Once Upon a Contract: Performances in the COVID-19 Era
Authors: Mudita Gairola & Skanda Shekhar, Rajiv Gandhi School of Intellectual Property Law, Indian Institute of Technology, Kharagpur, India
Life is inherently risky; so is business. Contracts embody the risk of the foreseeable future. However, can one allocate risk to mitigate the unanticipated? Is there a mystical way to undercut losses one cannot foresee?
No one is better placed to answer these questions than the All England Lawn Tennis & Croquet Club Limited (‘Club’). The Club had the foresight to purchase pandemic insurance for the Wimbledon tournament every year since 2003 suspecting the recurrence of an illness like SARS. Lo and behold, come 2020, it was all to pay off. The Club received an insurance payout of £141 million on canceling the Wimbledon tournament due to the unprecedented disruptions caused by COVID-19. Other sectors have unfortunately not been so lucky. Surely, paying millions in insurance premiums to mitigate the risk of something inherently uncertain may not constitute good business sense for all. Therefore, we must ask whether intelligent contract drafting can save the day.
1. Force Majeure: The Story So Far
1.1 Common law developments
Ever since the outbreak of Covid-19 in March 2020, there has been a fiery debate raging over the fate of contracts. Ironically, the principles of the common law impossibility too developed in the wake of the destruction caused by fires. Upon the burning down of the Surrey Gardens & Music Hall in London in 1863, concerts for which they were booked had to be cancelled. In a suit for breach of contract brought by the party that booked the halls against the one that owned them, the Queen’s Bench, in Taylor v. Caldwell, allowed for frustration of contracts when their objects were precluded from fulfillment by impossibility.
In 1883, a similar case came before the Supreme Court of the United States (SCOTUS) in Ellis v. Atlantic Mut. The case involved a contract under which a ship that was to carry freight caught fire and was rendered unseaworthy. The SCOTUS, while quoting Taylor, excused both parties from their obligations under the contract.
Upon the foundation laid by the frustrationdoctrine, the term ‘force majeure’ was imported into England from the French Civil Code in the 1900s.Force majeure has since been interpreted to include acts of God, war and strikes, embargoes, refusals to grant licences and abnormal weather conditions.
1.2 Common law’s tryst with Indian law
The term ‘force majeure’ made its way to Indian law through the 1925 Madras High Court decision of Bendit v. Prudhomme. Here, the respondents failed to ship groundnut to the appellants on account of the commandeering of ships by the government for the ongoing war. While excusing the respondent’s contractual obligations, the Court defined ‘force majeure’ as “causes you cannot prevent and for which you are not responsible”.
As force majeure clauses were incorporated in contracts in India, courts were required to resolve questions of the interplay between two provisions of the Indian Contract Act, 1872: sections 32 and 56. While section 32 provides for the enforcement of contingent contracts in the event of a future uncertain event, section 56 provides for 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, to be held to be void when the act becomes impossible or unlawful.
1.3 Settled law
This interplay was settled by the Supreme Court (SC) in SatyabrataGhose v. MugneeramBangur.It held that, where a force majeure clause exists in a contract, it shall be interpreted as a contingent contract under section 32. In its absence, section 56 would operate as a rule of positive law incorporating the doctrine of frustration. This position was elucidated recently by the SC in Energy Watchdog v. CERC. It held that when a contract contains a force majeure clause which on construction by the Court is held attracted to the facts of the case, Section 56 has no application. In effect, where a court applies section 32 to a contract, the construction thereof determines the relief granted to the parties, which commonly includes declaration of the contract as void or its suspension. However, when section 56 is applied by the court, the contract is rendered void. In either case, the party seeking relief on account of a force majeure event must establish a causal link between its inability to perform and the said event.
2. Force Majeure: Events beyond the Aam (Ordinary)
Let’s consider an example. In the mythical lands of Aampur in 2019, a mango farmer, Aam-Aadmi, entered into a contract with a local mango trader, Khaas-Aadmi. Khaas-Aadmi (Buyer) wished to be the sole trader of Aam-Aadmi’s (Seller) mangoes and agreed to purchase his entire produce for a predetermined price. Their contract contained a force majeure clause that read,
“FM Clause: In the event of a disease adversely impacting the mango produce agreed to be sold by the Seller to the Buyer under this contract in a manner that is beyond the control of the Seller, the Seller may, at his sole discretion and upon written notice to the Buyer, either terminate the Contract or delay performance thereof for a reasonable period of time.”
That year, a deadly disease, MOVID-19, destroyed mango produce across Aampur. The FM Clause came into operation when the contingency mentioned therein, i.e. a disease adversely impacting the mango produce, arose. Aam-Aadmi was discharged of his contractual obligation to sell his mangoes to Khaas-Aadmi under section 32.
Aam-Aadmi and Khaas-Aadmi entered into a similar contract the following year. However, this time, a deadly human disease, COVID-19, forced the Aampur administration to order all movement of persons and goods to be suspended sine die. Unfortunately, the FM clause mitigated the risk faced by Aam-Aadmi alone. Khaas-Aadmi pleaded frustration of the contract under section 56 as a consequence of the impossibility to collect the mangoes from AamAadmi before they perished. The contract was held to be frustrated providing some respite to Khaas-Aadmi, whose business remained not so khaas after all.
3. Force Majeure: COVID-19, Judicial Interpretation and Khatte Aam?
Of course, real-life force majeure clauses are more complex and require courts to apply standard rules of contractual construction. In the absence of a force majeure clause, a case under section 56 must be made out. Courts require a very high threshold of impossibility to be established for this purpose. In this backdrop, the next question to be probed is whether the COVID-19 outbreak constitutes a force majeure event for the purposes of contract law.
In order to answer these questions, we turn to the manner in which courts have been adjudicating disputes where the COVID-19 outbreak was argued to constitute a force majeure event. Since COVD-19 related force majeure jurisprudence is in its nascent stages, judicial pronouncements currently pertain only to a small section of sectors, viz. petroleum, infrastructure, tenancy, etc. Nonetheless, such an analysis is likely to underscore the position of the law of force majeure applicable to the COVID-19 outbreak.
One of the first instances concerning the COVID-19 outbreak arose before the Delhi High Court (DHC) in the case of Ramanand v. GirishSoni. In the case, the tenants of the suit property moved the Court for suspension of rent on account of loss of business due to the COVID-19 outbreak. The Court found that there was no express force majeure clause to be considered. The Court held that, since contracts of lease are partly executed in nature, even the doctrine of frustration cannot operate to the benefit of the tenants. However, the Court, under its equitable jurisdiction, extended the time given to the tenants to pay the rent.
Another case concerning tenancy came up before a division bench of the DHC in June 2020 in the form of a public interest litigation. The petitioner inter alia sought a blanket waiver of rents for all tenants on account of the COVID-19 outbreak. The Court held that it had no power to grant the relief sought while exercising jurisdiction under Article 226 of the Indian Constitution. The Court described the petition to be an abuse of the process of court and dismissed it with costs.
These decisions indicate that, in matters concerning tenancy, courts are apprehensive to grant suspension of rent or other reliefs even while recognising the COVID-19 outbreak to be a force majeure event when a force majeure clause is absent in the lease deed.
3.2 Shipping and transportation
In the domain of shipping, a case titled Standard Retail Pvt. Ltd. v. M/s. G. S. Global Corpcame before the Bombay High Court for adjudication. The petitioners and respondents entered into a contract for shipping steel, which the petitioner was to further distribute within India. The petitioners sought to have the impugned contract frustrated under section 56 as it found it impossible to transport the shipped steel within India. The Court rejected the petitioners’ contentions and held that the doctrine of frustration could not operate against the respondents, who had little to do with the petitioners’ plans of transporting the shipped steel further within the country.
This decision of the Court indicates that the doctrine of frustration must operate within the bounds of contractual privity and not to the disadvantage of a person not a party to a contract.
3.3 Infrastructure and construction
In MEP Infrastructure Developers Ltd. v. SDMC, the petitioner and respondent entered into a contract with a force majeure clause for the construction of roads. Under the contract, the party invoking the clause was to give five days’ notice to the other party. The question of whether the COVID-19 outbreak constituted a force majeure event for the sector was settled by a Government circular to the effect. The DHC held that, in the presence of a Government circular, the need to give notice as required by the contract was inherently fulfilled. The Court then granted to the petitioner the relief of suspension of the payment required by the contract as a consequence of the force majeure event.
It is clear thus that the presence of a force majeure clause bolstered by an official executive notification can go a long way in providing a safe harbour to parties affected by the COVID-19 outbreak.
3.4 Oil and gas
The DHC decision in M/S Halliburton Offshore Services Inc. v. Vedanta Ltd. clarifies that the presence of a force majeure clause alone does not suffice. The petitioner took recourse to the force majeure clause in the suit contract to restrain the respondents from encashing bank guarantees upon its breach of contract. The Court refused to restrain the respondents as it saw no causacausans between the breach of contract by the petitioner and the COVID-19 pandemic. The Court found that the petitioner had breached the suit contract much before invoking the force majeure clause therein, which it opportunistically did only to avoid liabilities accruing to it.
From the decisions analysedsupra, it becomes apparent that, for relief on grounds of a force majeure event to be sustained, it is imperative to establish that the event in question is indeed a force majeure event and that the there exists a sufficient nexus between the imminent/completed breach of contract and the said event.
4. Concluding Remarks: The Takeaway for Courts and Litigants in the Covid-19 World
This discussion reveals that the law on the subject of force majeure is well-settled. The unpredictability regarding the manner in which courts are likely to adjudicate such disputes appears to be a consequence of their factual vagaries. Courts are generally slow to interfere with contractual relationships; even when an event is well-understood to be a force majeure one, the success of a force majeure plea also depends on extraneous factors like the scale of the event and its recognition by official bodies. No doubt, sector-wise consistency in the judicial holdings as regards force majeure events like COVID-19 will go a long way in increasing the efficiency of the process of court and reducing burgeoning opportunism among litigants.
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