The world today is entangled with the Novel Coronavirus and is facing financial challenges and curtailment of social mobility due to the restrictions upheld by the Government. India has been no exception to this phenomenon. The Government is taking stringent actions with the evolving situation. Various policy measures are being implemented by the Government from time to time to go along with notifications. One such notification by the Government was that of the Procurement Policy Division, Department of Expenditure at the Ministry of Finance dated February 19, 2020 (vide Office Memorandum No. F.18/4/2020-PPD)[1] which recognized the disruption of supply chain logistics due to the COVID-19 Pandemic. The government recognized the pandemic as an ‘Act of God’ and brought forward necessary measures to allow the various Public Sector Enterprises to invoke the clause of ‘Force Majeure’ in the respective contracts.
Can a pandemic such as COVID-19 be recognized as an Act of Godand if so, whether the companies can invoke the clause of Force Majeure in their contracts?
The essence of any valid contract is based on the legal maxim – “PACTA SUNT SERVANDA” which means that “an agreement must be maintained”. However, it is not absolute in nature to maintain an agreement due to certain unprecedented situations and that the parties may not be able to fulfill their obligations. Such cases may include the term Act of God. Lord Westbury has defined an ‘Act of God’ (damnum Fatale in Scotch Laws) as, “an occurrence which no human foresight can provide against and of which human prudence is not bound to recognize the possibility[2].” In the case of The Divisional Controller, KSRTC vs Mahadeva Shetty And Anr,[3]the Supreme Court were of the opinion that an Act of God should be free from human intervention, these may include lightning storm, cyclones, tidal waves, etc. The Hon’ble Court also emphasized that an expected case should not be excused from liability, and a party cannot be excused if there existed a fair way to expect its occurrence. It is said that an Act of Godis when ‘no reasonable human foresight’ can be presumed to anticipate the event with regard to the time and place known to prevail. For example, preventive action can be taken from years of experience.
According to the World Health Organization (WHO), the pandemic has been defined as “an epidemic which is occurring worldwide, or over a very wide area, crossing international boundaries and usually affecting a large number of people and which is infectious in nature.” [4]Whereas, the meaning of an Act of God, refers exclusively to an unusual or extraordinary occurrence due to “natural causes” without human intervention.[5]
The outbreak of the COVID-19 virus is neither the first pandemic India has to bear in its long history, and nor will it be the last. A mere perusal of the definition of Pandemic and an Act of God shows that the two terms are incompatible with each other, as for an act to be considered an Act of God the event has to be a natural event without human intervention. A legitimate argument backed by fact can be made that, the transmission COVID-19 virus involves human agency, as the virus spreads from human to human through direct or indirect contact with respiratory droplets or saliva, etc.[6]The first case of COVID-19 that came out of China was in December 2019 which was followed by outbreaks across several countries across the world spanning continents such as Thailand, South Korea, Italy, USA. While the WHO published its risk assessment summary and guidelines in early January 2020[7]warning countries to be cautious and vigilant in stopping the outbreak of the virus, many countries lapsed in controlling the situation, and COVID-19 was officially declared as a pandemic on March 11, 2020. [8]Therefore, it can be said that a ‘reasonable human foresight’was taken into consideration the intensity of the contagious virus and various countries had started taking preventive measures for the same. WHO also further explained that the inaction of nation-states and the severity of the spread of the virus was a factor in declaring the novel coronavirus as a pandemic.[9]With such intense international media scrutiny and human oversight, calling out a pandemic under the ambit of the Act of God raises some questions. Similarly, in the English case of Nugent V Smith,[10]it was held that the actions should not be connected with any human agency. This has been interpreted in the sense of storms, flooding, and lightning. Further, at the time of the outbreak of Spanish flu in 1918, the Hon’ble Supreme Court of Illinois in the case of Phelps V School District No. 109[11]was of the opinion that an epidemic does not fall under the ambit of an Act of God.
Moving ahead, the Government of India, by including the pandemic under the Act of God led to invoke the Force Majeure clause. A broader aspect has to be seen that the pandemic was not the reason for the disruption in the business, but the disruption was caused by the regulatory and legislative responses of the State. The lockdown by the Government was the causative element for the disruption of the business and not the pandemic. Hence, qualifying the pandemic under the Act of God in order to invoke the Force Majeure clause may not be the way forward for parties looking to discharge themselves from the contractual liability.
· Now the question arises whether COVID19 can qualify under Force Majeure and excuse the parties from non-performance?
Force Majeure has been defined as “Latosensu”[12]which means a party was not able to fulfill the obligations because it was inevitable or irresistible. Force Majeure is a contractual clause that may be invoked from a natural cause such as natural disasters like an earthquake or a cyclone etc. The Force Majeure clause may also be invoked with a man-made cause such as war, mob violence, strikes, government restrictions etc. However, an explanation has been given that an Act of Godmay not be interchangeably used as Force Majeure.
It has been clarified that an Act of God refers exclusively to an extraordinary reason due to natural causes without human intervention, whereas a Force Majeure may include natural as well as human-made causes.[13]
As per the Government notification, it seems that the term Force Majeure has been used interchangeably with the meaning of the Act of God.
It raises a question that how a pandemic can qualify as an Act of God when a line of human intervention and foresight of the intensity of the virus was a visible factor. However, the notification is not binding in nature and the terms will depend based on how a contract has been drafted. Section 56 vis-à-vis Section 32 of the Indian Contract Act, 1872 governs the clauses of Force Majeure. This particular clause is added to protect the interest of the parties from the consequences which are beyond their control. However, whether a contractual obligation may be avoided shall be based on facts and circumstances which vary from case to case.
The Hon’ble Supreme Court in the case of Energy Watchdog vs Central Electricity Regulatory[14]explained that to invoke a Force Majeure clause:
a. The non-performance of a contract should have been because of the circumstances that were beyond control.
b. There were no reasonable steps to mitigate the event or consequences, i.e. the performance has become physically or legally impossible.
In the case of DhanrajamalGobindram V Shamjikaldas and Co.[15]the Hon’ble court was of the opinion that Force Majeure is a broader concept and may include accidents that are not necessarily involved with nature and can be affected by the human agencies, such as strikes, machinery breakdown, government restrictions, etc.
Considering the current scenario, the interruption in the supply chains due to national lockdown will have a considerable impact on many contracts pointing to delay, interruption, or cancellation of the contracts. Due to these grave circumstances, businesses have been majorly affected and consequently, the parties to various contracts are exploring different routes to delay/avoid the performance of their obligations or cancel their contracts due to delay and non-performance emerging out of an unexpected event.
The parties are articulating that the delay or non-performance of the contract is completely unintended and involuntary, making them eligible to avoid immediate performance or any other liability arising from the contractual obligations. Further, the parties may also use COVID-19 as an opportunity to re-negotiate the commercials or other key contractual components or may cancel their agreement being “non-performable” by stating COVID-19 as an Act of God and invoking the Force Majeure clause in their contracts.
In order to put COVID-19 as under the Act of God, one shall have to first prove that this virus did not have the involvement of human agency and secondly, there was no foreseeability of the event. It is still a brainstorming aspect as in the case of COVID-19 as such, it is a stretch to say that there was no human intervention in the transmission of the virus and there was no human foresight based on the WHO’s response and multiple warnings to all countries about the nature and severity of the new novel coronavirus, all of which are accessible in the public domain.
However, one can look at their contracts and can propose an alternative way to link the pandemic and the non-performance of the contract which can be the lockdown restrictions by the Government. Moreover, Covid-19 is an unprecedented situation, companies and individuals are striving to understand the meaning behind and are still waiting for the judiciary to take proper enactments for the same.
REFERENCES: –
[1]Government of India Ministry of Finance Department of expenditure Procurement Policy Division, Force Majeure Clause, No. F.18/4/2020-PPD.
[2]Hugh Tenant v. The Earl of Glasgow., (1864) 2 Paterson 1229.
[3]The Divisional Controller, KSRTC vs Mahadeva Shetty And Anr., MANU/SC/0529/2003.
[4]World Health Organization, what is a Pandemic, (May. 5, 2020, 3:41 pm) https://www.who.int/csr/disease/swineflu/frequently_asked_questions/pandemic/en/.
[5]United Nations Organization, ‘Force majeure’ and ‘Fortuitous event’ as circumstances precluding wrongfulness:Survey of State practice, international judicial decisions, and doctrine – study prepared by the Secretariat, 1978 vol II (1) (http://www.un.org/law/ilc/index.html).
[6]World Health Organization, How’s Coronavirus transmitted? (May. 5, 2020, 3:45 pm) https://www.who.int/news-room/q-a-detail/q-a-how-is-covid-19-transmitted.
[7]World Health Organization, WHO Timeline-COVID 19, (May. 3, 2020 3:49 PM) https://www.who.int/news-room/detail/27-04-2020-who-timeline—covid-19/.
[8]Id.
[9]World Health Organization, WHO-Directors General opening remarks at the media briefing of Covid-19 -11 March 2020 (May, 3. 2020 3:52 PM) https://www.who.int/dg/speeches/detail/who-director-general-s-opening-remarks-at-the-media-briefing-on-covid-19—11-march-2020/.
[10]Nugent v. Smith. 45 LJCP 19 (1876).
[11]Phelps V School District No. 109, 302 Ill. 193 (1922).
[12]Supra Note 5.
[13]Supra Note 3.
[14]Energy Watchdog vs Central Electricity Regulatory, (2017) 14 SCC 80.
[15]DhanrajamalGobindram V Shamjikaldas and Co, AIR 1961 SC 1285.
AUTHORED BY: MILIND SARASWAT