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Covid-19 has given rise to an economic crisis along with a humanitarian crisis at a massive scale. Due to the lockdown imposed because of Covid-19, restrictions were laid down on the movement of goods and persons. Only those movements were allowed which were related to essential services. This seriously affected the ability of the parties to the contract to perform their part of the obligations. This resulted in several parties breaching the contract and several of them assessing their remedies to such breach. Following this, every industry is trying its best to avail itself some levy from the contractual obligations by taking rescue of the ‘force majeure’ clause in the contracts. A force majeure event is the unforeseeable event which is completely beyond the control of the parties concerned. It encompasses both natural and artificial unforeseen events. This clause of force majeure imposes a stringent obligation on the parties to invoke it. They have to perform proper due diligence exercise and only when they cannot determine the happening or the non-happening of the event, can they invoke this clause. The effect of invoking such a clause is that the party is excused from performing the part of its obligations under the contract and is also prevented from being liable of committing the breach of contract.
The Delhi High Court in MEP Infrastructure Developers Limited v. South Delhi Municipal Corporation considered the validity of force majeure clause in the contract. The single judge bench upheld the validity of this clause and held that this clause, once acknowledged by the other party, instantly comes into effect and there is no requirement to explicitly invoke the clause. The present paper analyses this decision considering the Covid-19 situation.
Force Majeure Clause
The clause of ‘force majeure’ is often contained in contracts and is usually negotiated between the parties wherein they specify what constitutes the event of force majeure. Several contracts include acts of god, labour strikes, riots, pandemics, boycotts, etc. to come within this clause. If the event which is responsible to bring about non-performance of the contract is specifically mentioned in the force majeure clause of the contracts, then the parties to the contract can be relieved from the performance of such obligations under the contract. Even when such an event is not mentioned specifically in the clause, the parties usually put a catch all phrase like ‘including but not limited to’ in the contracts to include those events not specifically mentioned in the clause.
Whether pandemic of covid-19 falls under the ‘act of god’?
The Indian Judiciary has not specifically ruled on whether a pandemic like Covid-19 falls under ‘an act of God’ but there are a few decisions which provide support in this context. In the case of The Divisional Controller, KSRTC v. Mahadev Shetty, the Supreme Court held that the expression ‘Act of God’ means that the event has occurred because of the operation of natural forces and it is free from any sort of human intervention. It also stated that there is no excuse from the liability if the possibility of the happening of the event can be anticipated. The Madras High Court and the Kerala High Court have passed similar judgments in the case of P.K. Kalasami Nadar v. Ponnuswami Mudaliar and R.R.N. Ramalinga Nadar v. V. Narayana Reddiar respectively.
Global Perspective on considering Pandemic as ‘Act of God’
In contrast to the Indian courts, the Courts in the United States of America and the United Kingdom have included a pandemic to come within the expression ‘Act of God’. The case of Lakeman v. Pollard is related to a labourer who did not complete his work at the mill due to the cholera epidemic. He feared contracting the disease and thus left his job early. The Supreme Court at Maine held that the cholera epidemic could be said to be an Act of God and thus the labourer was not liable for breach of contractual obligation. In the U.K. law, in the case of Aviation Holdings Ltd. v. Aero Toy Store LLC which was related to the event wherein the party could not deliver an aircraft because of the pandemic, the court held that this was within the catch all phrase of a force majeure clause.
Brief facts of the case -MEP Infrastructure Developers Limited v. South Delhi Municipal Corporation
The petitioner was the contractor of a highway development project and he was supposed to pay revenue to the respondent. He could collect toll on a stretch of the road as per the terms of the Toll Collection Contract and the revenue was to be paid for this. The petitioner failed to make the weekly revenue payment to the respondent after the declaration of the Covid-19 pandemic and the consequent lockdown restrictions. As a result of this lockdown, the petitioner could not generate any revenue from the toll and thus he defaulted on making any payment to the respondent. Vide the order dated March 2020, the petitioner was asked to pay the arrears in three monthly installments and not to default in the future weekly payments. Thereafter, the petitioner approached the Delhi High Court and claimed that because of the force majeure which is the Covid-19 pandemic, the performance of contact had become impossible. There was an office memorandum by the Ministry of Finance which stated that any disruption due to the spread of the coronavirus in China or in any other country will be covered in the clause of ‘force majeure’. The circular also stated that the coronavirus pandemic may be considered a natural calamity and the force majeure clause may be invoked in case of disruption of business.
Assertions by the petitioner
The petitioner heavily relied on the above circular of the Ministry of Finance which clarified that Covid-19 pandemic is a natural calamity and a force majeure situation. Following this, another circular by the Ministry of Road Transport and Highways came out which also classified Covid-19 as a force majeure event. This circular was given a retrospective effect. It was the contention of the petitioner that this circular was applicable to all the contracts of development in the road sector and it was a generic order. The petitioner also asserted that since Covid-19 has been declared by the government itself as a force majeure event, there is no need for an express invocation of the clause under the contract.
Assertions by the respondent
The respondent asserted that the petitioner had invoked the force majeure clause on March 19, 2020, after he had defaulted in making the payment of three weekly installments. It was also contended that according to the terms of the contract, the force majeure clause could only be invoked effectively five days after the said notice which is on March 24, 2020. The respondent claimed that there were no benefits available to the petitioner prior to the said date. The respondent relied on the case of Energy Watch Dog v. Central Electricity regulatory Commission & others of the Supreme Court wherein it was observed that such force majeure clauses must be interpreted in a narrow sense and the parties must compel to the terms of the contract. Only in exceptional circumstances, can the non-performance of the obligations under the contracts can be excused.
Decision by the Court
The court acknowledged the fact that Covid-19 was declared as a force majeure event by the government itself under its office memorandum. It also stated that the official date for recognizing the event would be the same date mentioned in the memorandum. Therefore, the court observed that even though the petitioner acknowledged the force majeure clause at a later date, the applicability of it would start from the day the memorandum was issued. The High Court also observed that the respondent circulated the circular itself which spoke of the Covid-19 being declared as a force majeure event. Thus, a notice to that effect was not necessary and the clause becomes immediately applicable.
Analysis of the judgment
Through this judgment, the High Court had given a huge clarification. It has stated that once a party has acknowledged the existence of a force majeure situation, then it cannot challenge the non-performance of the obligations under the contract which is impacted by such force majeure event, in this case, the pandemic. The court had also observed that there is no requirement of a separate notice indicating the occurrence of such an event since the pandemic has already been classified as force majeure event. This observation becomes significant in case of road construction projects that prescribe the perquisite of an early warning notice for the invocation of force majeure clause under the contract. The High Court also observed that not only the construction projects but various other contracts as well would be affected by the nationwide lockdown that was imposed as a consequence of the spread of novel coronavirus and thus they would also come under the force majeure situations.
This novel interpretation by the court in this case may have opened the floodgates for potential litigations in the future. This is because it is divergent and in contrast to the position established under the jurisprudence related to force majeure. In the case of Energy Watchdog v. Central Electricity Commissioner, the Supreme Court has clearly stated that the force majeure clauses must be given a narrow interpretation and this clause would only be available to the parties in exceptional circumstances. The court also stated that this clause would come into action only when the operations of the firm or the entity are ‘hindered’. This hindrance should be such that it is severe in nature and the performance of the contract is completely affected as a result of the event. Thus, the court observed that the invocation of this clause by any entity or person must be scrutinized carefully considering the wording of the provision. Therefore, the court here clearly mentions that the benefits of this clause cannot be provided to each party coming before by filing a petition invoking this clause. Proper due diligence must be conducted before granting the benefits under this clause.
In this case, it was held by the court that the clause of force majeure would be made operational even before the operations are hindered because of the force majeure event. This can lead to applicants seeking relief from the court for the potential force majeure event. In this case, as per the terms of contract, there was a pre-condition of giving a notice for the invocation of the clause of force majeure. Even when the memorandum relied upon by the court mentions the requirement of furnishing a notice. However, it seems like the court wrongly interpreted and held that memorandum itself would serve as a notice for the invocation of this clause.
Certainly, the court’s holding in this case has lowered the threshold for the invocation of the clause of force majeure. In spite of the fact that the memorandum clearly states the need for a proper notice and the fact that such force majeure events cannot be claimed ex-post facto, the ruling circumvents the failure of the petitioner to render proper notice of the happening of the force majeure event. This judgment implies that for future reference, if there is an official recognition which categorizes an event as force majeure, then there would be no requirement of a notice even if there is an express stipulation to this effect.