Covid 19 Impact

ASC Legal, Solicitors and Advocates. April, 2020

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COVID-19 IMPACT: “FORCE MAJEURE” - IS IT A SHIELD

The COVID-19 pandemic has affected the subsisting commercial arrangements and relationship amongst businesses across the world. The World Health Organization (WHO) declared the Covid-19 outbreak as a ‘Public Health Emergency of International Concern’ on January 30, 2020 and it was official declared to be a ‘Pandemic’ on March 11, 2020. The Governments world-wide immediately have swung into action and imposed lock-down etc; even the masses are seen reciprocating the call and have taken the same in stride. However, beneath this spirit to overcome, there is an undertone of anxiety and an atmosphere of uncertainty surrounding the numerous commitments and contractual obligations with which Businesses and Corporations are invisibly bound. The execution and performance aspect under contracts which govern a variety of legal relationships between governments, corporates and individuals have come into some trouble. Such pressure is natural to be experienced in societies where rule of law governs the relationships of its subjects and the contractual obligations are considered sacrosanct. Yet, no one can deny the smallness of human grit in comparison to the indomitable will and the force of nature. When faced with such circumstances, a legal system based on the rule of law itself makes accommodation for failure to comply and perform, which even the most faithful and determined may experience. The privity and general sense of obligations is then required to give way to and consider the otherwise atypical element of fairness in contracts and it is then that the principle of ‘Force Majeure’ assumes importance. It deals with delays, non-performance or aberration in performance of contractual arrangement in times when forces beyond control and contemplation of parties to contract impact the performance of such contracts and arrangements. The Ministry of Finance, Government of India, on February 19, 2020 issued a notification stating that Covid-19 shall be regarded as ‘Force Majeure’ clause, in terms of the Manual for Procurement Goods, 2017 and should be considered as a case of natural calamity. Further on March 20, 2020, another notification for extension in Scheduled Commissioning Date of Renewable Energy Projects considering disruption of the supply chains due to spread of COVID-19 globally, as a Force Majeure (FM) event was issued by the Ministry of Finance.

Background In general parlance, Force Majeure means superior force or uncontrollable event or effect that releases one from fulfillment of contractual obligation. The legal theory for non-performance of a liability due to an unforeseen event has evolved over time. Force majeure is common clause in contracts that fundamentally frees both parties from legal responsibility or obligation when an extraordinary event or circumstances beyond the control of the parties arises. The theory of ‘Force Majeure’ effects all or part of the obligations of one or both parties. The international norm on the concept of “Force Majeure”, finds usefully incorporated in the United Nation Convention on Contracts for International Sale of Goods (CISG), Article 79 Impediment Excusing Party from Damages states the following: “(1) A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences. (2) If the party's failure is due to the failure by a third person whom he has engaged to perform the whole or a part of the contract, that party is exempt from liability only if: (a) he is exempt under the preceding paragraph; and (b) the person whom he has so engaged would be so exempt if the provisions of that paragraph were applied to him. (3) The exemption provided by this article has effect for the period during which the impediment exists. (4) The party who fails to perform must give notice to the other party of the impediment and its effect on his ability to perform. If the notice is not received by the other party within a reasonable time after the party who fails to perform knew or ought to have known of the impediment, he is liable for damages resulting from such non-receipt. (5) Nothing in this article prevents either party from exercising any right other than to claim damages under this Convention.” The aforesaid Article does not refer to force majeure, impossibility, frustration, hardship, and other terms that have their independent recognition in legal system. The language of the Article gives a plain and generic expression that can be related to the concept of force majeure, impossibility, and frustration. Article 79 needs to be read and interpreted without any reference to Domestic Law Principles.

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Force Majeure under Indian Law The concept of “Force Majeure” is considered differently under civil law and common law. In most civil law countries such as China, France etc., the concept of “Force Majeure” is codified. In most common law countries such as India, England etc. the concept of “Force Majeure” is not codified and finds mention and is usually incorporated as a clause, which finds mention in the agreement between the parties. “Force Majeure” or “Act of God” is a standard clause that finds reference in most contracts, is not commonly invoked and exempts a party from performing its contractual obligations which have become impossible or unfeasible due to an event or effect which the parties could not have foreseen or controlled. This clause usually covers unforeseeable incidents such as natural calamities, war, sudden change of government policies etc. "Force Majeure” is not expressly stated. The Doctrine can be traced under Section 32 and 56 of the Indian Contract Act, 1872. Section 32 deals with “Contingent Contracts”, in which the performance of the contractual obligations is contingent on the happening or non-happening of an event. For general contracts, Section 56 embodies the “Doctrine of Frustration”. For ease of reference Section 32 and 56 of Indian Contract Act, 1872 are as follows: “Section 32: Enforcement of contracts contingent on an event happening —Contingent contracts to do or not to do anything if an uncertain future event happens, cannot be enforced by law unless and until that event has happened." If the event becomes impossible, such contracts become void.” “Section 56: Agreement to do impossible act - An agreement to do an act impossible in itself is void. Contract to do an act afterwards becoming impossible or unlawful.—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. Compensation for loss through non-performance of act known to be impossible or unlawful.—Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the nonperformance of the promise.” In M/s. Alopi Parshad & Sons Ltd. vs. Union of India [(1960) 2 SCR 793], the Hon’ble Supreme Court after setting out Section 56 of the Indian Contract Act, 1872 held that it is only when a consideration of terms of the contract, in the light of the circumstances existing when it was made, showed that they never agreed to be bound in a fundamentally different situation which had unexpectedly emerged, that the contract ceases to bind. It was further held that the performance of a contract is never discharged merely because it may become onerous to one of the parties.

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Courts have generally construed “Force Majeure” clause(s) narrowly accepting the event as triggering the consequences of “Force Majeure” if the particular event clearly falls within the ambit and scope of a “Force Majeure” clause. “Force Majeure” clauses generally have a notification requirement and hence complying fully with the notice requirements is imperative for parties seeking to invoke the “Force Majeure” clause. The burden of proof of demonstrating the existence of “Force majeure” is on the party asserting existence of the same. In a recent judgment Energy Watchdog v. CERC [(2017) 14 SCC 80] the Hon’ble Supreme Court, referring to the decision Satyabrata Ghose v. Mugneeram Bangur & Co., [1954 SCR 310] held as follows: “Where the Court finds that the contract itself either impliedly or expressly contains a term, according to which performance would stand discharged under certain circumstances, the dissolution of the contract would take place under the terms of the contract itself and such cases would be dealt with under Section 32 of the Act. If, however, frustration is to take place de hors the contract, it will be governed by Section 56.”

(Emphasis supplied)

The judgment also summarized the concept around Force Majeure. It was held that the force majeure clause will not normally be construed to apply where the contract provides for an alternative mode of performance, and that the application of the doctrine of frustration must always be within narrow limits and will not apply so long as the fundamental basis of the contract remains the same. Further in Dhanrajmal Gobindram v. M/s Shamji Kalidas and Co. [(1961) 3 SCR 1020] the Hon’ble Supreme Court of India held that the term “Force Majeure” is a wider concept. It was also observed that the numbers of Force Majeure clauses are drafted differently and is limited to a few situations only. Government of India Notifications on Force Majeure During the initial outbreak of COVID-19 the Procurement Policy Division of Department of Expenditure, Government of India issued a notification dated February 19th, 2020 bringing attention to the Force Majeure Clause as per the Manual of Procurement of Goods, 2017 quoting para 9.7.7., which for ease of reference the same has been reproduced as follows: “9.7.7 Force majeure clause

A Force Majeure (FM) means extraordinary events or circumstances beyond human control such as an event described as an act of God (like a natural calamity) or events such as a war, strike, riots, crimes (but not including negligence or wrong-doing, predictable/seasonal rain and any other events specifically excluded in the clause). An FM clause in the contract frees both parties from contractual liability or obligation when prevented by such events from fulfilling their obligations under the contract. An FM clause does not excuse a party’s non-performance entirely, but only suspends it

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for the duration of the FM. The firm has to give notice of FM as soon as it occurs and it cannot be claimed ex-post facto. There may be a FM situation affecting the purchase organisation only. In such a situation, the purchase organisation is to communicate with the supplier along similar lines as above for further necessary action. If the performance in whole or in part or any obligation under this contract is prevented or delayed by any reason of FM for a period exceeding 90 (Ninety) days, either party may at its option terminate the contract without any financial repercussion on either side.” Please click here to view & download the Notification dated February 19, 2020

Additionally, the Ministry of New & Renewable Energy issued a notification with respect to Renewable Energy Projects stating that due to the impending pandemic. The parties (solar project developers) can invoke Force Majeure clause to avoid financial penalties if they miss the contractual obligations are not honoured in the given situation. Please click here to view & download the Notification dated March 20, 2020 Difference between Concept of “Force Majeure” & Doctrine of Frustration A force majeure clause characterizes a contracting party to terminate the contract, for the purpose of alleviating parties from performing their contractual obligations and / or liability for contractual nonperformance, when there is an extraordinary event which is beyond the control of the parties (e.g. Epidemic, Pandemic, Act of God) that prevents or delays that party from fulfilling their obligations under the contract. However, there are several prerequisites which must be satisfied before a party can successfully invoke a force majeure clause. Whereas, in an absence of the Force Majeure contract, parties might be able to terminate the contract on the ground that the contract has been frustrated. The affected party could claim relief under Section 56 of the Indian Contract Act, 1872, however, in order to claim the doctrine of frustration, it is well settled that the performance of the contractual obligations has become impossible by reason of some event which the party could not avert and that the impossibility is not self-induced by the party or due to its negligence. The Force Majeure clause is creature of contract; on the other hand, “Doctrine of Frustration” is a common law principle. For contracts relating to the supply of raw materials, assumingly where there is outage or shortage due to lockdown, in such circumstances the impossibility of performance of contract should be evaluated. As a result of COVID-19, the delays occurred can be regarded as steady and highly dynamic which might affect the intendment of the contract and in these circumstances the doctrine of frustration will be applicable. The application of doctrine of frustration is more narrower in approach as compared with force majeure yet it might act as an asset in the situations where it can be assumed that the performance of the contract is impossible.

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Illustrative Impact of “Force Majeure” on following situation Rent/ Lease Agreements COVID-19 has affected the Rent/Lease Agreements. The lockdown caused due to the COVID-19 has created a chaos in the realty sector. In the usual practice, the Builders Agreement contain the Force Majeure clause and as highlighted above if such arrangements contain a clause for Force Majeure the same can be evaluated for being invoked in the given circumstances. If one refers or considers lease agreement entered in ordinary course and such agreements do not contain a Force Majeure Clause, then in such situation, the question arises whether Section 56 of Indian Contract Act, 1872 shall be attracted. Indian Courts have shed their views on such situations. In Raja Dhruv Dev Chand v. Raja Harmohinder Singh [1968 AIR 1024] the Hon’ble Supreme Court observed that Section 56 of the Indian Contract Act, 1872 has limited application to covenants under a lease and would not apply to cases where the transfer is completed. The Hon’ble Apex Court further analysed, as to whether or not, rent is payable by the lessee due to a Force Majeure can fall within the meaning of Section 108(e) of Transfer of Property Act, 1882 & the scope of Transfer of Property Act, 1882 and held as follows: “where the property leased is not destroyed or substantially and permanently unfit, the lessee cannot avoid the lease because he does not or is unable to use the land for purpose for which it is let to him” Further it important to observe the view taken by the Hon’ble Madras High Court in the matter Kodi idi kondaiyan chettiar v. P Sivasamy [1998 (2) CTC 641] observed that the lessee is entitled to abatement of rent when there is no provision regarding the obligation of the tenant to pay rent after the property is destroyed/unfit for use. Aviation and Hospitality Sector (I) Aviation Industry The outbreak has impacted the aviation sector massively, with the international passenger commercial travel ban that has been imposed almost in majority part of the world, the Aviation sector is bound to suffer further acute losses. The Indian aviation sector contributes a reported $72 billion to the national GDP. The International Air Transport Authority (IATA) has estimated the loss incurred by the global airlines during pandemic to be $252 billion in 2020 and in the second quarter, it is estimated to be a net loss of $39 billion. Global airlines may have to refund tickets to the time $35 billion during the second quarter. In such prevailing circumstances, the Force Majeure clause can be considered, basis of the contractual agreement. Whether, the presence of the Force Majeure agreement, would permit the parties to waive off the performance of their obligations, as long as it were presented by Force Majeure.

(II) Hospitality Sector The spread of the corona virus has brought the hospitality sector into a sudden freeze. For the tourism sector Covid-19 is turning into the biggest crisis. The World Travel and Tourism Council (WTTC) has

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predicted the loss for the tourism sector to be approximately US$22 billion. This would also result in job loss of 50 million people and the travel sector shrinking by 25 per cent in 2020. As far as, Indian tourism and hospitality sector are concerned then there is a potential job loss of 38 million expected. Hotel operators, franchisors and owners should scrutinize carrying out a review of key contracts to actuate whether the impact of the outbreak establishes a Force majeure event. It is advisable to the contracting parties to consider invocation of Force Majeure clause in situation of suspension and nonperformance of its obligations and payments. Confiding on the wording of the contract, an event that amounts to Force Majeure may relive one or all parties from performance of, or suspend performance of, their contractual obligations. Considering the present scenario, if Force Majeure applicability is dicey, then in such circumstances, Doctrine of Frustration evaluated for its application. Due to ongoing situation, entities in such sector might not be in a realistic situation to perform its obligations arising out of such contracts. Workplace The outbreak of this pandemic has also brought up employment law issues. The lockdown has changed the whole scenario of the workplace, many employers are being forced and are attempting taking difficult decision and has affected the business of very many. Having a clause of force majeure in contracts would play a major role in such pandemic. Therefore, the workplace/employment decision will majorly implicate written contracts and collective bargaining agreements which compromise “Force Majeure” covenants that excuse performance, if such envisaged events occur. If there are no express Force Majeure clause which do exists to excuse non-performance then the common law “Doctrine of Impossibility and Frustration” may come into play.

ASC Legal Comments It has therefore become imperative now, than ever before, to evaluate situations which merit consideration of application ‘Force Majeure’ as a doctrine in situation(s) wherein the COVID-19 pandemic and the lockdown has created unwarranted legal implications under non-contractual relationships. For instance; Global Tax Administrations & Jurisdictions, guided by the Organization of Economic Cooperation and Development (‘OECD’) have been advised that the provisions under International Tax Treaties, which characterize and establish taxing rights between two tax jurisdictions, on basis of happening/ fulfillment of certain conditions, may consider ‘COVID-19’ as a ‘force majeure’ situation, even though such situations are not specified in ordinary course. The impact which COVID-19 and the resultant lock-down has created, is an unprecedented event, which is very unique when compared with any ‘Force Majeure’ situation which the Courts have dealt

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with till now, because this has not only paralysed contracting parties, but systems altogether and is thus much global in outreach and pervasive in terms of its impact. Therefore, Till now the Courts have held that non-performance or termination of contracts by virtue of ‘Force Majeure’ does not operate automatically and is somewhat predicated upon the drafting/existence of the relevant covenants/clauses, However, now it will be interesting to see Judiciary’s response wherein no ‘force majeure’ clause existed and how circumstances would weigh. Nonetheless, during the Covid-19 outbreak, it will still be of utmost significance to notify all the concerned parties in an affected contractual situation, about the presence of the ‘Force Majeure’ event under the said respective contracts and consequences emanating therefrom. We are confident that the Hon’ble Courts are well poised to deal with the situation, in sub serving the cause of justice. Hope the above would be useful. In case of any assistance/ further clarification required, please do let us know. Please note that in the light of potential impact of COVID-19 Pandemic, we are currently operating at the usual capacity, but working remotely to mitigate the risk and spread of the virus. Wherever possible, shall perform client meetings "online" rather than face-to-face, keeping in view all government guidelines with respect to outstation travels, including international travel. We would strive in ensuring that professional practice and client commitments are adhered to and well taken care of during these challenging times. Wishing Good Health With kind regards, Aseem & Team

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