COVID-19 as Force Majeure

The outbreak and the rapid spread of COVID-19 has sent shock waves across global markets.
It has disrupted supply chains, leading to the closure of several manufacturing facilities
globally; serious disruption of air and sea traffic and closure of vital air routes, like the one
between the US and Europe. This is turn has led to the collapse of stock markets around the
world, leading to the loss of billions of dollars, which got wiped out in a matter of days. A
combination of all these factors has led to a decline in the overall volume of global economic
activity, forcing the world economy towards a possible recession. It is forcing Boards across
the globe to confront a host of difficult questions on how business should be conducted
during a global public health crisis.

How has WHO defined a “pandemic”?

A pandemic is defined by WHO as “an epidemic occurring worldwide, or over a very wide
area, crossing international boundaries and usually affecting a large number of people.” This
means a disease outbreak will be labelled as a pandemic when it is widespread, over several
countries or continents, usually affecting a large number of people. The disease must also be
infectious – cancer affects many people around the world, but it is not infectious and hence it
is not defined as a pandemic1.

What is Force Majeure?

The law relating to Force Majeure (a French phrase that means a ‘superior force’) is
embodied under Sections 32 and 56 of the Indian Contract Act, 1872.

Energy Watchdog v. CERC2

In the above mentioned case, Hon’ble Supreme Court has defined the extent and usage of
Force majeure clause in the contracts. The Relevant Paragraphs are extracted below:

“41. Coming to the PPAs themselves, we find that the force majeure Clause
contained in all of them is in a standard form and is as follows:

12.3 Force Majeure

'Force Majeure' means any event or circumstance or combination of events and

circumstances including those stated below that wholly or partly prevents or
unavoidably delays an Affected Party in the performance of its obligations under this
Agreement, but only if and to the extent that such events or circumstances are not
within the reasonable control, directly or indirectly, of the Affected Party and could

1
https://corporate.cyrilamarchandblogs.com/2020/03/covid-19-officially-a-pandemic-faqs-coronavirus/
2
(2017) 14 SCC 80
not have been avoided if the Affected Party had taken reasonable care or complied
with Prudent Utility Practices:

2. Indirect Non-Natural Force Majeure Events

a. Any act of war (whether declared or undeclared), invasion, armed conflict

or act of foreign enemy, blockade, embargo, revolution, riot, insurrection,
terrorist or military action; or

b. Radio-active contamination or ionising radiation originating from a source

in India or resulting from another Indirect Non Natural Force Majeure Event
excluding circumstances where the source or cause of contamination or
radiation is brought or has been brought into or near the site by the affected
party or those employed or engaged by the affected party; or

c. Industry wide strikes and labor disturbances having a nationwide impact in

India.”

Para 32-“32. Enforcement of Contracts contingent on an event happening-

Contingent contracts to do or not to do anything if an uncertain future event happens,
cannot be enforced by law unless and until that event has happened. If the event
becomes impossible, such contracts become void.

56. Agreement to do impossible act-An agreement to do an act impossible in itself is

void.

Contract to do act afterwards becoming impossible or unlawful. A contract to do an

act which, after the contract made, becomes impossible or, by reason of some event
which the promisor could not prevent, unlawful, becomes void when the act becomes
impossible or unlawful.

Compensation for loss through non-performance of act known to be impossible or

unlawful. Where one person has promised to do something which he knew or, with
reasonable diligence, might have known, and which the promisee did not know, to be
impossible or unlawful, such promisor must make compensation to such promise for
any loss which such promise sustains through the non-performance of the promise”.

“38. This view of the law has been echoed in 'Chitty on Contracts', 31st edition. In
paragraph 14-151 a rise in cost or expense has been stated not to frustrate a
contract. Similarly, in 'Treitel on Frustration and Force Majeure', 3rd edition, the
learned author has opined, at paragraph 12-034, that the cases provide many
illustrations of the principle that a force majeure Clause will not normally be
construed to apply where the contract provides for an alternative mode of
 performance. It is clear that a more onerous method of performance by itself would
not amount to an frustrating event. The same learned author also states that a mere
rise in price rendering the contract more expensive to perform does not constitute
frustration. (See paragraph 15-158)”

“43. First and foremost, the Respondents are correct in stating that the force majeure
Clause does not exhaust the possibility of unforeseen events occurring outside natural
and/or non-natural events. But the thrust of their argument was really that so long as
their performance is hindered by an unforeseen event, the Clause applies. 'Chitty on
Contracts', 31st edition at para 14-151 cites a number of judgments for the
proposition that the expression "hindered" must be construed with regard to words
which precede and follow it, and also with regard to the nature and general terms of
the contract.

“This being so, it is clear that there must be something which partly prevents the
performance of the obligation under the agreement.’’

“This is echoed in the celebrated judgment of Peter Dixon & Sons Ltd. v. Henderson,
Craig & Co. Ltd. 1919(2) KB 778 in which it was held that the expression "hinders
the delivery" in a contract would only be attracted if there was not merely a question
of rise in price, but a serious hindrance in performance of the contract as a whole.”

From the above observations of the Hon’ble Supreme Court, it can be stated that COVID-19
may fall in the category of Indirect Non-Natural Force Majeure Events.

Can a force majeure clause be successfully invoked in light of COVID-19 being declared
a pandemic?3

A COVID-19 pandemic could make it more difficult for parties to perform their contractual
obligations. There are two possible instances, which may suggest that a force majeure clause
covers a pandemic: (a) if the contractual definition of a force majeure event expressly
includes a pandemic. Inclusion of pandemic to the list of force majeure events will provide
clarity as to whether COVID-19 outbreak would trigger a force majeure clause in a contract;
or (b) if the force majeure clause covers extraordinary events or circumstances beyond the
reasonable control of the parties. Such general, catch-all wording may be invoked if it is
determined that the factual circumstances caused by the pandemic are beyond reasonable
control of the affected party. Having said that, whether a party can be excused from a contract
on account of COVID-19 being declared a pandemic is a fact-specific determination that will
depend on the nature of the party’s obligations and the specific terms of the contract.

International perspective on COVID-19 as Force Majeure

3
Supra
 1. What are the prerequisites?

Two key conditions must be met for an event to qualify as a force majeure event:

 the event must be an insurmountable obstacle which renders performance absolutely

impossible (even though there is case law which tempers this requirement of absolute
impossiblility and holds that there needs to be a degree of reasonableness in assessing the
impossibility); and

 the event may not be attributable to the defaulting party or its representatives, and the
event's consequences must be unavoidable. This condition is often taken to mean that the
event's consequences on the possibility of contractual performance must have been
unforeseeable upon entering into the agreement.

To the extent that these conditions are met, the impact of Covid-19 could constitute a force
majeure event and may be invoked by a defaulting party. Note that in the event of a dispute,
the courts will examine the existence of a force majeure event on a case-by-case basis. There
are precedents where the courts have accepted health reasons and even a local epidemic as
amounting to force majeure.4

2. Coronavirus (COVID-19) can be considered without any doubt an obstacle that

occurred independently of the will of the obligated party, which, at the time of
undertaking the obligation, was not foreseen by the obligated party (at least in the
period before December 2019).5

Conclusion

The jurisprudence of Force Majeure as explained in the case of Energy Watchdog v. CERC
and the perspective of other countries with respect to the relationship between COVID-19
and Force Majeure, it can be stated that COVID-19 should be covered in the Force Majeure
clause. However, the interpretation would be on the facts of the case and the verbatim of the
clause in the contract.

4
file:///C:/Users/sukhi/Downloads/Covid-19-coronavirus-hardship-and-force-majeure-a-Belgian-analysis.pdf
5
https://www.allenovery.com/en-gb/global/news-and-insights/publications/covid-19-coronavirus-and-
businesses-in-slovakia-force-majeure