Force Majeure: Effect of Coronavirus on Performance of Contracts

Force Majeure: Effect of Coronavirus on Performance of Contracts

The coronavirus has taken the demand-and-supply balance of the world by storm and continues to cripple businesses and economies that are struggling to survive in the midst of shutdowns, disruptions, supply deficits and labour shortages. In light of this, this post discusses the effect of coronavirus on contracts and contractual arrangements between parties, on a national and global level. It also discusses whether affected parties can successfully invoke a force majeure event i.e. an unforeseen event that prevents parties from fulfilling a contract, thereby enabling them to be released from their contractual obligations or at least allowing them more time.

Background

The first case of COVID-19 reported in Pakistan was two weeks ago which gripped the nation in a mesh of panic, fear-mongering, propaganda and confusion. The rest of the world first heard of this virus in December last year. It has since then developed into a global threat and has been declared by the World Health Organization as a public health emergency of international concern.

As a response to the news of the outbreak in Pakistan, schools and colleges in Sindh had been shut down instantly. The offices of Engro Corp, a multinational conglomerate company situated in an expensive area in Karachi, had also been recently closed for three days.

It is foreseen that the outbreak will have substantial effect over the coming days upon businesses, workplaces, supply and distribution channels, labour and demand. In this light, it is important to discuss the impact that the outbreak will have on contracts and the application of the force majeure clause in such contracts.

Force majeure as per the laws in Pakistan

(1) Although the term force majeure does not have a statutory definition in Pakistan, the Islamabad High Court discussed the definition of the same in Atlas Cables (Pvt.) Limited vs. Islamabad Electric Supply Company Limited, 2016 CLD 1833 (Islamabad). In the judgment the court relied on Advanced Law Lexicon by P. Ramantha Aiyar, 3^rd ed. which explained force majeure in the following words:

“…events outside the control of the parties and which prevent one or both of the parties from performing their contractual obligations; A contract provision that stipulates that unforeseen events… will excuse a party from its duty to perform the contract; A contractual provision allocating the risk if performance becomes impossible or impracticable as a result of an event or effect that the parties could not have anticipated or controlled.”

The judgment further discussed Halsbury’s Laws of England and several cases from superior courts in India, particularly Dhanrajamal Gobindram vs. Shamji Kalidas, AIR 1961 Supreme Court 1285 which stated that,

“…where reference is made to “force majeure”, the intention is to save the performing party from the consequences of anything over which he has no control.”

The judgment of the Islamabad High Court concluded that,

“…force majeure refers to legal or physical prevention and not economic profitableness.”

(2) Force majeure provisions are usually standard provisions in most contracts. In such standard provisions, a list of specific force majeure events may be provided but the lists are deemed to be inclusive and do recognize that there may be such events which are not specifically part of the contract but are, nevertheless, unforeseeable and unavoidable. For example, “pandemics” are usually not specifically provided for but may be covered or addressed within other force majeure events such as government orders, national emergencies, or acts of God.

(3) In light of the above, what constitutes a force majeure event depends on the wording of the provision. For example, if a provision provides that the force majeure event has affected the ability of a party to perform, then such party is required to demonstrate that its performance has become impossible due to the force majeure event and not just difficult or costly to carry out. Such provisions also usually require the affected party to show that it has taken all reasonable attempts to mitigate the event and its consequences.

Force majeure as per the laws of other jurisdictions

(1) English courts have consistently focused on the actual language of the provisions in contracts and have adjudicated on a case-by-case basis. English courts have also found that words in a contract, such as “prevent” or “delay”, have a wider scope and force majeure may be satisfied if performance has become substantially more onerous. In this regard, the onus to prove difficulty faced by the affected party is purely on such party itself. This includes establishing that the party would have been “ready, willing and able” to perform the contract had the force majeure event not occurred. Additionally, the drafting of such provisions also includes that the affected party shall take all reasonable attempts to mitigate the event and its effects.

(2) In India, force majeure is recognized under Section 56 of the Indian Contract Act, 1872 which provides for an “agreement to do impossible act” and gives the affected party more time to perform its obligations when events are beyond its control. In this regard, certain requisites have to be fulfilled to ensure that the event is in fact a force majeure event, for instance, if the act is beyond the control of the party, if it is unforeseen and inevitable, if it has rendered the contract wholly impossible, and if the suffering party exercised caution.

Superior courts in India have illustrated force majeure in different manners and on a case-by-case basis. Following are some examples:

(a) In Energy Watchdog vs. Central Electricity Regulatory, Civil Appeal Nos.5399-5400 of 2016, the Supreme Court held that,

“In so far as a force majeure event occurs de hors the contract, it is dealt with by a rule of positive law under Section 56…The performance of an act may not be literally impossible but it may be impracticable and useless from the point of view.”

(b) In Alopi Parshad & Sons Ltd. vs. Union of India, 1960 (2) SCR 793, the Supreme Court observed that,

“…the [Contract] Act does not enable a party to a contract to ignore the express covenants thereof and to claim payment of consideration, for performance of the contract at rates different from the stipulated rates, on a vague plea of equity. Parties to an executable contract are often faced, in the course of carrying it out, with a turn of events which they did not at all anticipate, for example, a wholly abnormal rise or fall in prices which is an unexpected obstacle to execution. This does not in itself get rid of the bargain they have made.”

(3) With respect to the coronavirus being deemed to be a force majeure event in India, the Ministry of Finance vide an office memorandum on 19 February 2020 directed all ministries to treat disruptions of the supply chain due to the outbreak as a cases of natural calamity, which may invoke a force majeure clause in appropriate cases.

Conclusion

On 3 March 2020, the China Council for the Promotion of International Trade issued more than 4,000 force majeure certificates to companies that had applied for enabling businesses in China to invoke force majeure provisions in their contracts. However, they may have limited applicability in contracts governed by other laws, for example English laws, which require specific contractual provisions and for affected parties to prove that their ability to perform the contract has been made impossible by the outbreak. According to recent news, Total S.A, a French multinational integrated oil and gas company, has already rejected a force majeure notice from a liquefied natural gas buyer in China (see, https://www.cnbc.com/2020/03/06/coronavirus-impact-china-invokes-force-majeure-to-protect-businesses.html).

Nations may proceed to declare the coronavirus outbreak a force majeure event but the enforceability of particular contractual provisions continues to be governed by the governing law in the contract which may require certain requisites to be met before an affected party is provided any relief.

 

An earlier version of this article previously appeared on Lawyereadia. Republished here with permission. 

The views expressed in this article are those of the author and do not necessarily represent the views of CourtingTheLaw.com or any other organization with which she might be associated.