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Force Majeure & contractual disputes – In times of COVID

Force Majeure & contractual disputes – In times of COVID

UPSC CSE Mains Syllabus: GS-3- Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

In news:

  • The COVID-19 pandemic is unleashing a flurry of contractual disputes.
  • Due to the lockdowns, a large number of companies find their contractual obligations impossible to meetor economically ruinous, especially in the aviation, automobile, construction, hospitality and entertainment, retail, and insurance sectors. 
  • Consequently, they have refused the promised employment and suspended supplies of goods or services, triggering legal claims of compensation from the counterparties.

Force majeure:

  • Many parties have invoked COVID-19 as force majeure (FM).
  • It is an event that is beyond the control of the partiesand renders contractual performance impossible.
  • Most contracts contain a FM clause to catalogue events like wars, riots or strikesin which the parties would prefer to terminate the contract or put it on hold.
  • Acts of the government (such as lockdowns)and acts of god (such as floods, cyclones) are typically listed under a FM clause.
  • This provision reduces the scope of dispute between parties in case a FM event occurs.
  • It helps them allocate contract risks efficiently.

Some confusion:

  • The problems arise while interpreting the contractual agreement.
  • Many a times the clause contains ambiguousand catch-all phrases like, ‘events including but not limited to the ones listed herein’. 
  • Such ambiguities are being exploitedby many contracting parties.
  • They are seeking termination or suspension of business deals by claiming that COVID-19 is a FM event.
  • Moreover, ambivalent statements by government agencies regarding the pandemic have added to the confusion.

Adjudicating the contractual disputes:

  • How the courts and the regulators adjudicate contractual disputes will determine the distribution of losses among the disputants and, more importantly, the quantum of economic cost of the pandemic.
  • Delayed or ambiguous rulings will aggravate the economic costsof the disease by disrupting supply chains beyond the lockdown period.
  • By contrast, clear and consistent judgmentswill discourage opportunistic behaviour and encourage pre-trial negotiations thereby avoiding unnecessary litigation and attendant social costs.
  • Issues of individual welfare are better addressed through public policy and not court rulings.
  • As to the status of COVID-19 or the lockdowns as FM, courts should interpret ambiguous or catch-all terms on the principle of ejusdem generis.

(ejusdem generis -denoting a rule for interpreting statutes and other writings by assuming that a general term describing a list of specific terms denotes other things that are like the specific elements).

  • COVID-19 is not FM per se.
  • It is the lockdowns, not the virus, that has made it impossible for the airlines, hotels and caterers to deliver as promised and contractors to complete projects on schedule.
  • Under such contexts, it is justified to use the lockdowns as FM for non-performance or delayed performance, as the case may be.

No FM – How to resolve the dispute:

  • If the contract does not have a FM clause, parties can seek termination of the contract on grounds of frustration.
  • Section 56 of the Indian Contract Act, 1872,along with its interpretations by the Supreme Court ( Satyabrata Ghose v. Mugneeram Bangur ) renders a contract void if a subsequent event makes performance impossible or useless for one or the other party.
  • Accordingly, claims by wedding caterers regarding frustration of contract can hold ground for events that were pre-scheduled but could not take place during the lockdown.

Adjudicating unjustified usage of FM:

  • A justifiable use of COVID-19-induced lockdown as FM or an event causing frustration of contract is subject to context and facts.
  • In Standard Retail Pvt. Ltd. v G.S Global Corp. & Ors. (2020),the Bombay High Court rejected the claims of the petitioner, who argued that the lockdowns had led to frustration of his contract for supply of steel by the respondent G.S Global Corp.
  • The Court aptly observed that the lockdowns did not apply to the steel sector, an essential item as per the government notification.
  • Moreover, the relief under FM was applicable only to the seller(if supply became impossible). But the seller had already dispatched the supplies.

Genuine but complex cases:

  • Similarly, the demands of multiplexes, retailers and restaurants are genuine but untenable.
  • They are seeking rental waiversfrom premise owners citing the lockdowns as FM. Government notifications declaring COVID-19 as FM has encouraged such demands.
  • Lease agreements typically allow rental waivers only if a FM event causes physical damage to the propertyrendering it unfit for commercial use.
  • This is not the case with COVID-19.
  • Insurance contracts are intricate. Property insurance claims require physical damage to the property.
  • As the lockdown has caused no physical harm, claims for loss of business income are not tenable.
  • Moreover, courts should realise that the losses on account of the lockdown are quite different from those meant to be covered by individual policies.
  • Business losses caused by epidemics and lockdowns tend to be numerous and highly correlated.That is why standard insurance policies do not allow compensation for such losses. Allowing a single claim will set a precedent for all, potentially bankrupting the insurance industry.

Courts and regulators should encourage litigants to go for negotiations or mediation to settle disputes. In most cases, a middle ground exists within the contract letter.

Source:” The Hindu“.

POSSIBLE UPSC CSE MAINS QUESTION:

What is Force Majeure? How is it impacting contract enforcement and contractual disputes in times of COVID? How could such contractual disputes be resolved?