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Will Coronavirus qualify as a force majeure event?

By: Sharanya G Ranga

With China reeling under a lockdown due to the Coronavirus outbreak, global supply chains have been jolted as movement of people and goods/services in China and other neighbouring countries have been constrained. China is one of India’s largest trading partners and Indian businesses that depend on imports from China (pharma, electrical/electronic/auto parts, chemicals, etc.) are bracing for delayed/cancelled shipments, manufacturing delays and business slowdown.

How will the businesses that have suffered losses (including lost opportunities) get compensated? Can businesses invoke the ‘force majeure’ clause?

What is force majeure?

Force majeure (or vis major) literally means superior force – an extraordinary act or a circumstance that has occurred beyond the power of man and was unforeseeable. This could be an Act of God (earthquake, tsunami, flood, etc.) or epidemic, war, riot, act of terrorism, etc. A force majeure clause excuses a contracting party from performing its contractual obligations if it proves that the non-performance was due to reasons beyond its control or could not have been reasonably foreseen by it at the time of entering into the contract. A force majeure event may result in suspension and/or discharge of obligations, extension of term and/or termination.

Will Coronavirus outbreak qualify as a force majeure event?

The word ‘epidemic’ refers to an outbreak of disease that spreads quickly and affects many individuals at the same time. The coronavirus outbreak is believed to have begun in Wuhan, China in December 2019 and resulted in over 1800 deaths till date. With China imposing travel restrictions and quarantines around mid-January 2020, the World Health Organisation has declared the Coronavirus a “Public Health Emergency of International Concern”. Several countries have followed up with travel advisories; many airlines have cancelled/reduced flights to mainland China, Hong Kong and other parts of South East and East Asia. Businesses have also issued internal advisories restricting travel by their personnel. All this has caused tremendous hardship across the board with many business/social events getting cancelled/rescheduled and contractual obligations getting reneged.

So does this make a case for the Coronavirus outbreak to qualify as a force majeure event? This question is best answered with the classic lawyer response: It depends!

Specific cases relating to the last SARS outbreak in 2002-03 have been held to constitute an event of force majeure by Chinese courts but other jurisdictions have considered it to be an arguable case at best (as it was not something unforeseeable). Even in the US, some poultry businesses have declared ‘force majeure’ during outbreaks of bird flu. The last decade has seen the outbreak of many epidemics such as swine flu, zika virus and ebola. So courts may take a view that such outbreaks may well be beyond one’s control for sure but perhaps not something totally unforeseeable.

The other aspect to be considered is if one party invokes force majeure and notifies the other party only for the other party to reject it! In early February 2020, the China Council for the Promotion of International Trade (CCPIT) issued China’s first force majeure certificate on account of coronavirus to an auto parts manufacturer in Zhejiang Province, supplying specific parts to the French company, Peugeot’s factory in Africa.[1] Many more such certificates have been issued since then by CCPIT to minimise liabilities of Chinese suppliers for non-performance of their contractual obligations on account of the epidemic outbreak. In another widely reported news item, one of the largest national oil companies in China, China National Offshore Oil Corporation (CNOOC Group), issued force majeure notices to Shell and Total which was rejected by both the European majors. This may likely end up in a dispute.

Importance of the force majeure clause in contracts

A lot depends on the contractual language and how the force majeure clause is drafted in the contract, be it a lease, financing, sales/distributor arrangement, supply or construction contract. A well-drafted force majeure clause can be broken down into 3 parts:

  1. What constitutes a force majeure event? – This is typically broad-based and includes an expansive list of unforeseen events such as act of god, act of war, epidemic, blockade, embargo, strikes, riots and terrorism. It is also common in high value/long term contracts such as construction contracts, power purchase, development contracts to specify exclusions to force majeure such as unavailability, late delivery, change in price of the raw material, etc.

  2. Notification requirements – When should a party invoke force majeure and provide notice to the other party? And what should such a notice contain: request for temporary suspension of supply obligations for a specific period or delay in performance or immediate termination?

  3. Consequences of force majeure – This addresses allocation of risks, reliefs available to a party, temporary suspension of obligations upto a limited period, termination if the suspension continues for a longer period, post termination rights and obligations (repayment, forfeiture, damages, compensation, et al).

Frustration of contract under Indian law

If the contract does not expressly (or by implication) have a force majeure clause, Section 56 of the Indian Contract Act, 1872 provides for frustration of contract due to impossibility of performance. Impossibility here is not mere literal or commercial impossibility such as extreme cost or difficulty of performance but occurrence of events resulting in the physical impossibility of performance of contractual obligations by one party. Needless to say, this will not cover a default of either party to the contract or their failings, interests or circumstances. This has been the established position on frustration of contract set out by the Supreme Court of India (SC) in the seminal decision of SatyabrataGhose v. MugneeramBangur& Co.[2]

Impossibility of performance on account of a force majeure event may lead to a partial or complete discharge of obligations without default of either party. Indian courts have adopted a narrow interpretation of such cases depending on the intention of the parties, nature and terms of the contract and the surrounding circumstances.

In the recent case of Energy Watchdog v Central Electricity Regulatory Commission & others,[3] the SC reinforced some of the principles relating to force majeure and contractual impossibility under Indian contract law. Recognising the inherent risks and uncertainties present in most commercial transactions, the court stressed on the narrow construction of force majeure clauses and ruled out their application if the fundamental basis of the contract was not dislodged and alternative (even if more expensive) modes of performance were available.

Conclusion

Despite rising trade protectionism, the coronavirus epidemic demonstrates how closely integrated the global economies are and how events unfolding in one country can have adverse consequences elsewhere. And it is an arduous task to successfully invoke force majeure in cross-border commercial agreements and walk away from one’s contractual obligations. Official declarations regarding the epidemic, travel advisories issued by various governments, airline announcements and related press releases about the ground situation can indeed go some way in successfully making a claim for force majeure. But this is subject to the governing law of the contract, location of the party in question and how courts consider this aspect after keeping all circumstances in mind.

This is an opportune time to take stock of existing contracts (and those to be executed as well) and review the contours of the force majeure clause and other clauses that may get triggered.

[2] AIR 1954 SC 44:1954 SCR 310

[3] 2017 SCC Online SC 378

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