The coronavirus pandemic has thrown a range of legal issues. One of them is force majeure, an unforeseeable circumstance that prevents one from fulfilling a contract.
Force majeure is a clause that is included in contracts to remove the liability for natural and unavoidable catastrophes. It also encompasses human actions, such as armed conflict. It is a French term that literally means “greater force.” It is related to the concept of an act of God, an event for which no party can be held accountable, such as a hurricane or a tornado. Generally speaking, for events to constitute force majeure, they must be unforeseeable, external to the parties of the contract, and unavoidable. These concepts are defined and applied differently depending on the jurisdiction.
The examples of force majeure vary from war, crime and earthquake to tsunami that render the terms of legal agreement impossible. Natural disasters like hurricane that happen without human interventions are acts of God. It is a major defence to general and strict liability clauses too. Generally, in the contracts of indemnification, act of God may be no excuse, because that could be the substantive risk that was assumed by insurer to cover.
Doctrine of frustration
During earlier ages, under English Common law, contractual terms were considered sacrosanct, and failure to honour a contract could lead to an order for specific performance or internment in a debtor’s prison.
In 1863, the doctrine of frustration of contract was invented in Taylor v Caldwell case to provide relief. In this case, a rental contract could not be enforced as a music hall was burned down by act of God. The rule of law laid down in this landmark case was that “a party’s duty, under a contract is discharged if performance of the contact involves particular goods, which without fault of either party are destroyed, rendering performance impossible.”
The court agreed that the contract was frustrated.
COVID-19 and Act of God
It’s a paradox that in legal terms we can call act of coronavirus as ‘act of God’. This logic may not take us to infer COVID-19 is equal to ‘god’. If the terms of contract become impossible to be performed, not because of the fault of the parties but something beyond their control, it is not proper, both legally and morally, to impose liability.
COVID-19 was neither expected nor prevented. Hence, expression of frustration and impossibility have been introduced in the law of liability.
But it is not a blanket ‘defence’ to block all kinds of liabilities. There are many contracts which can still be performed. Those who invoke this defence must convince the courts how it became impossible and that impossibility was solely due to the outbreak of virus.
Fact of epidemic
India’s finance ministry has recognised coronavirus as a force majeure event of nature, facilitating invoking of this clause as defence to breach of contract.
The Ministry of Finance issued an office memorandum on February 19, stating that force majeure clause can be invoked in government contracts if there is a “disruption in supply chain due to spread of coronavirus in China or any other country.” The office memorandum further states COVID-19 should be considered as a case of “natural calamity.”
The Ministry of Road Transport and Highways also has declared COVID-19 as a force majeure event and informed the National Highways Authority of India (NHAI). But on March 25, NHAI has not issued a similar notification and this is causing serious confusion at the ground level.
The local field officers and independent engineers are acting as per their will and rejecting COVID-19 as a force majeure event in certain cases, according to the National Highway Builders Federation (NHBF). Total worth of national highway projects as on December 2019 is ₹5.85 lakh crore under various models like Build Operate Transfer (BOT) Model and Hybrid Annuity Model (HAM). About 3,434 km road projects were awarded in 2019-20.
Chinese firm invokes force majeure
Reuters reported on February 6 that the China National Offshore Oil Corp (CNOOC), a large importer of liquefied natural gas (LNG) of the country, has invoked force majeure to suspend contracts with three suppliers. French oil major Total rejected the force majeure notice from an unnamed Chinese LNG buyer. This is the first global energy supplier to push back openly against the attempt to invoke this clause to escape contractual duties.
The Chinese International Trade Promotion agency also was ready to offer force majeure certificates to companies affected by coronavirus on their businesses with foreign partners. However, one sided claims, certifications and declarations will not end the contracts but spring out new disputes or renewed negotiations, leading to prolonged litigations and arbitrations.
The force majeure is not a local phenomenon affecting one or two contracts, but it can globally render many contracts impossible. Though the force majeure as a general legal principle cannot be ignored while formalising contracts, parties can still build conditions around. The context of conditions, facts, circumstances and wording of force majeure clause will decide the liability, which open up scope for different interpretations and various litigations.
Human intervention or beyond human control
The liability returns if a party proves the fact of human intervention to the cause of event, which looks like act of God. For instance, if geothermal injections of water have provoked an earthquake, it cannot be considered as act of God. This happened in Basel, Switzerland in 2003. Similarly, mud volcano was caused in Java in 2008 by undue drillings. These examples show how the legal status of vis major would change and invite liabilities.
Such changes are possible in all kinds of civil liabilities, including tortious and contractual liabilities. While in English and Scots law, it is creature of contract, in other jurisprudences, force majeure is recognised as a legal concept which parties cannot negotiate. Hence, courts may accept this pandemic as force majeure event. Still the text of contract and context of circumstances could be disputed by either parties.
(M Sridhar Acharyulu is a former Central Information Commissioner and Dean of Law in Bennett University)