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The unprecedented global pandemic which has resulted from COVID-19 has led to uncertainties and government actions which have severely impacted businesses and are likely to continue to do so for the foreseeable future. In India, the National Disaster Management Authority has issued an order dated 24 March, 2020 (“NDMA Order”) followed by the Ministry of Home Affairs (MHA) guidelines on 24 March, 2020, directing Ministries/ Departments of the Government of India, State Governments and State Authorities to take measures to ensure social distancing in an effort to curb the spread of COVID-19, including closure of all commercial/ private establishments for 21 days with effect from 25 March, 2020 (with certain exceptions such as distribution of essential goods, telecom/ internet services, power generation and transmission/ distribution units etc.).
Given that supply chains across the globe have been affected, while organisations are making all possible efforts to save costs and minimise losses, the situation also merits proactive steps to be taken from legal and contractual perspectives.
The first instinct of businesses, in these times, is to invoke force majeure provisions under their contracts to claim relief from performance of obligations to the extent permissible under the relevant contracts.
While companies are evaluating their contracts, invoking force majeure provisions and sending notices to counterparties to minimise losses and risks on account of non-performance, before such notices may be issued, there are certain key aspects of force majeure provisions that should be analysed, due procedure that must be followed and steps ought to be taken to ensure that invocation of these provisions gets the affected party the relief that it intends to seek. This article explores some important aspects involved in claiming relief under the force majeure provisions of a contract.
The litmus test
There is no general definition of a ‘force majeure’ event. It varies from contract to contract. However, it is generally understood to be an intervening event which is beyond the control of both parties that either makes the performance of the contract impractical, or frustrates the performance. In order to successfully invoke a force majeure clause, there needs to be a causal link between the force majeure event and the affected party’s failure to perform.
The Supreme Court of India has held that that where reference is made to “force majeure” in a contract, the intention of the parties is to save the performing party from the consequences of anything over which it has no control. The plea of force majeure would be available to a party only if it can demonstrate that:
(i) the non-performance was due to circumstances beyond its control; and
(ii) there were no ‘reasonable’ steps that it could have taken to avoid or mitigate the event or its consequences, i.e., the performance has become physically or legally impossible.
In the absence of a force majeure clause, the party which is prevented from performing its obligations owing to the COVID-19 and/or the lockdown will have to seek relief under Section 56 of the Indian Contract Act, 1872 (Contract Act).
Time and cost relief – What do the contracts say?
|
Type of Contract |
Time Extension |
Cost Claims
|
Right to Terminate for Prolonged Force Majeure |
|
Contracts based on FIDIC contracts
|
✓ |
✓ (Employer to pay the cost except in case of natural catastrophe) |
✓ |
|
Concession Agreement based on the Model Concession Agreements issued by NITI Aayog[i] |
✓ |
✓
(But each party bears its own cost for non-political events) |
✓
(Termination Payments allowed) |
|
Other bilaterally negotiated or standard-form contracts |
✓ |
✓
(Each party bears its own cost) |
✓
|
[i] Erstwhile Planning Commission of India, the think tank of the Government of India.
Pandemic COVID-19 or Lock-down – Do they appear in the list of events?
A key enquiry to be made in order to claim relief in these circumstances is to determine if the occurrence of a pandemic like COVID-19 and/or the consequent steps taken by the Central and the State Government(s), including the lock-down, appear in the list of events identified by the parties that qualify as force majeure events.
Generally, most contracts (including those based on the FIDIC contracts and the Model Concession Agreements issued by NITI Aayog) provide for an inclusive list of events. However, it is possible that such list does not specifically include ‘epidemic’, ‘pandemic’ or ‘lock-down’ as events. In such cases, the principle of ejusdem generis can be applied to establish that these events are similar in nature to those mentioned in the list and fulfil the tests for claiming the relief.
In any case, regardless of the list of force majeure events being inclusive or exhaustive, reliance may be placed by the affected party on various notifications issued by the Government of India, where pandemic COVID-19 has been declared to be a force majeure event for claiming relief. For instance, the notification issued by the Department of Procurement, Ministry of Finance on 19 February, 2020, the press release by the Ministry of Road Transport & Highways of 25 March, 2020 or the Office Memorandum issued by the Ministry of New and Renewable Energy on 20 March, 2020.
Notice of force majeure
It is important that force majeure notices are sent for each event that prevents the performance of obligation(s), regardless of whether such events affect performance of a single or multiple obligations. For instance, installation or testing of a machinery could be affected on account of travel and visa restrictions imposed by the Government of India or on account of the lock-down in the state/country or on account of personnel or employees being diagnosed with COVID-19. In this example, if the obligation to perform installation and testing is affected on account of all three events, then it would be prudent to claim force majeure on account of all these events. Thus, notices for each event and its affect should be sent to the counterparty to claim adequate relief.
Following the procedure is critical
Courts in India, on various occasions, have held that where a contract provides for force majeure relief in unambiguous terms, the party seeking relief should strictly follow the procedure set out in the contract. Even certain contracts, such as those based on FIDIC contracts, state that the affected party can claim relief if it has given a notice of at least 14 days from the occurrence of the event of force majeure specifying the obligations which are prevented due to the occurrence of such event. Further, any lapse in following the procedure under the contract may lead to disputes with the counter party on the ground that the contractual provisions have not been adhered to and hence no claim is admissible.
Reliance on claims from sub-contractors
If a party’s ability under a contract to claim force majeure relief is dependent on receipt of force majeure notices from its subcontractors, then the party should analyse such contract(s) to identify the extent to which the contracts are back-to-back. In case the contracts are not back-to-back, the party should prepare a risk mitigation strategy to cover for risks on account of its inability to claim relief.
Dos and Don’ts
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Dos
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Don’ts |
|
✓ Identify the event(s)/provision(s) for relief. Ensure claim is not excluded from force majeure relief ✓ Identify obligations affected by force majeure events ✓ Identify subcontracts affected and reliefs that may be claimed under them ✓ Undertake review of dependencies, business risks and legal rights and remedies ✓ Take mitigation measures to minimize losses. Keep records of measures taken ✓ Identify affected party’s obligations which can be performed ✓ Strictly follow notice requirements ✓ Take corrective actions in case of any adverse communication from counterparties ✓ Follow the news and react to evolving circumstances |
x Miss any contractual timelines for claiming relief and sending notices x Forget to follow procedure prescribed under contracts for claiming remedy or seeking relief x Use ambiguous language when seeking relief. Draft detailed notices with reference to specific provisions of contracts x Forget to include documentary evidence along with claim notices x Fail to expressly reserve rights and remedies while drafting notices or response to notices x Accept claims of subcontractors, which can’t be claimed from employer on back-to-back basis x Omit to inform subcontractors that acceptance of claim is dependent on back-to-back relief received x Omit to exclude admission of any cost claims, escalations or price negotiations, if not allowed under contracts
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A review of contractual provisions and prompt action on the part of parties to a contract, wherever possible, could soften the blow which businesses are likely to suffer in the global aftermath of COVID-19.
Authored by :- Ms. Anuja Tiwari, Partner; Ms. Mallika Anand, Senior Associate; Ms. Amoolya Khurana, Associate and Mr. Aman Raj, Associate.
1 – Dhanrajamal Gobindram v. Shamji Kalidas and Co., AIR 1961 SC 1285.
2 – Delhi High Court in its judgment dated 25 March 2008 in Rajindra Nath Kundu v. Union of India.
3 – Erstwhile Planning Commission of India, the think tank of the Government of India.