A.PRELUDE:
Following the rapid spread of the Novel Coronavirus [“COVID-19”] that was first detailed in Wuhan, China towards the end of 2019, the World Health Organization [“WHO”] pronounced COVID-19 to be a pandemic on March 11, 2020. In this note, lets consider how Force Majeure provisions in commercial contracts and the related Common Law Doctrine of Frustration may be engaged in the context of the COVID-19 outbreak.
B.FORCE MAJEURE CLAUSES:
A Force Majeure Clause is a contract provision that relieves the parties from performing contractual obligations for a period of time or allows the parties to terminate the contract when certain circumstances beyond their control arise. In general, Force Majeure becomes relevant when an “Act of God” or other extraordinary event prevents performance.
Many organizations may be parties to contracts where the counterparty is seeking to cancel its obligations because of COVID-19. This situation is arising in relation to various commercial relationships, including supply agreements, events planning contracts, and numerous other types of agreements.
Where the Force Majeure clause in the contract does not stipulate the nature of qualifying events, the courts will apply the presumption that Force Majeure events are restricted to supervening events which arise without the fault of either party and which neither has intended to undertake responsibility. In addition, the party seeking to invoke the Force Majeure Clause in its contracts must show that there are no alternative means for performing its obligations, or that it has taken all reasonable steps to avoid the operation of the clause. Increased costs or hindrances alone will not be sufficient to prevail on a claim of Force Majeure. However, this is not an absolute duty and the party seeking the benefit of this clause need only take such steps as to account for foreseeable contingencies.
C.NOVEL CORONAVIRUS [COVID-19] AND FORCE MAJEURE CONDITIONS:
In this context, it is important to determine if COVID-19 will be considered as a ‘Force Majeure’ event. On Feb.17, 2020, the China Council for the Promotion of International Trade [CCPIT], revealed that it had already issued over 1,600 ‘Force Majeure certificates’ to firms in 30 sectors, covering contracts worth over $15 billion.
In India, the Department of Expenditure, Procurement Policy Division, Ministry of Finance issued an Office Memorandum on February 19, 2020, in relation to the government’s ‘Manual for Procurement of Goods, 2017’, which serves as a guideline for procurement by the government. The Office Memorandum effectively states that the COVID-19 outbreak could be covered by a Force Majeure clause on the basis that it is a ‘natural calamity’, caveating that ‘due procedure’ should be followed by any government department seeking to invoke it.
It seems clear that the spread of the COVID-19 is an event outside of a party’s control and is therefore likely to come within the definition of Force Majeure if the parties have simply provided that Force Majeure is any event that is outside a party’s control. If, however, the parties have a limited and closed list then it will depend upon the events specified in the contract. If the contract includes pandemics, epidemics or quarantine then it will almost certainly be applicable given that the World Health Organisation on 11 March, 2020 declared COVID-19 a pandemic and several countries have imposed quarantines in attempts to contain the spread of the virus.
However, it may also be possible that such circumstances will be caught by the Force Majeure clause if it applies to any act of any government or regulatory body where such bodies impose restrictions in response to the COVID-19 outbreak, such as travel bans or enforced quarantine zones or periods.
D.INDIAN LEGAL POSITION:
The law in India has been laid down in the seminal decision of the Supreme Court in the case of Satyabrata Ghose vs Mugneeram Bangur & Co. The entire jurisprudence on the subject has been well summarised by Justice RF Nariman of the Supreme Court in a the recent decision in the case of Energy Watchdog vs CERC [2017] which is as follows:
a) The concept of Force Majeure is to be restricted to a narrow purview and thus mere escalations in the cost of project due to some contingent event would not constitute the hindrance under Section 56;
b) The courts have no general power to absolve a party from the performance of its part of the contract merely because its performance has become onerous on account of an unforeseen turn of events;
c) Unanticipated conditions such as escalation of prices which are an obstacle to execution does not get rid the contractual parties of the bargain they have made and hence mere circumstantial change cannot be exclaimed as frustration;
d) Mutual agreement to transfer the risk of performance sets an obligation on the contracting parties to execute the commitment against all odds as far as practicable.
E. NOVEL CORONAVIRUS [COVID-19] AND BUSINESS INTERRUPTION INSURANCE:
Business Interruption Insurance is intended to cover losses resulting from interruptions to a business’s operations, and generally covers lost revenue, fixed expenses such as rent and utility, or expenses from operating from a temporary location. While these policies most frequently relate to physical property damage, businesses should nevertheless assess their coverage to determine whether they might be covered for losses due to business interruptions resulting from COVID-19.
Several companies were able to recoup losses through business interruption insurance for various operational disruptions after the global outbreak of Severe Acute Respiratory Syndrome [SARS] in 2002-2003. In turn, however, many insurers have now excluded viral or bacterial outbreaks from standard business interruption policies. As a result, it is critical for companies to proactively assess the specific terms and conditions of their governing insurance policies to determine whether interruptions from COVID-19 would be covered. In connection with that assessment, companies should review their policies’ insurer notice requirements to ensure their scrupulous compliance with those provisions in the event coverage is ultimately sought. Taking these proactive steps will help companies be prepared for any financial or legal implications that may result from the continued spread of COVID-19.
F. EPILOGUE:
At this time, it is impossible to predict the full impact of the coronavirus around the world. In the coming weeks and months, it is likely that there will be increased disruptions to businesses and their ability to continue normal operations. If you are considering declaring a Force Majeure event because of the coronavirus outbreak, you should carefully review your agreement and consult with legal counsel. Likewise, if any of your business partners have invoked the Force Majeure clause in an existing agreement, there are many issues to consider, including the scope of the Force Majeure clause, the ability to enforce the agreement against the other party (particularly in the context of international agreements), and how your response may impact your long-term relationship with your contract partners. Likewise, if you are in the process of negotiating any new contractual arrangements, you should carefully consider the scope of the force majeure clause and how it may affect your business.\
By- Adv. Tushar Kumar
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