in all cases.
Bombay High Court gave the fair reasoning as the terms like epidemic or pandemic are not included in Article of the contract. The clause gave the seller the ability or power to terminate the contract in such cases, not the buyer Petitioner in this case is a buyer. Hence Article 11 of the contract in this case cannot rescue the petitioner.
Principle of Supervening Difficulty
If there is no mention of the clause of force majeure arrangement inside a hypothetical contract, then there is a likelihood to include, the principle of “supervening difficulty.” The provision clearly expresses, that on the off chance if a contract gets difficult to perform, by reason of some unavoidable conditions, which the promisor can’t forestall, it will be unlawful and, in this way, the entire agreement gets void.
Since the Act doesn’t define the term “frustration of contract”, there is less scope for relief accessible to the parties, which is possible only by demonstrating the “absolute” impossibility of legally binding execution
Impact of COVID-19: Will Force Majeure be Applicable to Contracts?
During this pandemic, it is essential to consider the point that whether the ongoing pandemic will be constituted as an impossibility or not. To answer this, the landmark case of Satyabrata Ghose v. Mugneeram needs to be followed. In this judgement, the honourable Supreme Court laid as to what constitutes as an impossibility. The court held that “The performance of an act may not be literally ‘impossible’, but maybe impracticable and useless from the point of view of the object and purpose which the parties had in mind…the performance of a contract can be said to have become impossible if an untoward event or change of circumstances beyond the contemplation and control of the parties upsets the very foundation upon which the parties rested their bargain.”
In Energy Watchdog v. Central Electricity Regulatory Commission the court held that the parties can invoke the doctrine of frustration, if they can justify, in order to seek an exemption from doing their part of performance under the contract. The notion of performing the act at such time needs to be impracticable and hopeless while considering the object and purpose that is to be achieved due to doing the same.
Foreseeing the occurrence of Coronavirus in India, in the month of February 2020, the Government of India had issued an Office Memorandum regarding the disruption of supply chains. To this, it was decided that such happening will be covered as a case of “natural calamity” and therefore will be covered in force majeure as and when appropriate. Thus attracting this clause, the parties should show that the performance goes beyond reasonable control.
Even the Ministry of New and Renewable Energy (MNRE) issued an Office Memorandum dated March 20th, 2020 to regard the delay in the commission of renewable energy projects due to Covid-19 in China or any other country as to force majeure. International Chamber of Commerce has updated its Force Majeure and Hardship clauses to help businesses large and small draft contracts adapt to unforeseen events such as the COVID-19 outbreak.
Conclusion and Suggestion:
Though it is expressly laid down by the order that the force majeure clause will be considered for non-performance of the contract in COVID-19 timings, it is subjected from case to case basis as the order lays down the wording “as and when appropriate”.
Thus this shows that the court would take into consideration the places, subject matter, and intensity to non-performance to successfully regard the contract as force majeure so that the parties do not misuse this for non-performance. Proper evidence should be preserved and shown in order to show the inability to perform. They should try to exhaust all the next best alternatives to suit their need. The contract should be reviewed to see if a clause in regards to the non-execution is mentioned in the contract or not. It is advisable that parties enter into an agreement that clearly establishes the steps to be taken for the non-performance of unforeseeable nature This could be covered under “material adverse event”. And a clause should be mentioned in the contract that it can be terminated at the option of either of the party in light of such pandemic and to reduce the incurring losses. However, the language of the clause plays a significant role in deciding force majeure. If the parties agreed to it in the contract, it would then be binding. The burden of proof lies in the hands of the person who is claiming it. A notice needs to be served by the party claiming the non-performance to the contracting party.
Since there is an acute shortage on the part of the judiciary, it would be more fatal to provide for speedy justice through Alternative Dispute Redressal Forum as it was established in the Law Commission Report 221. Under these circumstances, most of the contracts include force majeure exceptions and frustration of contracts, thus increasing the claim for non-performance due to lockdown and restrictions in various areas.
 Section 32, Indian Contracts Act 1872, 32. Enforcement of contracts contingent on an event happening.—Contingent contracts to do or not to do anything if an uncertain future event happens, cannot be enforced by law unless and until that event has happened. —Contingent contracts to do or not to do anything if an uncertain future event happens, cannot be enforced by law unless and until that event has happened.” If the event becomes impossible, such contracts become void.
 Section 56 Indian Contracts Act, 1872, 56. Contract to do an act afterward 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.1
 Satyabrata Ghose vs Mugneeram Bangur & Co., AIR 1954 SC 44
 Standard Retail Pvt. Ltd. v. M/s G.S. Global Corp & Ors., Commercial Arbitration Petition (L) No. 404 of 2020
 “Article 11 Force Majeure: In the event of an Act of AKN 2/6 carbpl.404.2020.standard.retail.doc God (including but not limited to floods, earthquake, typhoons, epidemics and other natural calamities), war or armed conflict or serious threat of the same, government order or regulation, labor dispute or any other similar cause beyond the control of “Seller” or any of its suppliers or sub-contractors which seriously affects the ability of “Seller” or any of its suppliers or sub-contractors to manufacture and deliver the “Goods”, “Seller” may, at its sole discretion and upon written notice to “Buyer” either terminate the Contract or any portion affected thereof by such event(s), or delay performance of the Contract, in whole or in part, for a reasonable period of time. Any such delay of performance by “Seller” shall not preclude “Seller’s” later right to terminate the Contract or any portion affected thereof by such event(s). In no event shall “Seller” be liable to “Buyer” or to any third party for any costs or damages arising indirectly or consequentially from such non-fulfillment of or delay in the performance of all or part of the Contract”
 P. Ramanatha Aiyar’s Advanced Law Lexicon, 5th Edition; @ Pg. 2077.
 Energy Watchdog v CERC (2017) 14 SCC 80.
 Section 56 of the Indian Contract Act, 1872. Contract to do an 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.
 AIR 1954 SC 44.
 (2017) 14 SCC 80 (India).
 OFFICE MEMORANDUM issued by GOVERNMENT OF INDIA, MINISTRY OF FINANCE dated February 19, 2020, https://doe.gov.in/sites/default/files/Force%20Majeure%20Clause%20-FMC.pdf.
 OFFICE MEMORANDUM issued by GOVERNMENT OF INDIA, MINISTRY OF NEW & RENEWABLE ENERGY (MNRE) dated March 03, 2020, https://mnre.gov.in/img/documents/uploads/file_f-1584701308078.pdf.
 Law Commission Report No. 221- “Need for Speedy Justice, 2009”