prpri Lockdown cannot Rescue Importers from Contractual Obligations to Payments Lockdown cannot Rescue Importers from Contractual Obligations to Payments

The mighty force of nature has always proved it’s dominance over mankind through varied instances of natural calamities disrupting mankind. The year 2020 began with the world economies coming to a standstill due to Coronavirus aka COVID-19. With the lockdown and ‘Janta curfew’ imposed by the government the country has come to a standstill. The State borders have been shut, commercial transportation is hit, goods neither moving in nor moving out, unless they are on the essential commodities and emergency services list. Such sudden interruption in transportation and other crucial ancillary services for business to thrive are leading to business contracts being unenforceable on account of frustration.

A “Force Majeure” clause is one of the main features and a standard requirement of a contract. Force Majeure signifies unforeseen circumstances that prevent a individual from executing a contract. As a rule, a clause in the contract normal is that a party exempts itself, due to an occurrence or consequence which the parties have not been able to anticipate or manage, from meeting their contractual obligations which are unlikely or impractical.

The Indian Contract Act 1872 does not describe force majeure, but when a circumstance arises, Sections 32 and 56 of the Indian Contract Act 1872 (“Law”) play an significant role. The contingent contract is specified by Section 31 of the Act. A contingent contract is a contract to do something or not, if an event happens or does not occur. Section 32 of the Act states that, unless and until the event happens, contingent arrangements for doing or not doing anything uncertain of future events can not be followed by law. For any contingent contract to be contingent, the event has to occur before fulfilment of the conditions of the performance of the contract.

Section 56 of the Act is the second applicable clause. Section 56 states that any act that was to be performed after the contract is entered into is unlawful or unethical and can not be prevented by the Promoter, and that any act that is unreasonable or unconstitutional shall become unlawful, which is often referred to as the annoyance doctrine. [1]In more basic terms, this clause applies if either it is difficult to fulfil the object of the contract or an incident has happened that prevents the execution of the contract beyond the control of the promisor.

Keeping the abovementioned situation and the principles in mind, we will analyse the interim order dated 08.04.2020 passed by the Hon’ble High Court Judicature at Bombay in the matter of Standard Retail Pvt. Ltd. vs M/s G.S. Global Corp & Ors. (COMMERCIAL ARBITRATION PETITION (L) NO. 404 OF 2020).[2]

Petitioner sought directions restraining the Respondent–Bank from negotiating/ encashing the Letters of Credit in a petition filed under section 9 of the Arbitration and Conciliation Act. The Petitioner set out a case that in the tumultuous time of COVID-19 pandemic and the lockdown declared by the Central/State Governments, the Petitioners’ contracts with Respondent were terminated as unenforceable on account of frustration, impossibility and impracticability. The Respondent submitted that it had complied with its obligations and performed its part of the contracts and the goods have been already shipped from South Korea. The fact that the Petitioner would not be able to perform its obligations so far as its own purchasers are concerned and/or it would suffer damages, is not a factor which can be considered and held against the Respondent.

After hearing both the sides, the Court declined to award any interim relief to the Petitioner. The court observed –

1. that the Letters of Credit are an independent transaction with the Bank and the Bank is not concerned with underlying disputes between buyer and the seller;

2. that the Government notifications and advisories suggest that the distribution of steel has been declared as an essential service and there are no restrictions on its movement and all ports and port related activities including the movement of vehicles and manpower, operations of Container Freight Station and warehouses and offices of Custom Houses Agents have also been declared as essential services;

3. lastly and most importantly, that the lockdown would be for a limited period and the lockdown cannot come to the rescue of the Petitioners so as to resile from its contractual obligations with the Respondent No. 1 of making payments.

The Hon’ble Court has efficiently analysed the facts in hand, have then distinguished it from the land mark judgments on Force Majeure, Energy Watchdog v CERC [3](2017) 14 SCC 80 and Satyabrata Ghose Versus Mugneeram Bangure & Co[4]. (1954) SCR 310, and have clearly held that the Petitioner could not abandon its obligation under the Contract blaming the Covid-19 lockdown, as the subject matter fell within the essential goods list thus not hampering its movement. Further the court did not fritter its effort in realizing that the Petitioner could go back to business as soon as the lockdown, which is for a limited period, is lifted.

Under present situation of coronavirus outbreak in several countries, vendors, airline companies, shipment companies and in certain circumstances even consumers are like most likely to invoke the force majeure clause. It is evident that force majeure clause will result in monetary losses. Considering the example of airline companies in these circumstances, it can be anticipated that pre-booked tickets of consumers can be abruptly cancelled and refund may not be processed on force majeure. Based on aforementioned it can be clearly made out that interim measures in the time of Covid-19 or in any other pandemic would be based on Government notifications and advisories for that period and whether or not the same would frustrate the completion of the contract.

[1] The Indian Contract Act 1872, s.56.

[2] Standard Retail Pvt Ltd v M/s G.S Global Corp & Ors,

[3] Energy Watchdog v Central Electricity Regulatory Commission and Anr, SCC 2017 SC 80.

[4] Satyabrata Ghose v Mugneeram Bangur, AIR 1954 SC 44.


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August 2021