Interview: Corporate Lawyer Miss Hemal Shah on Effectiveness of Force Majeure Clause in COVID-19

Interview by-Shuvasmita Nanda




Miss Hemal Shah is a Corporate Lawyer with experience in Corporate Non-Litigation, Corporate Advisory, and Compliance Officer. Her strength lies in contract drafting, reviewing, and negotiating acumen. For further information about this concept or in regards with any other query you can contact her at:

Email- shahhemal34@gmail.com or follow her in

Linked in-https://www.linkedin.com/in/hemal-shah-1302




1.What do you mean by Force majeure and why is it important? 


Ans-Force Majeure in its literal sense is any activity that is beyond the control of the Parties and rescinds their obligations towards each other. Force majeure is a French term that literally means “Superior force.” The Supreme Court of India in Energy Watchdog v. Central Electricity Regulatory Commission, said that “insofar as a force majeure event occurs that dehors the contract, it is dealt with by the rule of positive law under the Section 56 of Indian Contract Act. The performance of an act may not be literally impossible, but it may be impracticable and useless from the point of view of the object and purpose of the parties”. As righty pointed out by the Hon’ble court, not every event can be termed as impossible between the Parties and effect of the same can differ from case to case.


2.What must a force majeure clause include and if not included, then what happens?


Ans-The ideal ingredients of the Force Majeure clause should include the circumstances in which the Agreement shall not be tenable between the Parties. Like act-of-God, volcanic eruptions, (natural) disaster, fire, (acts of) war, hostilities or any local or national emergency, invasion, compliance with any order or request of any national, provincial, port or other public authority, government regulation or intervention, military action, civil war or terrorism, (biological, chemical or nuclear) explosion, rebellion, riots, insurrection strikes, civil disorder (or the material or substantial threat or justified apprehension of any of the foregoing events), curtailment of transportation facilities, close down of airports or any other exceptional and catastrophic event, circumstance or emergency, making it impossible, illegal acts. The important aspect is now to include the terms such as Pandemic and Epidemic. The Hon’ble Delhi and Bombay high courts have pointed out that inclusion of terms will liberate the Parties form performing such actions against one another.


In recent news, the Real Estate Lawyers of Mumbai have started adding the “Lockdown Clause” in the residential and commercial properties. This is to highlight the importance and the clarity amongst the Parties that each of them will have to perform their set of performances even during the lockdown and its been given an equal status as that of that of the Force Majeure Clause. Such is the importance.


In case of absence of the Force Majeure clause, the courts have made it very clear that all the Parties will be responsible for their set of obligations. Having said that, any presumption of non-performance of the Party should not be made unless there’s a clear specification of Clause mentioned.


In the recent case pronounced by the Bombay High Court wherein certain steel importers were unable to function due to their international suppliers and refrained from making any payment citing frustration of contract. The Bombay High clearly mentioned that in the Force Majeure clause the mention of both the parties being affected is important, mere exemption of one party from performing the obligations towards the another would be dismissed and no ad-interim reliefs shall be provided.


3.What do you mean by the Frustration of Contract and how is it different from the clause of Force Majeure?


Ans-The doctrine of Frustration of Contract has its origin from the Roman Law. In layman terms, the Frustration of Contract comes into force when the Parties have been discharged from their obligations since the purpose of the contract is defeated or destroyed. However, the changes in the purpose can be attributed either through the natural or man-made cause. This changes the purpose and defeats the entire idea of entering into contract at the first place. It speaks about two impossibilities:

1) Initial Impossibility 2) Subsequent impossibility

In the case of former one, the subject matter is impossible to perform under any natural or political circumstances. However, in the subsequent one, the object is possible to achieve but later on cannot be performed due to the restrictions that can be either moral or political. Like exporting illegal goods into the country which is clearly a punishable offence at the first place.


Now, the major demarcation between the Force Majeure and Frustration is barely a thin line. They are inter-twined between each other. In the Force Majeure clause, although the objects may be impossible to perform but it doesn’t destroy the object itself. It makes it useless for the parties to perform such object. Since with regards to the Frustration of Contracts, the object is destroyed here and it becomes extremely impossible for the parties to perform along with the illegality attached.


Force Majeure clause is typically a contractual clause which is made by parties in order to protect themselves from damages, losses or liabilities. However, regarding the Frustration of the Contract, it has its statutory place under section 56 of the Indian Contract Act. Hence, if any party does not expressly include the situations in which the performance of the Contracts shall be impossible, they can take shelter towards Frustration of Contracts except in property lease.



4.How will you explain the concept of Force Majeure and Frustration of Contract in the form of an example keeping COVID-19 in purview?


Ans-Both of them have an extremely narrow approach while applying. As stated above, Force Majeure clause is mere designed as contractually as compared to Frustration which can be taken as a recourse in the court of Law. The COVID-19 will have different approach to different cases. Let’s take an example: An IT firm or a business that’s majorly run on the internet will have no effect of the Force Majeure clause. However, if any business conducted by the IT firm is clearly beyond the reins of law or declared illegal by the government or by order of the court, the frustration of contract shall be applicable. No clear demarcation can apply to any one situation, it shall depend from one case to another. Having said that, neither of them will be applied if the Contract clearly talks about an alternate route decided by the Parties which has to be applied in case of occurrence of the events mentioned in the Agreement.


There are many instances wherein, in spite of receiving government notifications citing the outbreak of pandemic as Force Majeure, the courts have been examining the purview under the industry to industry basis. The defence for both the parties would be to take reliance under the garb of the notifications and any significant interim orders passed by the courts in the Country. Be rest assured, the applicability is not clearly going to be same for all the industries and areas of business, negotiation of contracts will play a major role here.


5.What are the areas where both the concept of Force Majeure and Frustration of Contract are not applicable?


Ans-The Force Majeure exemption and frustration of contract is not clearly applicable on the essential services. More importantly, it is essential to understand how the courts are treating the force majeure clauses from case to case basis. As mentioned above, the Bombay High Court dismissed a plea invoking the Force Majeure clause in the case of Standard Retail Pvt. Ltd. v. M/s G.S. Global Corp & Ors., Commercial Arbitration Petition (L) No. 404 of 2020. The court ruled out that threshold for each individual and industry should be examined on case to case basis. Hence, in spite of the fact that both the Parties could tenably be termed under the exemption, the dismissal of court even for such essential services requires a through review.


6.In the current scenario of COVID-19, what will be the impact of both the concepts on businesses and companies?


Ans-It is essential for every business and individual to understand that after the lockdown is lifted and the Pandemic seems to be reduced, the consequences post COVID-19 shall always remain and the Parties need to look out for alternate changes or inclusion of conditions in order to waive such objective or an alternate route to perform the object of the Contract.

The Parties post pandemic need to necessarily include the following parameters while drafting the agreement or framing one:


1) Force majeure clause

2) Inclusion of all the possible words such as Pandemic, Epidemic and Lockdown

3) Who will bear the losses in such unforeseen circumstances

4) Clear demarcation of the rights and obligations

5) Alternate dispute resolution (other than going to courts, like online resolution)

6) The impossibility of such performance was due to the lockdown and was it affected directly?

7) Have Parties taken all the reasonable measures to protect object of the Contract?


The drafting and the negotiation of the contracts for lawyers will be stringent and vetting of risk assessment of legal obligations will play a large role. Damage control strategies to protect the management will also have its own recourse. Another important aspect that lawyers and the companies need to forgo is to let go the age-old Force Majeure clause that has been dead in the contracts bringing enough parties in the soup. However, inclusion of all the possible situations and in variety shall be a good recourse to save the face of the business and individuals.


We all understand this for a fact that termination of the contracts plays a major role in the contracts and so does the post termination obligations. It has brough this clause at par with the Force Majeure and frustration of the contracts. An easy exit mechanism amongst the parties is important to understand the implications and the losses to be divided.

Time is precious, lawyers need to be creative to solve the solutions for their problems faster and that too without the help of physical filing of the court, alternate dispute resolution, online recourses should surely be taken care of.


Lastly, it’s not only the lawyers, but the businesses and the individuals that need to thoroughly take care of all the possible circumstances and mention about them to the highest possible extent of the human mind. It’s a setback for an ill-famed contract but a boon for those parties that have included all the possible situations in order to safeguard their rights and obligations.





 
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