Validity of force majeure clause for sellers/suppliers amid COVID-19

Validity of force majeure clause for sellers/suppliers seeking extension or termination of contractual liability on account of COVID-19 pandemic:

Brief background:

Havoc of pandemic COVID-19 pandemic has brought together severe operational difficulties across all geographies as well as industries and various trades have been forced to shut their operations temporarily or permanently down owing to the slowdown.

With the onset of COVID-19 pandemic since March 2020, one of the key steps taken was to impose absolute lockdown across all states by various governments at all levels. Such curbs in movement and mobility led to major difficulties have been faced in the nature of non-availability of raw material, labour, direct as well as indirect facilities like logistics. These difficulties have led to supervening impossibility upon the seller or suppliers to complete the production and contractual obligations and leading to a threat of imposition of liquidated damages by the buyers for delay or in fact no supply.

Force majeure clause in the agreement:

Normally, no extensions of the scheduled delivery or completion dates or a leeway to terminate a contract should be granted except where events constituting force majeure, as provided in the contract, have occurred or the terms and conditions include such a provision for other reasons.

Force majeure clause (FMC) shall usually be explicitly entered in to in the ‘General’ or ‘Special’ Terms and Conditions vide an agreement or contract between both the parties, so that any unforeseen circumstances can be tackled down with some sort of ease by the grieving party. Such FMC shall provide for exceptions in cases of force majeure, whereby buyer shall not be rightful to levy liquidated damages and same might look like extract produced as follows:

‘If the Seller fails to deliver any or all of the Goods/Services within the original/re-fixed delivery period(s) specified in the contract, the Buyer will be entitled to deduct/recover the Liquidated Damages for the delay, unless covered under Force Majeure conditions aforesaid, @ ‘xxx’ amount per day or part of the day of delayed period as pre-estimated damages not exceeding ‘yyy’ amount of the contract value without any controversy/dispute of any sort whatsoever.’

Reference to other laws and judicial pronouncements in absence of specific force majeure clause in the agreement:

It is also noteworthy to consider here that Force Majeure clause is usually not specifically mentioned in the contract entered into and thereby a commercial dispute arises between both the parties. in case of absence of specific clause, reference shall be derived from its meaning bestowed under various other laws.

Section 56 of the Indian contract act talks about a situation where ‘Contract to do an act afterwards becoming impossible or unlawful’ as ‘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’.

Section 56 encompasses the doctrine of frustration and deals with impossibility of performance of contracts. The best exposition of Section 56, can be found in the Supreme Court’s judgment in Satyabrata Ghosh vs. Mugneeram Bangur & Co. [1954 SCR 310(12)], whereby the Hon’ble Court held:

“We hold, therefore, that the doctrine of frustration is really an aspect or part of the law of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done and hence comes within the purview of Section 56 of the Indian Contract, Act. It would be incorrect to say that Section 56 of the Contract Act applies only to cases of physical impossibility and that where this section is not applicable, recourse can be had to the principles of English law on the subject of frustration. It must be held also, that to the extent that the Indian Contract Act deals with a particular subject, it is exhaustive upon the same and it is permissible to import the principles of English law de hors these statutory provisions. The decisions of the English Courts possess only a persuasive value and may be helpful in showing how the Courts in England have decided cases under circumstances similar to those which have come before our Courts.”

In another leading judgment on Section 56 of the Indian Contract Act, 1872, Energy Watchdog vs. Central Electricity Regulatory Commission and Anr. (2017) 14 SCC 80, the Supreme Court held as follows –

“… in so far as a force majeure event occurs de hors the contract, it is dealt with by a rule of positive law under Section 56 of the Contract. 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.”

Considering the above, it is sufficiently clear that even in cases where the explicit force majeure clause is not present, parties may resort to its application considering the supervening and practical impossibility to adhere by the same and that the meaning of such practical instances may also be drawn from the real life aspects.

Further, Ministry of Finance (Govt of India) has already declared vide an office memorandums that the COVID-19 pandemic is included into one of the reasons to activate ‘Force Majeure clause’ and that if the conditions laid there thereunder are fulfilled i.e. activating party should not have been in default of the contractual obligations as on 19 February 2020, then the party can enforce the clause of force majeure for the specific period of coronavirus in place and no adverse action shall be taken by the counter party i.e. buyer in the pertinent case.

Conclusion:

Basis the above backdrop, it appears that selling party may resort to the reliefs of seeking extension in delivery period or completion dates or in fact terminating a contractual liability considering the impact of COVID-19 pandemic subject to express or implied clause in this regard and in case of absence of such clause, a basis of aforementioned provisions and judicial precedents may be taken seeking relief and in case of denial or turndown at ground level, a relief may be expected at higher forums as these forums have taken a leveraged view in favor of suppliers considering the hardships faced by them in the recent past.

Should you require any further clarifications or details, please feel free to revert: