Unlike in countries like Germany and France where the term is coded in civil laws, the Indian Contract Act – the 148-year old legislation which determines the circumstances in which promises in a contract shall be legally binding — is silent on the term `force majeure’. Though the Act allows an agreement for performing an ‘impossible’ act to be considered void, court outcome of disputes have varied from case to case, depending on the facts of each.
And, even if the term ‘force majeure’ — or, superior force in Latin — is mentioned in a contract between two parties, `epidemics’ or `pandemics’ are rarely, if ever, included in the definition of ‘force majeure’ which typically covers catastrophes like earthquake, flood, and war.
“Inevitably, all contracts will be put to litmus test… Very few contracts in India includes pandemic as a force majeure event as such events are never anticipated. This will affect many. Some impacted by the lock-down may also be affected as acts of government may not be under the terms of force majeure. It all depends on terms between the parties,” said Ashish Pyasi Associate Partner Dhir and Dhir Associates.
It appears that despite the overwhelming nature of the COVID19 outbreak, there could be slew of disputes, even litigations, in trade and businesses well after the world is free of the lethal virus. This, according to industry circles, could spread across sectors: cross-border trade, real estate, EPC (engineering, procurement & construction), plain joint-venture agreements as well as M&A deals.
“We are receiving several queries from players across sectors. While some of the cases may get amicable resolved, in others litigation is inevitable. We are approaching each case on its own merit. The sustainability of the claim would depend on the language of the force majeure clause and the facts of each case. In the absence of a FM clause in a contract, one would have to test the case in the backdrop of section 56 of the Contract Act,” said Kingshuk Banerjee, Partner at the law firm Khaitan & Co.
In cases, where contracts do not have a force majeure clause, Section 56 of the Contract Act comes into play; it deals with `frustration of contract’ – a situation where fulfilling a contract becomes impossible or unlawful after the execution of the contract. Traditionally, courts have chosen a narrow interpretation of the law in ruling on disputes where Section 56 had kicked in. “The threshold to invoke the ‘doctrine of frustration’ is formidably higher than that of force majeure. It has to pass judicial tests and proving frustration is more difficult than proving force majeure,” said Anirudh Gotety, Associate at L&L Partners.
There are chances where companies may face allegation that it has used the COVID19 situation to wriggle out of payment or performance. Businesses will then have to demonstrate it was indeed hit by the massive disruptions caused by the pandemic outbreak—and, not by financial difficulty and general slowdown. According to Anoop Narayanan, Principal, ANA Law Group, “It’s time for people to start preparing to enforce or defend contracts. The force majeure clause of every contract will have certain compliance requirements as well such as the obligation to issue notice to the other party. Similarly, a party unable to form a contract must compile evidence on the steps taken to mitigate, and also adequate proof on how Covid-19 has impacted its ability to perform the contract.”