The COVID-19 Pandemic And Government Lockdowns - Are they Force Majeure Events and if so, What is the Effect?

Introduction - Force Majeure is a mechanism of contractual risk allocation

At one end of the spectrum is the rule of “absolute contracts” laid down in the seventeenth century in Paradine v. Jane[1] wherein a person who “binds himself by contract absolutely to do a thing… cannot escape liability for damages” on the basis “that as events turned out performance is futile or even impossible" at the other end, is proving discharge of contract owing to impossibility/ frustration on the basis of erosion of the fundamental bargain between the parties [3].

Between the two extremes, it was but natural that an intermediate contractual mechanism for risk allocation would evolve. Such evolution has resulted in multiple kinds of clauses-- a “best endeavours” clause, a “reasonable endeavours” clause, a clause which pins liability or lack of it based on a specific contingency, etc. A force majeure clause is nothing but a risk allocation mechanism in a contract.

The position is best summed up by the US Supreme Court in Day v. U.S.[4] thus:

“One who makes a contract never can be absolutely certain that he will be able to perform it when the time comes, and the very essence of it is that he takes the risk within the limits of his understanding… But when the scope of the understanding is fixed, that is merely another way of saying that the contractor takes the risk of the obstacles to that extent. “

Although force majeure is often mixed up with the concept of frustration, it is purely a contractual remedy (though the existence of condition precedents/ contingencies is recognized by Section 32 of the Indian Contract Act, 1872 (ICA)). Frustration, on the other hand, in the Indian context, is a statutory remedy enshrined in Section 56 of the ICA. While the latter results in discharge of the contract altogether, the former is only a risk allocation clause, which at best creates a temporary exemption from performance (subject to the terms of the clause). Since “force majeure” is a contractual mechanism, much is at stake in how the force majeure clause is constructed.

Contents of a typical Force Majeure clause

Generally, while a contract between parties is operational, situations may arise that are beyond the contemplation and reasonable control of the parties to the contract. These situations tend to render impossible, the performance of the contract by the parties. These situations are termed as ‘force majeure’ events. The term ‘force majeure’ is a French term derived from the Latin expression, ‘vis major’ or ‘superior force.’

Force majeure clauses are of many kinds-- the first kind provides for a limited list of events that the parties agree would constitute a force majeure event for the purposes of the contract. These events generally include war, civil strife, epidemics, acts of Government etc. A second kind is where the parties agree that all those events that could not have been contemplated at the time of execution of the contract, and that are beyond the reasonable control of either party, constitute a force majeure event for the purpose of the contract. Hybrid versions of the two and multiple variants of these are obviously possible since the clause is entirely left to the parties. The principle to be kept in mind while interpreting a force majeure clause is that it must be narrowly construed [5].

Usually, a force majeure clause would provide that neither party (or in some cases one particular party) can make a claim on account of a force majeure event. Some force majeure clauses may also provide for a termination option in case the event continues over a specified time period.

Whether the outbreak of COVID-19 and the ensuing lockdowns ordered by the Central and State Governments would constitute a force majeure event is dependent on the specific wording of the clause. Where “epidemics” or “acts of Government” are part of the force majeure clause, it is most likely that a Court/ Arbitral Tribunal would hold that the present events would constitute a force majeure event subject to:

a) Proof of causation

b) Harmonious construction with other provisions

c) Complying with the condition precedents contained in the force majeure clause.

Each of these issues is discussed separately.

a) Proof of causation

Establishing a causal link between the force majeure event and hindrance to performance of the contract is a pre-requisite to claim the benefit of a force majeure clause[6]. As part of establishing this test, the party seeking to benefit from the force majeure clause must demonstrate, first, that it would have been able to perform its obligations but for the force majeure event; [7] second, that the force majeure event itself was sufficient to cause the non-performance as against being one of the many causes for non-performance [8]. On this basis, it was held that where a charterer could not establish its capability to ship the goods, even if the shipment was made impossible by virtue of a force majeure event (bursting of a dam in this case), the charterer could not take recourse to the force majeure clause [9].

Applying this test to the present scenario, the first question to be answered remains whether contractual compliance could have been achieved despite the impact of the COVID-19 and the COVID-19 advisories (travel advisories dated 17.01.2020, 05.02.2020, 02.03.2020, and 19.03.2020, among others) and subsequently the lockdown by way of Governmental Orders (Central lockdown for a period of 21 days vide the Ministry of Home Affairs Order dated 24.03.2020 and multiple individual state lockdowns on earlier dates). The second question that needs to be answered is whether a party is using the force majeure as a mere excuse to shield a breach that would have occurred even in the absence of COVID-19 advisories and/ or lockdowns.

Applying this rationale, neither a party which could have performed its obligations remotely (such as a designer who could have designed an infrastructure project remotely), nor a party who was anyway in breach notwithstanding the force majeure event (such as an employer who had not yet acquired the site to handover to the contractor for construction and who cannot establish that it is in a position to acquire the same during the period of the force majeure event) can take advantage of the force majeure clause.

Another situation could be where the initial breach by one party caused the other party to suffer the effect of the force majeure event such as a construction project which was supposed to be concluded by February 2020 but got delayed by 2 months due to one party’s breach. In such a situation, the force majeure event would have had no impact and hence the breaching party will not be absolved of liability.

b) Harmonious construction with other provisions

Since a force majeure clause is a contractual creation, the provision will have to be read harmoniously with other provisions. Hence, even though the force majeure clause might itself provide that neither party may be entitled to make a claim, the same cause of action may also fit within the ambit of another clause which may entitle a party to make a claim. In such a scenario, the two clauses would have to be harmoniously construed and by doing so, it may still be possible for a party to make a claim.

To illustrate, most Power Purchase Agreements and some infrastructure contracts contain a “Change in Law” clause, which entitles one of the parties to claim certain additional costs in the event of an adverse impact by a “change in law.” In such a scenario, it may be possible to argue (based on the wordings of the individual clauses) that the lockdown Order, which was made pursuant to a legislation (Section 10(2)(l) of the Disaster Management Act, 2006) resulted in a change in law and hence this was a case where parties had agreed that compensation was payable. There may be other clauses as well such as a “Suspension clause” which may be applicable in certain cases. In all such cases, the force majeure clause will have to be read harmoniously with the other provisions of the contract to decipher what the intention of the parties was. Hence, even though an event may qualify as a force majeure event, in case there is a specific provision allocating risk in relation to the event, the specific provision will be applied on the basis of the rule of lex specialis derogat legi generali i.e., the special prevails over the general.

c) Complying with the condition precedents contained in the force majeure clause

Most contracts have a notification requirement vis-à-vis the occurrence of the said force majeure event, which stipulates that the non-performing party notifies the performing party about the occurrence of the force majeure event and the subsequent impossibility to perform the works. Indian Courts have held such a notification as a mandatory contractual requirement, failing which the force majeure clause will not be attracted[10]. This is obviously on the basis that since the force majeure clause is a creation of the contract, the pre-conditions in the contract for bringing into play the said clause will have to be adhered to.

Concluding Remarks - When The Force Majeure Clause Is Attracted Does The Loss Always Lie Where It Falls?

The general presumption is that in case of a force majeure event, the loss lies where it falls since neither party is responsible to the other for a loss caused owing to an event beyond its control[11]. However, a case for claiming compensation can be made in the following cases:

A) By establishing that the cause of the loss is not really the force majeure event but the other party’s breach,

B) Where the force majeure event falls within the ambit of another risk allocation clause (such as a “change in law” clause) which provides for payment of compensation by one party, and

C) Where the force majeure clause itself is limited in scope.

The exceptions cited may not be exhaustive and it is likely that with different fact scenarios emerging, the jurisprudence in this area would develop significantly.

Before concluding, it is appropriate to emphasize that none of the examples given in this article relate to contracts where time is of the essence, since it is more likely that such contracts would stand frustrated owing to impossibility. Many such examples would be considered in subsequent articles.

Anirudh Krishnan is a Partner, Hitesh Singhvi is a Senior Associates And Pranay Prakash is an Associate at AK Law Chambers.

[1] [1647] EWHC KB J5

[2] M.P. Furmston, Cheshire & Filfoot’s Law of Contract 512 (10th edn. 1981).

[3] Taylor v. Caldwell, [1863] EWHC QB J1; Lebeaupin v Richard Crispin, [1920] 2 K.B. 714; Davis Contractors Ltd v Fareham Urban District Council, [1956] A.C. 696; Ocean Tramp Tankers Corporation v V/O Sovfracht, [1964] 2 Q.B. 226; Intertradex v Lesieur-Tourteaux S.A.R.L., [1978] 2 Lloyd’s Rep. 509; Pioneer Shipping Ltd v B.T.P. Tioxide Ltd, [1982] A.C. 724, 753; Atisa S.A. v Aztec A.G. [1983] 2 Lloyd’s Rep. 579; J. Lauritzen A.S. v Wijsmuller B.V., [1990] 1 Lloyd’s Rep. 1; CTI Group Inc. v. Transclear S.A., [2008] EWCA Civ 856.

[4] 245 U.S. 159, 38 S. Ct. 57, 62 L. Ed. 219 (1917)

[5] Energy Watchdog and Ors. v. Central Electricity Regulatory Commission and Ors., (2017) 14 SCC 80

[6] Seadrill Ghana Operations Limited v. Tullow Ghana Limited, [2018] EWHC 1640 (Comm.); Classic Maritime v. Limburgan Makmur SDN BHD and Another, [2019] EWA Civ. 1102

[7] Classic Maritime v. Limburgan Makmur SDN BHD and Another, [2019] EWA Civ. 1102

[8] Seadrill Ghana Operations Limited v. Tullow Ghana Limited, [2018] EWHC 1640 (Comm.)

[9] Classic Maritime v. Limburgan Makmur SDN BHD and Another, [2019] EWA Civ. 1102

[10] Himachal Sorang Power Limited v. Central Electricity Regulatory Commission and Ors., MANU/ET/0068/2015; Raichur Sholapur Transmission Company Limited v. Power Grid Corporation of India and Ors., 2016 SCC OnLine CERC 188.

[11] 30 Samuel Williston, A Treatise on the Law of Contracts 366 (4th edn. 2004), citing Vicari v United States, 47 Fed Ct 353 (2000); [Attorney General of Belize v. Belize Telecom Ltd., (2009) 1 WLR 1988 (PC) was recognized in Nabha Power Ltd. (NPL) v. Punjab State Power Corporation Ltd. (PSPCL) (2018) 11 SCC 508 and Adani Power (Mundra) Limited v. Gujarat Electricity Regulatory Commission and Ors., AIR 2019 SC 397], North East Karnataka Road Transport Corporation v. Vijayalaxmi, 2011 (6) CTC 353 (Kant) (FB), Pongiammal & others v. R. Chinnarasu & Ors. 2013 SCC OnLine Mad 28, The Branch Manager, The New India Assurance Co. Ltd. v. Smt Suguna Rani, 2017 SCC OnLine Mad 18249.