Businesses which not being able to invoke Force Majeure during COVID 19 pandemic

Force Majeure is a clause that is written into contracts which implies that a contract can be cancelled or postponed due to impossibility of performance.

Force Majeure events are those which are beyond the control of a person or an enterprise. These events include an ‘Act of God’ or natural disasters, war or war-like situations, labour unrest or strikes, epidemics etc.

The present COVID 19 global pandemic is one such scenario which has caused disruptions to the very lifeline of the economy i.e. business.

With India into a state of lockdown till 3 rd May, 2020, the economic activity is surely going to take a beating.  

The Courts have time and again with judicial activism aimed to clear the ambiguity through their various judgments about the application and scope of Force Majeure clause and has laid down the tests that need to be fulfilled for availing the said protections. The same are shared as follows:

The Supreme Court in its landmark judgment Satyabrata Ghose vs Mugneeram Bangur & Co held that to determine whether a force majeure event has occurred, it’s not necessary that the performance of an act should literally become impossible; a mere impracticality of performance will also be covered. “If the contract has an express or implied ‘force majeure’ clause, then the situation will be analysed on the basis of that, and not through the application of principles under Section 56,” it said.

Further, in Industrial Finance Corporation of India Ltd vs The Cannanore Spinning & Weaving Mills Ltd. and Ors., the Court stated: “It may be noticed here that the Statute itself has recognised the doctrine of frustration and encompassed within its ambit an exhaustive arena of force majeure under which non-performance stands excused by reason of an impediment beyond its control which could neither be foreseen at the time of entering into the contract nor can the effect of the supervening event could be avoided or overcome.”

In M/s Alopi Parshad & Sons Ltd. vs Union of India, , the Court held: “A contract is not frustrated merely because the circumstances in which it was made are altered.”

More recently, in Energy Watchdog vs CERC in 2017, the Court held that if a contract has an express or implied force majeure clause, it will apply over the principles under Section 56 and the force majeure clause will not apply if alternative modes of performance are available.

The Ministry of Finance has though declared that Force Majeure protection would be granted but still some businesses will suffer despite the same which are as follows:-

1. Power sector and Electricity distribution companies     

In the power sector, distribution companies (discoms) normally maintain a payment assurance for all the power that they intend to procure from a power generator (genco) to prevent a build-up of dues. However, after the lockdown, problems for the power sector have increased manifold as the demand of power has come down by 20-30 percent. Electricity bill collections by discoms witnessed a fall by 80 percent, leading to their inability to make daily payments not only to generators but also for debt servicing to banks and financial institutions.

The power ministry had received requests from power distribution companies and state governments for waiver of late payment surcharge considering force majeure coming into effect due to the lockdown restrictions.        

Acknowledging the gravity of the situation, the ministry relaxed the payment security mechanism to give support to discoms that were finding it difficult to collect payments for bills.

Six discoms—UP, Punjab, Haryana, Telangana, MP and Dadra and Nagar Haveli—have invoked the force majeure clause for an indefinite period and asked private sector gencos, with whom they have entered into power purchase agreements (PPA), not to expect any payment till further notice.

In response the Solar Energy Corporation of India stated that the claim of force majeure for its inability to pay on the grounds that it could not collect consumer dues was not valid. Therefore, the discoms can only ask for relief measures on account of the pandemic.

 

2. Hospitality Industry

Force majeure was also invoked by some hotels. OYO suspended payment of minimum assured amount to its hotels by invoking this clause in their agreement. Hotel owners have expressed disapproval and alleged that such a clause was not included in the original agreement, while according to OYO, it reserves the right to terminate the contract completely if the situation worsens.

 

3. Transportation

the ministry of road transport and highways has advised the National Highways Authority of India (NHAI) not to levy toll charges during the lockdown. In order to balance the revenue loss for companies and  NHAI.

 

4. Insurance

The Life Insurance Council of India has announced that the clause of ‘Force Majeure’ will not apply in case of COVID-19 death claims. Apart from this, the Insurance Regulatory and Development Authority of India (IRDAI) has also provided additional time for payment of renewal premium in case of health insurance policies and motor third party insurance.

Moreover the IRDAI as issued guidelines for processing of COVID 19 by the public sector as well private insurance companies.

 

5. Steel Imports

In a recent judgment namely Standard Retail Pvt. Limited integral Industries Pvt. Ltd and Ors versus M/s Global Corp. and anr passed  by the Hon’ble High Court of Bombay, the single Judge bench of Justice A. A. Sayed held that lockdown cannot come to the rescue of steel importers so as to resile from its contractual obligations and stop themselves from making payments by invoking the force majeure clause of contract.

 

6. Indian Corporates

Though the Ministry of Finance has though declared that Force Majeure protection would be granted to the businesses but functioning in a grey area the big corporations such as large retail chains such as Reliance, Domino’s and Mcdonalds , Big Bazaar have stopped to pay rents in respect of the premises used by them.

The law states that ‘where the property leased is not destroyed or substantially and permanently unfit, the lessee cannot avoid the lease because he does not or is unable to use the land for purposes for which it is let to him’.

Despite lockdown notifications, these companies continue using premises for storing goods for present or future sale. For instance, most retail verticals are continuing to take orders and payments online for all postal codes. Even during the national lockdown, unable to complete the delivery of sale, they continue to receive payments for products being stored in their premises.  

Nothing renders the payment of rent impossible. Any kind of temporary business interruption is covered in the risk insurance these companies are obliged to have. The burden of rent cannot be wriggled out of because of Covid-19-induced reduced business opportunities.        

Even if a company claims that it may have become onerous to pay the contracted amount as a result of Covid-19-related notifications, no notification has rendered it impossible for companies to pay for goods and services availed, or being availed of. The ability of a company to generate a monthly profit is not linked to the obligation, or ability, of a profitable public corporation to pay the contracted amount.     

Hence, a blanket protection is yet not available to the corporate at this stage due to the COVID 19 pandemic.       

Following the model of South Africa wherein, the President Cyril Ramaphosa has urged the big corporations to not to opt for force majeure in the interests of the country’s economy, there is a strong likelihood of this model replicated in India as well.

 

Concluding remarks

Force Majeure does not give a blanket protection against any non-fulfillment of contractual terms. It depends on the mutually agreed upon events and obligations to be covered by this clause.

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