COVID-19: A Tsunami of Commercial Litigation

As the world faces an unprecedented health crisis from the Covid-19 pandemic, the corporate world is already embroiled with multifarious challenges related to the non-performance of commercial contracts, which will likely culminate into a tsunami of contractual disputes.

The doctrine of Force Majeure and the doctrine of Frustration will be central to all such disputes. In this article, we examine the principle and historical perspective of how these doctrines have been applied in earlier instances of a global or national crisis.

Force Majeure

The buzzword right now across the corporate world is, a legal term, 'Force Majeure'. It is a French word, derived from the Latin expression "vis major", which literally means an "Act of God". Natural calamities like earthquake, cyclone, flood etc. are commonly considered as 'Force Majeure' events. For an event to be considered as "Force Majeure", it must meet the following conditions: (i) occurrence of an unexpected intervening event, (ii) the unexpected event was caused by a superior force / act of God, (iii) the unexpected event was beyond the control of the parties, and, (iv) the unexpected event made contractual performance impossible.

Legal provisions in India relating to Force Majeure and Doctrine of Frustration

While the Indian Contract Act, 1972 ("Act") does not specifically deal with the term 'Force Majeure', Section 56 of the Act covers wider situations where a contract becomes impossible to perform. Under this provision, the law will not compel a man to do: (a) what he cannot possibly perform (Doctrine of Impossibility of Performance), and, (b) an act that has become unlawful. Similarly, a contract to do an act, which after the contract is made, becomes impossible or unlawful to perform, would also become void.

This Doctrine of Frustration is an aspect or part of the law of discharge of contract under Section 56 of the Act, by reason of supervening impossibility or illegality of the act agreed to be done. This doctrine is also partly inbuilt in Section 32 of the Act (Contingent Contracts).

The effect of both, Sections 56 and 32 of the Act is that, if the conditions provided therein are fulfilled, the contract would become void. That is, the contract would not be legally binding, and the parties will have no further rights or obligations arising out of the contract. There is, however, no statutory provision under the Act which results in temporary suspension and resumption of contract.

The Supreme Court on Force Majeure and the Doctrine of Frustration

The Hon'ble Supreme Court of India, in the case of Energy Watchdog Vs CERC [2017 14 SCC 80], has declared the law on the issue as under:

(i) If contract has a specific Force Majeure clause, it will apply over Section 56 of the Act,

(ii) Application of Doctrine of Frustration must be within narrow limits,

(iii) A mere rise in cost or expenses will not frustrate a contract,

(iv) Doctrine of Frustration will not apply so long as the fundamental basis of the contract, remains the same,

(v) Force Majeure clause will not apply if alternative modes of performance of contract is available,

(vi) It is clear that a more onerous method of performance by itself would not amount to a frustrating event. There must be a break in identity between the contract as provided for and contemplated, and its performance in the new circumstances.

Application of Force Majeure principles by the Supreme Court of India in special circumstances

Some of the special circumstances in which the Hon'ble Supreme Court of India has considered the application of Force Majeure, and, its findings are listed in a tabular column as under.

An International Perspective

Is Covid-19, a Force Majeure event?

In terms of the applicable principles and past precedents, it would be unexceptionable that Covid-19 is a Force Majeure event. Vide an Office Memorandum dated 19 February 2020, issued by Department of Expenditure (Procurement Policy Division), it has been clarified that disruption of supply chain on account of COVID-19 may be considered a case of natural calamity and Force Majeure may be invoked. Vide Circular dated 24 March 2020, the Ministry of Shipping has advised that major port trusts may consider COVID 19 as valid ground for invoking Force Majeure clause

on port activities and port operations.

Impact of Government Notifications on lockdown

Section 56 of the Act not only deals with the situation of an act becoming impossible to perform, but also situation where the performance under the contract has become unlawful. Therefore, in cases where performance of obligations under a contract is time-specific or activity-specific, and such time or activity occurs during a period during the notified lockdown by the Central Government or the State Government, the performance of such a contract could be regarded as having become unlawful. The contract would therefore stand frustrated and could be considered as having been rendered void.

Recent rulings in India post Covid-19

Some of the High Courts have already dealt with certain issues arising out of Covid-19 pandemic for interim measures. The Delhi High Court, recently, in the case of Anant Raj Limited Vs Yes Bank Limited [W.P. No 5 of 2020] held that the classification of the account of the Petitioner therein as NPA on 31st March 2020 could not have been done by the Respondent bank, and, directed that status quo ante is restored.

In the case of Standard Retail Limited Ors Vs G S Global Corp (Commercial Arbitration Petition No.404 of 2020) before the Bombay High Court, the Petitioner therein sought directions against a bank from encashing the Letters of Credit on the basis that the underlying contract has been frustrated on account of the pandemic. The Bombay High Court refused to grant any ad-interim relief on the basis that the LC is an independent transaction. The Court also observed that the lockdown is for a limited period and would not come to the rescue of the Petitioners so as to resile its contractual obligation from making payments.

In another case before the Bombay High Court, Rural Fairprice Wholesale Limited and Anr Vs IDBI Trusteeship Services Limited and Ors (Commercial Suit No 307 of 2020), considering the market situation as arising from the pandemic, as an ad-interim protection, the Bombay High Court granted a temporary injunction, restraining the Respondents therein from selling the pledged shares till next date of hearing.

These are interim orders. The substantive law will only evolve when the final judgments are passed on a consideration of the relevant legal and commercial issues.

Impact in India

The expected implosion in contractual litigation is of particular concern in India, as the justice delivery system, both Courts and Arbitral Tribunals, are already burdened with a load which causes long delays and unproductive costs. As the burden on the justice delivery system rises exponentially, India will need to formulate a quick and effective response to address this issue. India should consider the following options:

1. For the Hon'ble Supreme Court of India (with the cooperation and support of the Government of India) to activate some of its extraordinary powers under the Constitution of India to issue a judgment in an appropriate case, or, an opinion or guidance (like, the Supreme Court of China did in 2003), which clarifies the legal principles and framework to deal with varied contractual issues as will arise consequent to the pandemic. This will provide a valuable guidance to lower courts, citizens and corporates.

2. For the Government of India to legislate by way of an ordinance or an Act, provisions similar to what the Government of Singapore has done under the COVID-19 (Temporary Measures) Act 2020, promulgated on 8th April 2020.

'This Article was first published in the Bloomberg Quint'