COVID 19 – Performance of agreements in India

1. On March 11, 2020[1], the World Health Organization (“WHO”) characterized the COVID-19 virus as a ‘pandemic’. On the same day, the Government of India issued[2] a Revised Travel Advisory inter alia suspending all existing visas (except diplomatic, official, UN/ International Organisations, employment, project visas) till April 15, 2020. The COVID-19 has, in the past couple of months spread across the globe. Similar restrictions have also been imposed by various other countries to protect its citizens from the virus, which has already claimed many lives and is still spreading and infecting people all across. In addition to the major impact on human life and health, the present situation also impacts businesses and transactions all across the globe as it has potentially given rise to various contractual disputes. This article aims to explain the legal perspective behind this evolving impact of COVID-19.

THE OUTBREAK

2. On December 31, 2019, WHO – China Country Office was informed of cases of pneumonia of unknown etiology (unknown cause) detected in Wuhan City, Hubei Province of China. [3] On February 11, 2020, the WHO named the  disease ‘COVID-19’, short for “coronavirus disease 2019.”[4] By March 9, 2020 the above figures of confirmed cases had increased to 109,577 confirmed cases globally in at least 106 countries/ territories/ vessels (including 43 cases in India) with China continuing to be the most infected country, with 80,904 confirmed cases.[5]

3. The reasons for the quick and widespread impact of COVID-19 across countries may be associated with (a) its source of transmission (person-to-person within 6 feet or through respiratory droplets produced when an infected person coughs or sneezes); (b) the limited knowledge about COVID-19; (c) no identified cure for the same; and (d) travel and interaction across the globe. In such circumstances, governments across the globe have taken various steps to protect its citizens from the outbreak, including as identified above. Some of the primary steps taken which may have an impact on business include[6],

i. Restrictions on travel to countries where confirmed cases of COVID-19 have been identified;

ii. Restrictions on travel into the country from countries where confirmed cases of COVID-19 have been identified or where travel history of individual indicates recent travel to such countries;

iii. Checks and balances to restrict movement of individuals showing early signs/ symptoms of probable infection; and

IMPACT ON BUSINESS

4. The COVID-19 is first and foremost a human tragedy. The virus has already infected hundreds of thousands of individuals and has claimed close to 4000 lives across the globe[7]. With no confirmed cure in sight, it is difficult to identify the extent of impact COVID-19 is going to have on human life in the coming months.

5.  As indicated above, in light of the global outbreak of COVID-19, a number of governments have either imposed lock-downs, restricting local movement within regions which have been significantly affected (such as China and Italy[8]). Further, numerous countries have implemented travel bans and restrictions on entry of foreign nationals. These have substantially impacted the capacity to ship goods by air (though the impact on surface shipment is yet to be assessed).

6. McKinsey & Company, in a study[9], has also identified global economic slowdown as an impact of the COVID-19. According to the study, the outbreak may result in a significant fall in the global Gross Domestic Product (“GDP”) and all sectors of industry may be impacted. While the impact of COVID-19 on business and GDP has only started to manifest itself, the extent of the same is yet to be completely assessed.. There have been similar studies carried out by various other organisations as well.

7. Today business is truly carried out across boundaries with the advent of technology, ease of travel and the convenience of communication across countries. Businesses, especially large-scale and long-term contracts, frequently have cross-border elements in performance. One impact of COVID-19 (and the consequent restrictions imposed by countries across the world) on global business that seems to already be causing concerns is the inability/ difficulty being faced by businesses in performance of obligations agreed to in existing agreements.

COVID-19 AND FORCE MAJEURE

8. The inability/ difficulty being faced by businesses in performing their obligations due to the outbreak of COVID-19 could have neither been anticipated nor controlled by the businesses. It is therefore incumbent to analyse as to whether COVID-19 can be classified as an event of Force Majeure and if so, what steps ought to be taken by businesses to protect their interests.

9. ‘Force-Majeure’ is derived from the French language and literally translated means ‘a superior force’. A ‘force-majeure’ can be defined as “an event or effect that can be neither anticipated nor controlled; esp., an unexpected event that prevents someone from doing or completing something that he or she had agreed or officially planned to do. The term includes both, acts of nature (e.g., floods and hurricanes) and acts of people (e.g., riots, strikes and wars).”[10] In other words, ‘force-majeure’ refers to “events outside the control of the parties and which prevent one or both of the parties from performing their contractual obligations.“[11]

10. It may be pertinent to note that the concept of ‘force-majeure’ may be 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. Therefore, a specific provision for ‘force-majeure’ may not be required in agreements governed by laws of such countries. In other jurisdictions such as the United States, courts are known to look at various elements (such as Whether the contract contains an applicable force-majeure clause?[12]; Was the force-majeure foreseeable?[13]; Was performance rendered impossible?[14]; Was the impossibility relatable to the force-majeure event?[15]; etc.) when considering a claim of ‘force-majeure’. In most common law countries (such as India, England, etc.), the concept of ‘force-majeure’ is not codified[16] and is introduced by way of contract, i.e., provided for in the agreement between parties. It is therefore important to first identify as to which law is applicable to a particular commercial understanding between parties.

11. In Indian context, most long-term contracts or contracts with continuous obligation of supply, generally contain a ‘force-majeure’ clause. The purpose behind inserting such a clause in a contract is to save the performing party from the consequences of anything over which the party has not control[17]. Such a clause generally identifies the events which may lead to situations outside the control of parties, which, if found to prevent or delay performance of obligations by any or all parties, may be excused. Further, continued ‘force-majeure’ event impacting performance of the contract may also lead to termination. Additionally, such a clause generally also provides the actions to be taken by an affected party in the event a ‘force-majeure’ clause is triggered.

12. “Force majeure” is governed by the Indian Contract Act, 1872 (“Contract Act”). In so far as it is relatable to an express or implied clause in a contract, it is governed by Chapter III dealing with the contingent contracts, and more particularly, Section 32 thereof.[18] Section 32 of the Contract Act provides for “Enforcement of Contracts contingent on an event happening”.

13. It may be pertinent to note that courts have generally construed ‘force-majeure’ clauses narrowly[19]. Accordingly, unless a particular event may clearly fall within the ambit and scope of a ‘force-majeure’ clause, courts may not accept such event as triggering consequences of ‘force-majeure’. The primary focus, while interpreting such clauses, ought to be on whether the clause encompasses the type of event a contractual party claims is causing its nonperformance[20].

14. A standard ‘force majeure’ clause[21] in vogue in public procurement contracts of the Government of India generally includes natural force majeure events. One such example is,

Act of God, including but not limited to lightning, drought, fire and explosion, chemical or radioactive contamination or ionising radiation (to the extent of the fire, explosion, chemical or radioactive contamination or ionizing radiation originate from a source external to the Power Station Land), epidemic, earthquake, volcanic eruption, landslide, flood, cyclone, typhoon, tornado, or exceptionally adverse weather conditions which are in excess of the statistical measures for the last hundred (100) years”.
(emphasis supplied)

It is thus clear that a ‘force-majeure’ event, as provided for in standard agreements, generally include natural events such as ‘Act of God’ which may be extended to capture a pandemic or an epidemic. An ‘epidemic’ has been defined[22] as “spreading widely, generally prevailing, affecting great numbers”. An epidemic disease is one of which “the cause acts upon a large number at the same time by reason of its wide diffusion”. Various States in India such as Karnataka, Haryana and the National Capital Territory of Delhi have already declared COVID-19 as an ‘epidemic’.

15. It may be pertinent to note that the Government of India believes that the spread of COVID-19 falls within the definition of ‘Act of God’ as a ‘natural calamity’. The Government of India has clarified[23] that for the purposes of considering disruption of the supply chains due to spread of COVID-19, in China and other countries, this may be considered as ‘natural calamity’ and force-majeure clauses may accordingly be invoked. A ‘calamity’ has been defined[24] as a “disastrous event”.

16. While the guidance may not be universally applicable as law, it may still have persuasive strength in interpreting contracts with the Government of India, which are based on common procurement guidelines. Such an observation may be considered a possible tool for interpretation on the grounds of contemporanea exposito. However, the acceptance of such an argument is yet to be tested.

17. It may thus be open for one to argue that impact of COVID-19 on the ability of a party to perform its obligations under a contract may be covered as a ‘force-majeure’ event. In addition to being identified as a ‘force majeure’ event, courts may also require showing that the party attempted to perform the contract regardless of the event, perhaps by finding an alternative source of supply[25].

COVID-19 AND FRUSTRATION

18. The law in India with respect to ‘frustration of contracts’ has been laid down in Section 56 of the Contract Act. The leading judgments with respect to ‘frustration’ are Satyabrata Ghose v. Mugneeram Bangur & Co.[26], where the Hon’ble Supreme Court has adverted to the second paragraph of Section 56 and Energy Watchdog Vs. Central Electricity Regulatory Commission & Ors[27] where the Hon’ble Supreme Court considered Section 56 in the context of long-term contracts. In Energy Watchdog, the Supreme Court  stated,

“What was held was that the word “impossible” has not been used in the Section in the sense of physical or literal impossibility. 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. If an untoward event or change of circumstance totally upsets the very foundation upon which the parties entered their agreement, it can be said that the promisor finds it impossible to do the act which he had promised to do. It was further held that 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.”

19. In situations where an agreement does not provide for ‘force-majeure’ or one does not fall within the ‘force-majeure’ clause, a party may have to look beyond the clause. In such a situation, one may consider invoking Section 56 of the Contract Act. However, in such a case, one would have to show that the event, i.e., COVID-19, has changed the circumstances totally, to upset the very foundation of the agreement, thereby rendering it ‘impossible’ to perform. It may be noted that mere economic difficulty or ‘loss’ may not be sufficient basis to trigger Section 56 of the Contract Act. Parties in such cases may not be excused form performing their rights.

THINGS TO REMEMBER

20. COVID-19 is pandemic that has surfaced approximately two months back (December 2019). Its outbreak has already started impacting businesses all across the world. However, we are yet to see the full extent of its spread (as little success has been achieved in curbing the outbreak or finding a cure) and the impact it will cause on the ability of parties to perform their obligations.

21. China, where the virus had first surfaced and where the impact of the virus has been seen the most, has curbed international business and reduced exports. News Reports[28] indicate that China has already issued thousands of ‘force-majeure’ notices. A trickle-down effect on agreements across the globe may be inevitable.

22. India itself carries on significant trade with China and China as its second largest trading partner. China, as also other primary trade destinations for India, have already been hit by COVID-19 and have taken drastic measures to protect its citizens against the virus.

23. In such circumstances, instances where need arises to invoke the ‘force-majeure’ clause in contracts or seek protection under Section 56 of the Contract Act, may arise. While doing so, it is imperative that parties abide by the terms of the agreement and the requirements of the ‘force-majeure’ clause. The affected party should act promptly in notifying the contracting party regarding trigger of force majeure in terms of the contract. In such notification, the affected party should provide the requisite details required in terms of the agreement. Additionally, it may be advisable to ensure that the impact of COVID-19 on the ability to perform the obligations under the agreement are clearly identified and all efforts are taken to mitigate the loss/ damage/ delay caused in performing the obligations.

24. It is imperative that businesses and parties be mindful of the developments to protect their arrangements from the global-economic slowdown that may be difficult to avoid in the present scenario.

Authors:
Vijayendra Pratap Singh, Senior Partner
Aditya Vikram Jalan, Senior Associate

Footnotes:
[1] Extract from the Opening Remarks by the Director General, WHO, at the Media Briefing on March 11, 2020, as uploaded on the official web-site of the WHO – https://www.who.int/dg/speeches/detail/who-director-general-s-opening-remarks-at-the-media-briefing-on-covid-19—11-march-2020
[2] Revised Travel Advisory Issued by the Government of India on March 11, 2020 after review of current status by High level Group of Ministers
[3] World Health Organization Novel Coronavirus (2019-nCoV) Situation Report – 1, dated January 21, 2020
[4] World Health Organization Novel Coronavirus (2019-nCoV) Situation Report – 22, dated February 11, 2020
[5] World Health Organization Novel Coronavirus (COVID-19) Situation Report – 49, dated March 9, 2020
[6] Consolidated Travel Advisory – COVID-19 dated March 6, 2020 issued by the Ministry of Health and Family Welfare; Advisory issued by the Ministry of Home Affairs, Government of India on its official web-site – https://boi.gov.in/content/advisory-travel-and-visa-restrictions-related-covid-19 Also see, Advisories issued by various departments of the Government of India as also advisories issued by other countries
[7] Ibid
[8] Chengdu and Chongqing have imposed local movement lockdowns. Further, Lombardi (in northern Italy) has also been quarantined. Whereas travel restrictions have also been imposed across Italy.
[9] Coronavirus COVID 19: Facts and Insights (Updated: March 9, 2020) – Global Health + Crisis Response, by McKinsey & Company
[10] Black’s Law Dictionary, 11th Edition; @ Pg. 788
[11] P. Ramanatha Aiyar’s Advanced Law Lexicon, 5th Edition; @ Pg. 2077
[12] Corestar Int’l v. LPB Commc’ns, 513 F. Supp. 2d 107, 120, n.8 (D.N.J. 2007); See Wisconsin Elec. Power Co. v. Union Pac. R. Co., 557 F.3d 504, 507 (7th Cir. 2009) (Posner, J.); Mitsubishi Int’l Corp. v. Interstate Chem. Corp., No. 08-cv-194, 2008 WL 2139137, at *3 (S.D.N.Y. May 20, 2008)
[13] Watson Labs. v. Rhone-Poulenc Rorer, 178 F. Supp. 2d 1099, 1111–14 (C.D. Cal. 2001). See also TEC Olmos v. ConocoPhillips Co., 555 S.W.3d 176, 183–84 (Tex. App. 2018); but see Perlman v. Pioneer Ltd., 918 F.2d 1244, 1248 (5th Cir. 1990); Sabine Corp. v. ONG W., Inc., 725 F. Supp. 1157, 1170 (W.D. Okla. 1989).
[14] See Hemlock Semicondutor Corp. v. Kyocera Corp., No. 15-CV-11236, 2016 WL 67596, at *7 (E.D. Mich. Jan. 6, 2016); Great Lakes Gas Transmission Ltd. v. Essar Steel Minnesota, 871 F. Supp. 2d 843, 852 (D. Minn. 2012).
[15] See, e.g., Gulf Oil Corp. v. F.E.R.C., 706 F.2d 444, 453-55 (3d Cir. 1983); In re Old Carco, 452 B.R. 100, 119–20 (Bankr. S.D.N.Y. 2011).
[16] While Indian la provides for frustration of contracts under Section 56 of the Indian Contract Act, 1872, the same is distinguishable from ‘force-majeure’
[17] David Contractors Ltd. Vs. Fareham Urban District Counsel; (1956) 2 AllER 145
[18] Energy Watchdog Vs. Central Electricity Regulatory Commission & Ors., (2017) 14 SCC 80
[19] Ibid; Also see – Bank Line Ltd. Vs. Arthur Capel & Co, (1919) A.C. 435; Kel Kim Corp. v. Cent. Mkts., Inc., 70 N.Y.2d 900, 902 (1987) (holding that force majeure defense is narrow and excuses nonperformance “only if the force majeure clause specifically includes the event that actually prevents a party’s performance”).
[20] See RICHARD A. LORD, 30 WILLISTON ON CONTRACTS § 77:31 (4th Ed.) (“What types of events constitute force majeure depend on the specific language included in the clause itself.”)
[21] Draft Standard Power Purchase Agreement as provided by the Ministry of Power, Union of India on its official website https://powermin.nic.in/en/node/5167 While there may be other force-majeure clauses which may not specifically provide for terms such as ‘epidemic’ or ‘natural calamity’ used in it and only provide for ‘act of god’. Such clauses would have to be scrutinized and examined to understand the scope and extent.
[22] P. Ramanatha Aiyar’s Advanced Law Lexicon, 5th Edition; @ Pg. 1789
[23] Office Memorandum No. F. 18/4/2020-PPD, dated February 19, 2020 of the Government of India, Ministry of Finance, Department of Expenditure, Procurement Policy Division
[24] P. Ramanatha Aiyar’s Advanced Law Lexicon, 5th Edition; @ Pg. 707
[25] Gulf Oil Corp. v. F.E.R.C., 706 F.2d 444, 452 (3d Cir. 1983)
[26] 1954 SCR 310
[27] Supra Note 12
[28] https://www.cnbc.com/2020/03/06/coronavirus-impact-china-invokes-force-majeure-to-protect-businesses.html; http://www.xinhuanet.com/english/2020-02/17/c_138791495.htm;

Date: March 13, 2020