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COVID 19 – Applicable Indian Laws

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On 11th March 2020, the World Health Organization (WHO) declared COVID-19 a pandemic. WHO defines pandemic as “the worldwide spread of a new disease.” Dr. Tedros Adhanom Ghebreyesus, the Director-General of WHO described it as “a crisis that will touch every sector’.

In the aftermath of the outbreak, every significant sector in the global economic has been adversely impacted, the ripples transcending geographic borders. The pervasive impact of the outbreak has caused extreme disruptions of commercial ventures, activities and day-to-day business transactions. The world economy and supply chains are severely constrained and rapidly adapting, which is likely to have wide-ranging influences on Indian corporates and individuals. Given the current forecasts of how long COVID 19 will disrupt the supply chains, international travel and business operations, it is natural that several individuals and businesses may be restricted in meeting their existing contractual obligations in the medium to long run.

Indian Law provides a broad framework to address and respond to situations and circumstances that are conspicuous in the present economic uncertainties inflicted by the COVID-19 outbreak.

On 19th February 2020, the Ministry of Finance declared that in the event of disruption in the supply chains due to spread of COVID-19 across the world, such situation will be covered under Force Majeure Clause (FMC) in a contract. Also, that the situation should be considered as a natural calamity and Force Majeure may be invoked, wherever appropriate, after following the due process.

Recourse under Force Majeure or the Principles of Frustration of Contract

Etymologically originating from the French language, Force Majeure means “the occurrence of an event or effect that can neither be anticipated nor controlled, which prevents a person from doing something he/she had planned/promised to do”.

There is, however, no generic definition of Force Majeure in common law and it remains within the realm of contractual interpretation. An analysis of rulings of Indian Courts describes Force Majeure as “the intention to save the performing party from the consequences of anything over which he has no control”. Being the widest meaning that can be given to the term, it is obvious that the terms about “force majeure” in the agreement are not vague or subjective. The use of the word “usual” makes all the difference, and the meaning of the condition may be made certain by evidence about a Force Majeure clause, in the contemplation of parties.[1] Simply put, the inclusion of a Force Majeure clause in a commercial arrangement is essentially a blueprint of the circumstances under which the performance of the contract may be excused or temporarily suspended.[2]

The Supreme Court of India has held certain conditions applicable to any recourse under Force Majeure terms – (i) The very basis of such clauses is that the events are beyond the reasonable control of the parties and in such conditions, parties cannot be held liable for non-performance of obligations under the contract; (ii) it is also necessary to analyse if best endeavours have been taken to mitigate Force Majeure event; (iii) the event of force majeure, should be unforeseeable by the parties; and (iv) the event of Force Majeure has actually rendered the performance of the contract impossible or illegal. However, since all of these conditions are subjective, they differ on a case to case basis and therefore, need to be interpreted carefully and accordingly.

[1] Dhanrajamal Gobindram v. Shamji Kalidas & Co., AIR 1961 SC 1285, 1291.

[2] Pollock and Mulla, Indian Contract and Specifc Relief Acts; Dhanrajamal Gobindram v. Shamji Kalidas & Co., AIR 1961 SC 1285.

 

Contracts Containing Force Majeure Provisions

The scope and extent of a Force Majeure clause in the event of a pandemic, the likes of which we are facing today, has to be determined on the touchstone of:

  • definition of force majeure” under the contract; and
  • Judicial precedence on the classification of ‘extraordinary events’ and ‘circumstances beyond the reasonable control and expectation of the parties’.

If a contract defines and contains a Force Majeure clause, at the outset it merits understanding whether such clause encompasses the outbreak of a pandemic, or epidemic, or even a general catch-all phrase that covers all events “outside the reasonable control of the parties.” The party seeking to invoke Force Majeure must therefore establish that performance of the contract, by such party, has become physically, practically or legally impossible. And further that such impossibility has arisen from or accountable to “events outside the reasonable control’ of such party. Mere commercial difficulty or the business/venture becoming unprofitable or even a recession in the economy, as a result of a pandemic will not, by itself, be sufficient to constitute an event of force majeure. The validity, scope and enforceability of a Force Majeure clause in a contract is always tested in the context of the contract’s governing law.

Some Force Majeure clauses, as also the governing law, require the party invoking the clause to take reasonable steps to mitigate the impact of the Force Majeure In the backdrop of COVID-19 and the nationwide lockdown declared by Indian government in its aftermath, reasonable preventative steps may include – adhering to quarantine protocols, proper sanitation, policies with respect to travelling, seeking guidance from public health officials, adhering to the legal and policy changes by the Indian State etc. Parties should however comply with the timelines provided under the contract (if any) within which the party intending to invoke Force Majeure can successfully exercise and enforce such a right. Early notification of the event (s) of force majeure, with sufficient details of the event itself as also its impact on contractual performance, is the first step in claiming contractual remedies or recourse on account of the such an event.

Thus, the basic premise for invoking remedy under the Force Majeure clause would be :-

  • the existence of a valid contract between the parties;
  • the performance of the contract is not complete; and
  • it becomes impossible to perform the contract due to a fact or law.

Generally, if parties agree, they are free to alter or renegotiate the terms of their contract. While invoking a contractual force majeure, such party may request for renegotiation of the contract. And in the event the renegotiation is refused or fails, parties may agree to terminate or suspend performance of the contract or seek the assistance of the Court or any other mode of dispute resolution specified in the contract.

Contracts Sans Force Majeure Provisions

In the event that the contract does not contain a Force Majeure clause, or the clause does not cover a pandemic outbreak, a party may take recourse under the doctrine of frustration of contract.[1] Section 56 of the Indian Contract Act, 1872, allows for the temporary discharge of obligations on grounds of impossibility in the instance of any untoward event or change in circumstance that is totally dehors the “very foundation” upon which the parties entered their agreement.[2] In law, a contract terminates automatically when an event constituting frustration of contract occurs. In such situations, Parties may be able to recover monies or consideration paid (less the other party’s expenses) under the contract before it was frustrated.

The above doctrine is designed to relieve parties from their mutual obligations under a contract because of the occurrence of certain events subsequent to their entering into the contract which makes it impossible for the parties to perform the contract. Impossibility in this context includes not merely physical but also commercial. Holding the parties to their original contract, in such circumstances, would result in binding them to almost a new contract which they did not enter into. The Supreme Court has therefore termed such a provision as the “rule of positive law”.[3] Exceptions do also exist where certain events may not be included with this doctrine of frustration of contract – like (i) events deliberately inflicted; (ii) performance hardships; (iii) commercial unviability; (iv) third party actions etc.

If there remain uncertainties over a claim for Force Majeure in a contract or under law, an insurance claim to cover or mitigate losses caused by the COVID-19 outbreak may also be an option.

[1] See section 56 of the Indian Contract Act, 1872.

[2] Energy Watchdog Vs. Central Electricity Regulatory Commission & Ors.; (2017) 14 SCC 80

[3] Satyabrata Ghose v. Mugneerum Bangur and Co. [AIR 1954 SC 44.]

Exception to the Doctrine

The doctrine of frustration ordinarily excludes further performance but there is an exception in cases of statutory contracts, such as government contracts and tenders, where the party takes absolute responsibility to perform the contract and cannot escape liability whatever may be the reason. In such situation, such events will not discharge the party from the consequences of non-performance of the obligation under the contract. In a case in which the consequences of non-performance of contract is provided in the statutory contract itself, the parties shall be bound by that and cannot take recourse to a claim of frustration of contract.[1]

[1] Mary v. State of Kerala (2014 14 SCC 272)

 

 

 

Lease Agreements:

 

A lease of immovable property is “a transfer of a right to enjoy such property for a certain time either express or implied or in perpetuity in consideration of a price”.the doctrine of frustration does not apply to leases as it is a “completed conveyance,” different from an “executory contract”; and “events which discharge a contract do not invalidate a concluded transfer.”[2]

However, in terms of Transfer of Property Act, 1882, the doctrine of frustration of contract would apply to leases only in the event the purpose for which the property was leased out to the lessee, could not be achieved or stands frustrated. In other words, the lease could be avoided by the lessee if the property is destroyed or rendered substantially and permanently unfit for the purpose for which it was let, and not simply when the lessee is unable to use the land for purposes for which it is let to him.[3]

[1] See section 106 of the Transfer Properly Act, 1882.

[2] Raja Dhruv Dev Chand v. Raja Harmohinder Singh AIR 1968 SC 1024,

[3] See section 108(e) of the Transfer Properly Act, 1882.

Recent Judicial Developments

Recently, on 8th of April 2020, the High Court of Bombay delivered a prominent judgement on “force-majeure” and “frustration of contracts” during the period of COVID-19 pandemic and the lockdown issued by the Government of India. The Commercial Arbitration Petition in Standard Retail Pvt. Ltd. vs. M/s G.S. Global Corp. and Ors., which was combined with other similar petitions, was filed to restrict the banks from negotiating and/or encashing the letters of credit which had been furnished for ongoing projects.

The Petitioners pleaded that on account of lockdown enforced to prevent the spread of COVID-19, the existing contracts stood terminated since they would not able to unload the cargo from the ships and therefore would not be able to fulfil their obligations to their purchasers. As a result, the contracts had become unenforceable on account of frustration, impossibility and impracticability. The Petitioners relied upon Section 56 of the Indian Contract Act, 1972.

However, the High Court of Bombay took a different view that :-

  • the Letters of Credit, against which a relief is sought, are actually an independent transaction with the bank, who is not concerned with the disputes between the parties;
  • the notifications and advisories of the government have declared steel and the operations of Container Freight Station and warehouses and offices of Custom Houses Agents as essential commodity and services, thereby lifting all restrictions on them. Furthermore, the Directorate General of Shipping, Mumbai has declared that there will be no container detention charges on import and export shipments during the lockdown period;
  • the Respondent has already performed its obligations under the Contract, and they are not concerned with whether or not the Petitioners are able to fulfil their commitments to their purchasers.
  • since the lockdown is only for a limited period of time, it cannot be used by the Petitioners to resile from its contractual obligations of making payments to the Respondent.

The remedies indicated herein are all viable, however, companies are encouraged to seek specific legal advice to manoeuvre through the broader legal risk management issues while addressing, assessing or mitigating the ramifications of COVID-19 on their business, operations and contractual commitments.

 

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Asia Law Offices advised a major transnational strategic collaboration between its client, UAE-Based Pharmax Pharmaceuticals, and Swiss pharma major Acino Pharmaceuticals.

ALO represented Pharmax in the structuring and closure of entire transaction documents of the significant collaboration.

The collaboration framework extends to licensing, manufacturing, and supply of Acino formulations within the gastroenterology and the cardiovascular space throughout the Middle East and Africa.