IMPACT OF THE COVID-19 PANDEMIC ON COMMERCIAL AGREEMENTS AND LATEST GOVERNMENT NOTIFICATIONS RELATING THERETO
As you are all aware, the world has been gripped by the outbreak of the COVID-19 epidemic which has been declared by the World Health Organization as a global pandemic. This has drastically affected the performance of many commercial contracts and resulted in many infrastructure projects coming to a sudden halt. In the present economic scenario, the concepts of force majeure and frustration of contract have gained significant importance.
Force Majeure clauses and their application
- Force Majeure clauses are provisions inserted by parties in contracts which exempt a performing party from its obligations upon the happening of certain events provided for in the clause itself. The occurrence of a force majeure event protects a party from liability for its failure to perform a contractual obligation. These events are usually events over which a party has no control or events which could not have been reasonably foreseen by the parties at the time of entering into the contract. Force majeure events are generally in the nature of acts of god i.e. natural calamities or man-made events i.e. wars, strikes, lock outs, change in government policy, political events etc. Whether or not a particular event can be classified as a force majeure event will depend on the terms of the force majeure clause and its interpretation.
2) A force majeure clause is generally invoked by notifying the other party as soon as the concerned event has taken place or as soon as the performance of the obligations under the contract become impossible. The party claiming force majeure is usually under a duty to show that it has taken all reasonable endeavours to avoid or mitigate the event and its effects. This would also largely depend on the contract between the parties and the interpretation thereof.
Consequences of invocation of Force Majeure
3) Once a contracting party invokes the force majeure clause, the obligations of the parties under the contract will generally stand suspended entirely or partly till the event continues and a party cannot be held liable for the non-performance of its part of the contract during such period. As a result of such suspension, the timelines under the contract or the term of the contract may stand extended as required or as agreed between the parties. Many force majeure clauses also provide for termination of the contract if the force majeure event does not conclude within a period of time mentioned in the contract. Further consequences of the invocation of a force majeure clause will be subject to the contract between the parties.
Steps taken by the Government and various authorities
- The Ministry of Finance, Government of India has 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 should be considered as a natural calamity and may be invoked as a force majeure.
- Similarly, Ministry of Shipping by its memorandum dated March 24, 2020, addressed to all major ports in India has ordered, that the COVID-19 pandemic may be considered as a valid ground for invoking force majeure clause on port activities and operations. Pursuant to this, various major ports have further issued notifications in relation to the port operations.
- The Hon’ble Supreme Court by its order dated March 23, 2020 in exercise of its powers under Article 142 of the Constitution of India has directed all Courts, Tribunals and Authorities that the period of limitation prescribed under the various laws shall stand extended from March 15, 2020 till further orders. The order was passed taking cognizance of the peculiar situation arising out of the challenge faced by the country on account of COVID-19.
- SEBI also vide it’s circular dated March 19, 2020 extended the timelines for certain filings as required under the provisions of the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (‘LODR’) to listed entities. Further, by the said circular SEBI has exempted the Board of Directors and Audit Committee of the listed entities from observing the maximum stipulated time gap of 120 days under the LODR, between two meetings for the meetings held or proposed to be held between the period December 01, 2019 and June 30, 2020.
Frustration under Section 56 of the Indian Contract Act, 1956 (Contract Act)
8) The concept for force majeure is not defined in any statute under the Indian Law. Force Majeure is a contractual remedy and can be invoked if a contract provides for the same. The Contract Act recognises the doctrine of frustration of contract under Section 56 which may also be relevant in the present context. Even in cases where a contract does not contain a force majeure clause, the performing party can claim for a discharge from performance of its obligations under the doctrine of frustration of contract under the section 56 if subsequent events make the contract impossible or impracticable to perform. Section 56 provides that an agreement 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.
9) It is a settled position of law that in order to claim termination of a contract on the grounds of frustration, the party seeking reliefs must show that the events or circumstances due to which the contract has become impossible, must be so fundamental as to be regarded by law as striking at the root of the contract. The following well settled principles need to be borne in mind while claiming relief of frustration under Section 56 of the Contract Act:
(a) The party claiming frustration must show that concerned event or change of circumstance totally upsets the very foundation upon which the parties rested their bargain such that the promisor finds it impossible to do the act which he promised to do.
(b) The term “impossible” used in Section 56 of the Contract Act has not been used in the sense of physical or literal impossibility but also includes situations where it becomes impracticable to perform the contract.
(c) Once it is proved that there is frustration, a dissolution of a contract occurs and both parties are discharged from their future obligations under the contract.
(d) If the intervening change or circumstance was contemplated by the parties at the time of entering into the contract, then the contract would stand despite the occurrence of such circumstance and no relief of frustration will apply.
10) In view of the prevailing situation, it is important for companies to carry out a detailed review of its contracts and analyse the rights and obligations of the parties, performance of which is likely to be affected. The review must specifically include (but not limited to) analysis of the clauses on termination, force majeure, compensation, governing law and dispute resolution. A detailed review of its operations and the likely effects and risks attached to suspension of its operations must be undertaken.
We trust that the above analysis is helpful for you to assess the legal impact of the current scenario on your business and operations and accordingly, enable you to take appropriate commercial decisions. If you require any further clarifications, please feel free to contact us. We will update you in case of any further decisions, measures, notifications by the Government and other authorities in this regard.
Zerick Dastur, Advocates and Solicitors
Zerick Dastur, Advocates & Solicitors
15, Manek Mahal 5th Floor,
Veer Nariman Road, Churchgate, Mumbai 400 020
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