Is Covid-19 a Force Majeure Event? : A Global Scenario

This article is authored by Nitya Jain, a 4th year student at the Institute of Law, Nirma University, Ahmedabad.

Introduction

The world position at a standstill, for an unforeseeable force disrupts lives across boundaries. Covid – 19 has emerged as a pandemic whose expiration is still a blurry vision. As a retort to the deadly virus, the governments of various nations have put strict travel restrictions with almost nil movements of goods and people, leading to severe disruptions in the supply chains all over the world. Consequently, various contracts are being assailed or tend to be violated because of late or no delivery. This article assembles and then, analyses the answers of various governments to the question - Whether Covid -19 pandemic can amount to a force majeure event, excusing parties of their contractual obligations for time being?

Force Majeure and Global Responses

Force majeure is an extraordinary and unforeseeable situation that banishes all possibilities of putting up the promise of performance of the contractual obligations. Till date, various nations’ governments have announced Covid 19 to be a Force majeure event which means that irrespective of an explicit mention in the contract, parties may excuse themselves from performing their obligations.
Starting from where it all started– China, through its Council for the Promotion of International Trade (CCPIT) has resorted to issuing Force majeure Certificates to exempt parties from fulfilling the contractual obligations. The Chinese government is allowing exemptions selectively on the basis of need. Notably, these certificates hold value only in the Chinese jurisdiction and not on the foreign contracts. Similarly, Mongolian Chamber of Commerce has also decided to issue certificates on force majeure and hardship to provide exemptions.


Russia, also started issuing certificates declaring Covid 19 as a force majeure event but for both international contracts and domestic contracts. It is important to understand that a “certificate of force majeure” can be relied on as evidence, but does not guarantee release from liability. The CCI has also opened a hotline for advising business entities on issues of force majeure.

Unlike the Certificate strategy, various nations have declared blanket exemptions because of Covid- 19. For instance, Iraqi government has Covid 19 as a force majeure event for all contracts and projects. Similarly in France, the government has announced that Covid 19 Pandemic should be treated as a force majeure for all public procurement contracts.

There are also certain countries that have provided this exemption, only sector wise. For instance, India has announced that Force Majeure clause may be invoked only for disruptions of supply chains, wherever considered appropriate. Further, the Shipping ministry suggests that for all stakeholders of the all the major ports COVID 19 pandemic is a valid ground for invoking FMC on port activities and operations. Further, India has suspended the operation of IBC against any default within next year.
At the same time the Cook Islands have announced that they will be applying the concept of force majeure where statutory work, docking or servicing cannot be carried out in circumstances arising due to Covid 19.


A novel method has been upheld by Singapore wherein Singapore has introduced a (Temporary Measures) Act, 2020. The party unable to perform its obligations and is qualified to relief under the act will be entitled to a moratorium on commencement of legal proceedings including Singapore seated domestic arbitration. Force majeure clauses and the Frustrated Contracts Acts as per the Singaporean Law will prevail over the Act if the default has been materially cause by Covid 19 event.


In countries where there is no direct declaration from the government, Covid 19 is being derived Force Majeure exemption from the enforced local regulations. For instance in the USA, numerous restrictions have been put forth, including on travel, business, entertainment etc. The inability to perform obligations because on the ongoing State orders is being used as one way to get exempted.  Wherein countries like Sri Lanka has been providing assistance and advice to local business, but haven’t declared Covid 19 as a FME.


Given the varied response across the globe, it is quintessential that contracts to be renegotiated between the parties rather than imbuing a prolong legal battle, which would be detrimental to the interest of both the parties. However, any non-compliances not due to Covid 19 need to have a stricter outlook and can be enforced against party.

The  fate of International Agreements

One common phenomenon that all the nations will face is the tussle between foreign contracting parties. Mostly where government has declared Covid 19 as a force majeure event, it is applicable only to domestic contracts. International contracting parties will have to face lengthy legal disputes sans inclusion of pandemic, epidemic in their contracts. The better approach to include hardship clause as to renegotiate the position if something arises which wasn’t unforeseeable. In absence of hardship clause, the disputes should take recourse of arbitration.


Further, mostly “unpredictability” of the event qualifying as force majeure is evaluated on the day of the conclusion of the contract. For Covid 19, if the question does not arise for old contracts, it will be necessary to consider when the intervention of Covid 19 on the contract could have been foreseen and on the actions taken as a result.  Also, the role of precautionary principle comes into play while quantifying risk. There might be areas that are hotspots for Covid 19 but some are still considered safer than others. Will the blanket exemption apply in the name of precautions?

Conclusion


Countries that have declared Covid 19 as a force majeure event have been reporting huge losses because of unfulfilled contracts and the countries where the declaration hasn’t been made, parties will face extraordinary legal expenditure in proving (or disproving) Covid 19 to be a force majeure event. Some of the general measures that parties can resort to are – All transactions and contracts must be reviewed and assessed pre hand to foresee breaches and impossibility of performance. Contracts without force majeure clause can be renegotiated. Parties should properly record all transactions and communications. The parties and legal teams should discuss and demarcate as to understand the impact to force majeure and self-induced frustrations. It is expected that in the coming time more and more companies globally may invoke ‘force majeure’ clauses in their contracts resulting in a of litigations should parties not come to a practical understanding.

ENHANCING DISPUTE RESOLUTION THROUGH DLT: A CASE FOR REGULATORY FRAMEWORK OF “SMART” CONTRACTS

This article is authored by Urmil Shah, a 3rd-year law student at AURO University, Surat 

Introduction

There has been quite deliberations on distributed ledger technology and its application with smart contracts on utilizing it as a mode of dispute resolution, from a conflict management standpoint. Although, smart contracts provide endless potential to assist disputing management, particularly in the field of international arbitration due to its delocalized nature; however, the compliance of such contracts with the domestic legal regime of states is imperative to ascertain the validity, from legal certainty standpoint.

The article analyses and compares smart contracts firstly, as traditional contracts to seek domestic compliance with Indian contract law and secondly, as arbitration agreement with the “soft” international arbitration regime. The author attempts to establish that an effective sui generis legislation must be passed for the domestic regulation of such contracts and their increased compliance and utilization within most jurisdictions.

The convergence of technology and law enhances the efficiency of conventional mechanisms of dispute settlement. The emergence of technologies like distributed ledger technology (“DLT”) provides a wide array of avenues for alternative modes of dispute resolution. The prolific academic discourse on this theme has given the DLT a novel dimension as a tool for enforcement of agreements without human intervention.^[i] DLT, also referred to as block-chain, refers to a collection of blocks (ledgers), linked through cryptography and distributed on an open-source. Some of the most striking characteristics of block chain-like, decentralization, flexibility^[ii], immutability, traceability of data, and reduced third-party intervention allows for the operation of highly confidential transactions in a secure manner^[iii], changing the dynamics of interaction.

Block chain has a diverse application as any transaction can be recorded on it; however, it is worth understanding the deployment of Smart Contracts (hereinafter ‘SCs’) in the context of dispute resolution. A SC is similar to a traditional agreement containing coded instructions where the execution is automated. The essence lies in the fact that it is neither smart nor a contract. They often operate on “if-then” command. The terms are entered on the ledger (if-token-money-inserted-then-toffee-pops-out) and the triggering event (inserting-token-money) occurs resulting in self-execution of terms; however, once the transaction of inserting token money is initiated it cannot be revoked and the entire transaction is carried out without any human intervention. Such a revolutionary technology, when used on a large scale has the potential of removing intermediaries,^[iv] thereby reducing transaction costs and leading to the creation of an environment where the need for trust between contracting parties is eliminated.

The potential of this technology can be explored for the construction of the contract whereby obligations of parties are entered on the ledger and at a particular date the enforcement of the agreement is automated, leaving no hassle approaching courts for enforcement of the contract.

However, the application of SCs within the realm of DLT, to create and enforce contracts must seek compliance with the domestic laws of the contracting parties. The author argues for the positive compliance of SCs as traditional contracts within the contours of Indian Contract Act, 1872 to operate as an arbitration agreement when the Lex loci arbitri is India and compliance with the NY Convention to operate as an arbitration agreement in an international arbitration setup.

I. SMART CONTRACTS AS TRADITIONAL CONTRACTS

The SCs often lie on a spectrum and have rarely operated in isolation. They are usually amalgamated with a variety of hybrid agreements that pose numerous challenges to fundamental propositions of the domestic contract law. As a general rule, in case of international arbitration, the parties themselves determine the seat of arbitration, subsequently, domestic law applicable to the parties is ascertained.

For an SC to be tested on the touchstone of traditional contracts, the domestic contract law of the parties has to be taken into consideration. For the purpose of regulatory analysis, the Contract Act is taken as a benchmark for determining the compliance of SCs. The ICA provides for certain fundamentals that distinguish a contract from a mere agreement, namely lawful consent, consideration, a lawful object, and competence of the parties. When dealing with SCs, there is a possibility that the consent of a contracting party is obtained by way of misrepresentation or mistake, since the terms of the contract are coded, making the understanding of obligations cumbersome for them.

Moreover, the ICA doesn't deal with e-contracts; however, common law principles are referred to interpret such contracts. These contracts are signed through cryptographic hash key functions which require compliance with the IT Act, 2000 to be used as a lawful form of digital signature^[v] and with the Indian Evidence Act, 1872 to be used as a valid form of evidence in Indian courts.  

The electronic and automated nature of SCs leaves a nagging space of conundrum where the lex loci is India and Indian laws are made applicable. The recognition of such disruptive technology requires a sui generis regulatory framework for their operation as a valid form of contracts as was the case with the Uniform Electronic Transactions Act.^[vi]

II. SMART CONTRACTS AS AN ARBITRATION AGREEMENT

The raison d'être of international arbitration is its consensual and delocalized^[vii] nature, which makes it an appropriate platform to resolve disputes arising out of SCs. Article II of the NYC provides a detailed understanding of the structure and fundamentals of an arbitration agreement. It states that the agreement must be in writing, defined legal relationship between contracting parties, which must concern an arbitrable subject-matter with an undertaking to submit differences to arbitration. The “writing” requirement complies when the agreement is signed by the parties; however, NYC doesn't provide any guidance regarding the signature of parties. The UNCITRAL ML on e-Commerce provides a substantially broad determination to a signature where any method can be employed as long it identifies the person, his approval to information, and is reliable for the purpose of such information. The requirement is broad in its categorization but takes into account several non-exhaustive factors like the sophistication of equipment, kind of transaction, a function of signature, etc. to ascertain the intention of parties.

Moreover, the definition of a data message is also "not limited to” the methods provided under the treaty, thereby increasing the scope of acceptance of hash keys.

Since the legitimacy of a contract and an arbitration agreement is governed by the law of the seat of arbitration, the requirement of a defined legal relationship may be difficult to determine since very few jurisdictions consider SCs a valid form of contracting. The term “arbitrability of the subject-matter” has often had different interpretations^[viii] and is also to be determined by the law of the seat; however the UNCITRAL Model Law doesn’t provide any guidance as to the arbitrability of disputes and the Working Group’s view was that ML should not contain a provision delimiting non-arbitrable issues^[ix], where often there is inconsistency among jurisdictions for a standardized arbitrable subject matter.^[x]

For instance, In A. Ayyasamy v. A. Paramasivam, (2016) 10 SCC 386, it considered that disputes involving insolvency and bankruptcy are non-arbitrable whereas the US Federal Rules of Bankruptcy Procedure provides for arbitration as a viable model for dispute resolution for insolvency and bankruptcy purposes.]

Although, the regulatory framework pertaining to usage of SCs as an arbitration agreement is broad enough to capture the technological peculiarity; the paradox lies in the fact these rules also, refer to the law of the seat of arbitration. This creates a situation where, although the arbitration agreement has the capacity to significantly alter the existing mode of dispute resolution; however, the regulatory structure pertaining to SCs domestically represents a somber picture. SCs provides a novel perspective of utilizing it as an efficient mode of ADR a mechanism, replacing the existing modes involving courts and middlemen which creates an environment of corruption and red-tape bureaucracy; however the present the legal regime of most jurisdictions doesn’t provide for them as “valid and legal” mode of dispute resolution.

CONCLUSION

The proliferation of DLT and SCs have been primarily affected due to the “trustless” factor; however, it's worth noting that the accuracy of SCs depends entirely upon the original coding. The potential application of blockchain is countless ranging from banking and finance, real estate, insurance, auditing, art, stock exchanges, intellectual-property to almost all commercial transaction capable of being recorded on a ledger. The most interesting of such application is when it is used to form a legal and binding contract. Blockchain provides endless opportunities for forming effective, creative, yet diverse agreements capable of reducing inefficiencies existing within the enforcement of traditional contracts. However, for proper implementation of such contracts within the  purview of a regulatory regime, it must comply with domestic regulations. SCs have not developed for the potential where it can be utilized for resolving disputes via arbitration in an automated manner; however, the prospective scope has to be channelized to effect a regulated mechanism capable of dispute settlement.  

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^[i] Max Raskin, The Law and Legality of Smart Contracts, 1 GEO. L. TECH. REV. 305 (2017).

^[ii] Jeremy Sklaroff, Smart Contracts and the Cost of Inflexibility, 166 U. PA. L. REV. 263 (2017).

^[iii] De Filippi, Blockchain and the Law: The Rule of Code, Harvard University Press, (2018)

^[iv] Scott McKinney, Smart Contracts, Blockchain, and The Next Frontier of Transactional Law, 13 WASH. J.L. TECH. & ARTS 313 (2018)

^[v] The IT Act is silent on the aspect of private and public hash keys as a valid form of signature and merely provides for validity of digital e-signatures, refer, Rishi A, The Legality of SCs in India, IndiaCorpLaw, https://indiacorplaw.in/2017/12/legality-smart-contracts-india.html

^[vi] Section 7 UETA provides for legal recognition to e-signatures, records, and contracts. See, Alan Cohn, Smart After All: Blockchain, Smart Contracts, Parametric Insurance, and Smart Energy Grids, 1 GEO. L. TECH. REV. 273 (2017).

^[vii] Jan Paulsson, Delocalisation of International Commercial Arbitration: When and Why It Matters, 32 ICLQ 1 (1983).

^[viii] Mahmood Bagheri, International Contracts and National Economic Regulation: Dispute Resolution through International Commercial Arbitration, Kluwer Law International, 11 (2000).

^[ix] A/CN.9/216, 23 March 1982.

^[x] In Olympus Superstructures v. Meena Khetan, 1999 (3) SC 514, the Supreme Court took the view that only dispute arising of specific performance of the contract are arbitrable.

COVID-19 AND THE EXTENT OF CONTRACTS ENFORCEABILITY: IMPACT ON COMMERCIAL CONTRACTS

Introduction

With an unprecedented turn of events in the wake of COVID -19, the enforceability of contracts have become a major lookout. Giants such as Inox Leisure Ltd., PVR, Cinepolis are invoking the Force Majeure [“FM Clause”] in their contracts for subduing the rental obligations to their landlords.[1] COVID-19 has caused serious market disruptions and financial dislocations. The basic assumption is that there is a fundamental change in market circumstances due to the uncertainty of an outbreak, and there is a persisting problem until the extenuation of the disease. In this light, it is pertinent to administer, whether a party can invoke the doctrine of frustration under Section 56 of Indian Contract Act [“ICA”] or the FM clause; if yes, under what set of circumstances shall this be invoked.

A claim to avoid adherence to legal obligations in the contract can be fundamentally challenged on various grounds. Parties may seek to invoke the FM clause on the primary grounds of impossibility due to the unforeseeable COVID-19 outbreaks. Yet another ground that can be invoked is the performance of the contract to be commercially impractical or fundamentally expensive to further avow the contract.

The doctrine of Frustration under the ICA and Impossibility

Section 56 of the ICA, 1872 states an agreement to do an act which has become impossible or unlawful to be void. Unlike the common law jurisprudence which confides in different theories like just and reasonable principle,[2] construction,[3] multi-factorial approach,[4] it enunciates positive rules for the frustration of a contract.[5] This doctrine is applicable when a supervening event happens which was unexpected, beyond the control of the parties leading to an impossibility performance of the contract.[6] In the seminal case of Satyabrata Ghose v MugneeramBangur and Co,[7]   impossibility is the second paragraph of Section 56 as interpreted,

‘[T] he performance of an act may not be literally impossible, but it may be impracticable and useless from the point of view of the object and purpose which the parties had in view. Therefore, if an untoward event or change of circumstances totally upsets the very foundation upon which the parties rested their bargain, it can very well be said that the promisor finds it impossible to do the act which he promised to do.’[8]

This understanding creates a contrast with the wordings of Section 56 of the ICA. Section 56, paragraph 2 envisages the discharge of contract by two reasons – first, impossibility, and second illegality by reason of any event which the promise could not prevent. In the latter condition, illegality arises due to faults that are within the control of a party, whereas; the former condition does not prescribe such the same. This leads to an immaculate understanding of the non-enforceability of a contract if performance has been rendered impossible due to the party’s fault. However, this isn’t in conformity with the subsisting position. Self-induced frustration cannot be a ground to avoid contractual obligations.[9] However, this interpretation can be simulated in illustration 5 of Section 56;

Illustration 5: A contract to act at a theatre for six months in consideration of a sum paid in advance by B. On several occasions A is too ill to act. The contract to act on those occasions becomes void.

This illustration elucidates an understanding that due to self-incapacitation, the contract shall deem to be void. Hence, a sharp divergence from the literal interpretation of Section 56 can be noted down.

Further, any change of circumstances cannot be considered an ipso facto ground for avoiding contractual obligations. The landmark case of Alopi Parshad & Sons Ltd, v Union of India[10] held that a contract is not frustrated merely because circumstances have changed. The court’s power to dissolve a contract under Section 56 is limited in its scope. The contract is not frustrated until the fundamental basis of the contract is changed,[11] and is radically different from the existing circumstances.[12]

FM Clause and Impossibility

The Courts have applied the doctrine of frustration restrictively, and thus, are reluctant to discharge a party from adhering to the contract.[13] In Paradine v Jane,[14] the court held that usually contracts are not discharged by any frustrating event, and if such a scenario would have existed, the parties must have included such eventualities in their contract. Therefore, to averse the risk, which is unforeseen and beyond the reasonable control of human, the parties devise mechanism like the FM Clauses. It should properly be inserted in a contract. Omissions of inclusion of such provisions will render the incurrence of liability.

The FM clause seeks to anticipate unforeseeable eventualities and settles the allocation of risks beforehand rather than in an imposed manner.[15] Even after having a close affinity with the common doctrine, it is very narrowly interpreted in its relieving effect.[16] It doesn’t include the acts of negligence, omission, or default of the contracting party.[17]

For an event to qualify as an FM, the event preventing performance must be unforeseeable and irresistible.[18] If there is an alternative way to perform obligations, even after the dramatic change in market circumstances, such would not qualify to invoke a Majeure clause.[19] In Palmco Shipping Co. v. Continental Ore Corp., [20] unavailability of the Suez Canal route cannot tantamount to frustration if goods can be transferred via the Cape of Good Hope. There should be a direct link between the supervening event and the impossibility of performance.

In India, an FM can be traced back to Section 32 which stipulates the impossibility of rendering performance on the ground of an uncertain and unforeseeable future event becomes impossible. Impossibility can be interpreted as the deviation of the basic foundations on which the contract was agreed upon.[21] Commercial Impossibility is not within the purview of impossibility.[22]

Since, COVID-19 is an unprecedented outbreak that has ravaged businesses, including stock exchanges meeting circuit breaks, it is forcing Govt. to impose nationwide lockdown which soars contractual obligations across the world owing to commercial hardships. Therefore, it is quintessential to culminate meaning from the construction of the contract through language and wordings.[23]

Covid- 19 and FM : A tale of uncertainty

To ascertain whether COVID 19 is an FM event or not, the actual result would depend on the contractual context and intention of the parties.

In 2003 SARs in an epidemic-related case Li Ching Wing v Xuan Yi Xiong,[24] a tenant claims that the tenancy agreement is frustrated owing to an isolation order issued by the Govt. for which a tenant could not be inhabited for 10 days. The Court held the SARS epidemic to be an unforeseeable event, and, 10 days are insignificant to claim frustration in a two-year lease agreement. Similarly, even though, COVID-19 is an unforeseeable and a supervening event, it is assumed to be temporary in nature, thus, it is highly unlikely that frustration can be claimed within the framework of Section 56 of the ICA. Rather, if a contract contains an FM clause containing specific inclusions like a pandemic, and epidemic expressly, or by necessary implication, the contractual obligations may be suspended for a while. For instance, if the theatres are facing closure owing to lockdown orders, it would be safe to invoke the FM clause in their agreement with the landlords to suspend their legal obligation to pay rent till the outbreak continues.

However, the drafting of these FM clauses assumes an understanding to incorporate this specific exclusion within its scope. The burden of proving for establishing the FM clause rests on the party who invokes it.[25].  Effectively, in severity and unusual nature of events, the burden would be wrapped under the general context of the contract unless a specific clause is directed towards a different event. Therefore, the burden would be on the parties to establish that COVID 19 has led to the impracticality and impossibility to perform such contractual obligations, and no alternative way is available to them for obeying such obligations.

Grounds for Invoking FM Clause

·       Temporary Unavailability –The subject matter of the contract, either a person or an object that is fundamental to render the performance of the contract is temporarily unavailable. Time is the essence of such contracts. In Play Larga,[26] due to the outbreak of war, the Cuban Govt. denounced any trade with the Chilean Government. However, the buyer from Chile invoked FM clause containing expression ‘temporary interruption’ which extended to 30 days. The court held that such ‘temporary interruption’ cannot be subsumed with this catastrophic event because an extension of time was incomprehensible. Similarly, in various commercial contracts like supply contracts, services, and outsourcing agreements, the inevitable consequence is a failure to discharge contractual obligations owing to non-availability of the subject matter of the contract[27] even at exorbitant prices,[28] where an agreement was to deliver the goods at a particular time. Mere temporary interruption without a time constraint cannot be invoked.[29]

However, in agreements of Computer and IT, Cloud Computing, automation services contract, it would be difficult to prove the direct causation because COVID-19 is not preventing them from any other alternative medium to provide services. However, if the FM clause contains specific exceptions like a power cut failure, back-up arrangements, [30] it can be beyond the reasonable control of the supplier.

·       Failure of Specific Sources – If the subject matter of the contract is obtained from a specific source that became unavailable owing to no fault of either party, the FM clause can be invoked, for example, the deteriorations of the corps.[31] For instance, 70% of the coffee produced in India is exported, and Italy is one of the major importers. In such circumstances, where coffee could not be produced owing to lockdown measures, the exporters can claim that the subject matter of contract to not be available, and cannot be arranged through any other medium, even with extra-ordinary efforts in the wake of COVID-19 outbreak, since the production of the coffee is a fundamental essence of the contract, and thus FM is validly invoked.

·       Method of Performance – Due to COVID-19, Gateway Terminal, India’s biggest container terminal has invoked FM Clause,[32] because due to lockdown, all terminals have not been operation. In such circumstances, where the availability of terminals for offloading stock is fundamental to the contract, this does lead to the impossibility of the contract, where the performance cannot be rendered through any other medium available.[33] With regards to Commercial Contracts like in terms of distribution; in Peter Dixon & Sons Ltd. v. Henderson, Craig & Co. Ltd.[34], during WWI when British Ships were not available, foreign ships could have made available at an increased freight, the party couldn’t invoke the FM clause. For example, in supply and distribution agreements, any imports from China, an epic-center of the pandemic, would not be avowed owing to a total prohibition of transport mechanism by Indian Govt. Since, the impact could have been foreseen by the suppliers in China, it is flexible for them to invoke FM by relying on impossibility.

·       Illegality – On account of any amendment or enactment of any new legislation which may fluster the purpose of existing contracts owing to illegality, the contract may be rescinded. Any agreement cannot be acted against the law.[35] Govt. of India invoking Section 51 to 54 of Disaster Management Act, 2005 and Section 3 of Epidemic Disease Act, 1882 to override any laws in specific circumstances like rental obligations towards landlords is justified. In such rent agreements, the landlords cannot force tenants to obey the contractual obligations. Also, if the supply of medicine has requisitioned for public services in India, and any amount of export from India is strictly prohibited, the contractual obligation may be discharged.[36]

Pressure Points and Drafting Solutions

The FM clause is a scheme of civil law,[37] and thus, its scope is dependent on the construction, language, and wordings of the contract,[38] which gives rise to disputes and claims with respect to a specific set of facts. The FM can be covered in different shapes and can be flexible, as may be construed by the parties in the contract.  Therefore, it is pertinent to include FM clauses in the widest sense as to incorporate unforeseen risks like COVID-19, and to decide the fate of the enforceability of the contract thereon. A commercial contract is to be interpreted in a manner which gives business efficacy to such contracts,[39] and thus it is necessary to include a tenet of different measures in FM clauses. Following are some drafting solutions that may be feasible to be incorporated within the contract to avoid the liability.

1.     Whereas Clause:

Under English Law, it is assumed that when a party entering into the contract, they are deemed to have consented to the risks associated with the contract, even though the circumstances change. However, incorporation of ‘whereas clause’ in the contract highlights the intention of the parties, and provides a good example of a muddled meaning.[40] This clause serves as an interpretative guide to further clauses, and the contract in a whole.[41] During this pandemic, a clause may allow a party to avoid contractual obligations if significant market circumstances change. This clause is not substantive to bestow relief, and thus, must be followed by some clauses like hardship clause, MAC clause to gain relief.

2.     Use of Express Conditions along with a Hardship Clause:

The principle to apply express conditions in a contract is pertinent because of a robust trend of adhering to strict compliances to express conditions.[42] For instance, a party may incorporate a clause ‘right of parties when significant market conditions changes’ in which circumstances like COVID 19 can be encapsulated, and the party may decide relief on whatever basis like renegotiation, adjustment, or any hardship clause.

3.     Material Adverse Change [“MAC”]

MAC clause is generally used in the context of Mergers and Acquisitions but can be used in the contract of sale of goods. MAC is a clause which highlights that if there is a significant material change in business, the affected may terminate the contract.[43] Alternatively, the clause could provide for renegotiation, and after the failure of renegotiation, the adjustment clause by the court can be rendered. Since, largest stock exchanges of the world hitting circuit breakers, a downturn in the whole sectors leading to MAC in the businesses across the world in the wake of a pandemic - is the safest to incorporate the MAC clause.

4.     Hell or High Water Clause:

In this clause, the parties agree that regardless of a dramatic change of circumstances, the obligations are paramount duties to perform the contract, and thus making payment even on the occurrence of impossible events. It is mutually agreed that no party can obtain relief due to a substantial change in the contract.

5.     Renegotiation and Adjustment Claims:

On the occurrence of the supervening event, it is likely that the party would like to renegotiate amongst themselves. Therefore, re-negotiation and adjustment claims through a price adjustment variance, the appointment of a third person as an agent, escalator, or de-escalator clause are suggested.

Conclusion:

Amidst the outbreak of COVID-19, the invocation of FM, and the doctrine of frustration are practical and probable in all aspects. The doctrine of Frustration has been narrowly applied, and the courts have been reluctant to bestow relief thereon. This simulates an understanding that parties may renege the contract on the grounds of the FM clause incorporated within the agreement. It would holistically depend upon the construction of the contract as to pandemic like COVID-19 can be assimilated within the explicit or implied meaning of the contract. Therefore, the drafting of such an extensive clause is a safe approach. In the future, parties may incorporate a set of clauses relieving themselves from the consequences of such outbreaks.

SHUBHAMGUPTA

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[1]Forum Bhatt, Inox Joins PVR To Invoke FM, BloombergQuint  (Apr. 08, 2020, 3:57 PM), https://www.bloombergquint.com/business/inox-joins-pvr-to-invoke-force-majeure

[2]M. P. Ram Mohan et. Al., The doctrine of frustration under section 56 of the Indian Contract Act, 4 Ind. L. Rev.  85, 89-90 (2020).

[3] Davis Contractors Ltd v. Fareham Urban District Council, [1956] 3 AC 696 (Eng.) (‘Davis’).

[4]Sea Angel,  [2007] EWCA (Civ) 547 (Eng.).

[5] Frederick Pollock & Dinshaw Mulla, Indian Contract Act and Special Relief Acts 323 (11^th ed. 1990 ).

[6] Kesari Chand v. Governor-General in Council, (1949) ILR (Nag.) 718 (India).

[7] AIR 1954 SC 44 (India).

[8] Id.

[9]Balwinder Singh v. State of Punjab,  (2017) 185 PLR 356 [16] (India).

[10] (1960) 2 SCR 793 (India).

[11]Dharanjamal Gobindram v. Shamji Kalidas, AIR 1961 SC 1285 (India).

[12]Davis, supra note 3.

[13]British Movietonenews Ltd. v. London and District Cinemas [1952] AC 166 (Eng.); Tsakirog- lou & Co. Ltd. v. Noblee Thorl G.M.B.H [1962] AC 93 (Eng.); J. Lauritzen A.S. v. Wijsmuller B.V. (The Super Servant Two) [1990] 1 Lloyd’s Rep. 1 (Eng.).

[14][1647] EWHC KB J5 (Eng.); 82 ER 897 (Eng).

[15] FM and Frustration 45 (Ewan McKendrink eds., 2^nd ed. 1995) (‘Ewan’)

[16]Nicholas, FM and Frustration, 27 Am. J. Comp. Law 231 (1979).

[17]Schmitthoff’s, Export Trade 199 (9^th ed. 1990).

[18] Ewan, supra note 15, at 06.

[19] Nathan M. Crystal & Francesca Giannoni-Crystal, Contract Enforceability During Economic Crisis: Legal Principles and Drafting Solutions, 10 Global Jurist [i] (2010). (‘Nathan’)

[20][1970] 2 Lloyd’s Rep. 21.  (Q.B.) (Eng.).

[21] Krell v. Henry [1903] 2 KB 740 (Eng.)

[22] Karl Ettinger v. Changandas,  [1916] 40 (Bom.) 301 (India).

[23] Energy Watchdog v. CERC, (2017) 14 SCC 80 (India) ( ‘Energy’).

[24][2004] 1 HKLRD 754 (H.K.).

[25]Tamplin SS Co v. Anglo Mexican [1916] 2 AC 397 (Eng.). (‘Tamplin’).

[26] [1983] 2 Lloyd’s Rep. 171 (Eng.).

[27][1989] 1 Lloyd’s Rep. 148. (Eng.).

[28]Tennants (Lancashire), Ltd. v. C. S. Wilson and Co. Ltd. [1917] AC 495 (Eng.)

[29] Tamplin, supra note 25.

[30]Peter Savile & Sanjay Pritam, FM and Cloud Computing Projects (Nov. 06, 2012),  https://www.internationallawoffice.com/Newsletters/Tech-Data-Telecoms-Media/United-Kingdom/RPC/Force-majeure-and-cloud-computing-contracts

[31]Couturier v. Hastie, [1856] 5 HL (Cas.) 67 (China).

[32]Manoj P, Gateway Terminal, India’s Single Biggest Container declares FM (Mar. 29, 2020), https://www.thehindubusinessline.com/economy/logistics/gateway-terminals-indias-single-biggest-container-terminal-declare-force-majeure/article31190856.ece#

[33] Energy, supra note 23.

[34] 1919(2) KB 778 (Eng.)

[35] Indian Contract Act, Act. No. 9 of 1872, Imperial Legislative Council (1872) (India).

[36]Tennants (Lancashire), Ltd. v. C. S. Wilson and Co. Ltd. [1917] AC 495 (Eng.).

[37] Ewan, supra note 15, at 08.

[38] Energy, supra note 23.

[39] Id.

[40]Block Gertrude, Consider the Whereas Clause, 68 Wis. Law. 36, 37 (1995).

[41]UNIDROIT Principles, Preamble, http://www.unidroit.org/english/principles/contracts/main.htm.

[42]Nathan, supra note 19.     

[43]Timothy R. Donovan & Jodi A. Simala, Successful Partnering between Inside and Outside Counsel §41.32 (2010).