Will 'Act of God' Clauses in India Inc's Contracts Help Restart the Economy?

Several large business houses have already invoked the provisions of force majeure in India, but it remains to be seen how the courts will interpret this.

The present lockdown has caused the Indian economy to grind to a halt. Some enterprises have already been forced to shut down and there is a sense of increasing panic amongst many businesses. The images of millions of migrants rushing home, some on foot, remind us that a large part of India depends on daily and weekly income to survive. In fact, of the 400 million-strong working population of India, 25% are employed in small, micro and medium sized enterprises. Various pundits portend the worst recession in living memory.

We must restart our economy. And quickly. The government of India will certainly work out various institutional and industry-specific stimulus packages, but these will certainly pale in comparison to the mega boosters that several rich countries of the world have and will roll out. Unless all of us do whatever we can to boost this recovery, the toll will be unbearable for our country as a whole.

It is in this context that I propose the tool of force majeure to alleviate the economic fallout that micro, small and medium businesses will surely face as they struggle to pay wages and stay afloat.

The doctrine of force majeure has been evoked by several companies and governments in the past to deal with unprecedented global catastrophes. In 2015, during the outbreak of the Ebola virus in West Africa, the Moroccan government evoked it to limit its legal liabilities when it was forced to postpone the African Nations Cup, a biennial soccer tournament.

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Force majeure or an ‘act of God’ is a contractual clause that refers to an unnatural event such as an earthquake, fire, war, or other such situation which prevents parties from continuing or performing their contractual provisions. This clause exonerates parties from contractual penalties or liabilities during the occurrence of force majeure. Such contractual duties could mean and include the occupation of premises, the delivery of goods, the payment for services and other such acts for which the contract has been entered. The force majeure event must make the contract impossible to perform and not just impose a financial burden on the performance of the contract.

For example, if the delivery or manufacture of goods suddenly becomes economically unviable because the cost of a raw material has doubled or multiplied ten-fold due to an external factor, under a contract this does not qualify as a force majeure event. That is because the goods can still be procured or manufactured although this may not be financially viable.

The term force majeure refers to a situation in which the parties are completely restrained due to factors beyond their control from performing the contract. This could apply to the current lockdown which has made it impossible for many businesses to keep their shops and offices open and thus made impossible the operation of premises and, in many cases, the performance of a contract.

In the famous Supreme Court case of Energy Watchdog v CERC, Adani Power unsuccessfully tried to use force majeure to terminate a contract. In 2017, the company had won the bid to supply power to the government of Haryana. At the time, the company had assumed that the energy charges applicable and payable by the government would not escalate. However, a few years later, an increase in the price of raw coal procured from Indonesia caused Adani Power to appeal to the Supreme Court to terminate the contract on the basis of force majeure. The coal prices in Indonesia had not been revised for 40 years prior to the submission of the tender, they argued. The court however held that the bidder when submitting the tender should be well aware of the risk of rising or variable cost of raw materials and hence dismissed the plea of force majeure. As this case reveals, a force majeure event has not occurred just because an agreement has become financially unviable.

One complication is that an application of the doctrine of force majeure can be difficult to prove unless the type of event is specifically mentioned in a contract. The specific mention of force majeure events in a contract may relate to events other than the novel coronavirus virus. It is highly unlikely that contracts drawn before 2020 would mention the occurrence of COVID-19. However, the mention of the cessation of a contract due to an epidemic, pandemic or other such events being forces outside the control of the contracting parties could perhaps be relied upon to invoke force majeure.

Low traffic in Ahmedabad, India, March 21, 2020. Photo: REUTERS/Amit Dave

It is important to point out that even if a contract makes no mention of a force majeure eventuality, parties to a contract may rely on section 56 of the Indian Contract Act to plead frustration of a contract in the present lockdown situation. This section allows termination in the event that a contract is frustrated and cannot be performed. Such interpretation will depend on the length of the lockdown and on each individual case. It is not known at this point how the courts of India will consider the economic consequences of the present lockdown.

Several large business houses have already invoked the provisions of force majeure to stall the payment of license fees and to restrain the invocation of penalties. PVR Cinemas, which has 870 screens across the country, has invoked force majeure as grounds not pay any rent during the lockdown period. Several large retail chains such as Reliance Retail, Big Bazaar, McDonald’s and Dominos Pizza have also already invoked the doctrine of force majeure to redeem their legal liability to pay licence fees or rental dues and/or penalties.

India’s top LPG importer has also invoked force majeure due to the lockdown as grounds to stop the import of LPG gas from Qatar Gas. They argue that low demand during this period has meant that the storage supply vats remain full and hence any additional supply cannot be stored at this time.

Also Read: What Can Be Done to Ensure the Wheels Don’t Come off the Indian Economy?

Gateway Terminals, India’s largest container terminal at JNPT Mumbai, which is partly state-owned and the largest Indian container terminal in India, has invoked this doctrine to forestall any claims from clients for penalties including any damage to cargo.

It remains to be seen whether the courts and insurance companies will accept the claims of force majeure. It also remains to be seen whether governments will allow companies and business houses an exemption from the payment of dues due to the present lockdown. In the case of private contracts, a lot will depend on the wording in individual contracts and the purpose for which contracts were originally executed.

In order to restore the balance of the economy, the government, as well as private players, must allow some generosity and leeway to businesses so that they are enabled to open shop again, to continue with the employment of their workers and pay salaries and taxes once again. This approach follows the theory of economic enlightenment propounded by John Meynard Keynes after the Great Depression in 1930. Keynes argued that excessive savings during an economic crisis could lead to ruin. A weak economy makes people hesitant to takes risks, which in turn doesn’t create new jobs, generate any income, stimulate spending or increase manufacturing. This becomes a self-fulfilling downward cycle. Thus in hard times, an enlightened self-interest actually supports the wellbeing of each individual and the economy as a whole. A longer term approach, not short-sighted greed, will help each of us in the medium and longer term to navigate this unprecedented time in our lives.

Naheed Carrimjee is a solicitor and been a founding partner of Desai Desai Carrimjee and Mulla, a firm specialising in corporate and civil law. She supports and is closely involved with  several charitable organisations.