Is COVID-19 a Force Majeure?

What is Force Majeure? According to Black’s Law Dictionary, Force Majeure clause is common clause in contract to protect the parties in the event that a part of the contract cannot be performed due to causes which are outside the control of the parties and could not be avoided by exercise of diligence and due care. From Indian Contract law perspective, Force Majeure clause is a provision in a contract that typically excuses a party from not performing its contractual obligations that becomes impossible or impracticable, due to an event or effect that the parties could not have anticipated or controlled which include events like natural disasters, acts of God as well as uncontrollable events and such events is sufficient to justify the non-execution of a contract or part of contract.

On 11th March 2020, WHO declared Novel Coronavirus Disease (COVID-19) outbreak as a pandemic and call for countries to take immediate actions. Government of India Ministry of Finance also issued an Office Memorandum on ‘Force Majeure Clause’ clarified that COVID-19 should be considered as natural calamity and Force Majeure may be invoked, wherever considered appropriate, after following the due procedure.

The law relating to Force Majeure is embodied under Sections 32 and 56 of the Indian Contract Act, 1872. Section 56 in the Indian Contract Act, 1872 states that an agreement to do an act impossible in itself is void. 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. The Indian courts applies section 56 objectively to assess whether a particular situation has rendered performance impossible and frustrated the contract, without delving into party intention, justness and reasonableness etc.

Given the lockdown announced by our Honourable Prime Minister, in some way or other, almost all the parties either individual or firm or companies have experienced distress either commercially or financially or operationally due to COVID-19. It has either made performance difficult or impossible since it has caused hardship to parties in performance of their contractual obligations.

A Force Majeure clause usually provides that the party seeking to rely on the Force Majeure clause must notify the other party of the fact that the Force Majeure event is impeding its performance within a specified time frame, it cannot be claimed ex-post fact.

If any contract does not contemplate such Force Majeure clause and the performance of the contract becomes impossible or illegal, the remedy lies under Section 56 of the Indian Contract Act, 1872 and the parties have to rely on doctrine of frustration of contract. However, Section 56 could have little application if parties expressly contemplate the provisions of Force Majeure and its consequences.

To assess whether COVID-19 could trigger the relevant Force Majeure clause, or frustrate the contract, it will be critical to evaluate the operational aspects of the relevant commercial transaction and the type of Force Majeure clause in the contract. Also, the meaning of each word used in the clause is critical to understand if a party can invoke the Force Majeure clause or not.