COVID-19 & FORCE MAJEURE:

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.

Many domestic companies facing financial penalties due to their inability to fulfil contractual obligations as agreed upon with their business partners because of disruption in the supply chain due to coronavirus outbreak may take shelter under 'Force Majeure' clause. Force Majeure clause protects a party from any financial liability for its failure to perform a contractual obligation

The outbreak of Covid-19 has impacted mainly real state sector, development sector and commercial businesses, leaving the homobuyers in bubble of uncertainty whether they would have sufficient, regular and timely cash flows to make payments to the developer or service their home loans, as the outbreak has brought their economic activities to a standstill. Homebuyers who are professionals or run independent businesses are more vulnerable.

‘Force Majeure’, as a concept, is applicable across all industries and sectors and as such, its applicability and ingredients remain unchanged for contracts governing the real estate sector. The key ingredients for invoking a ‘force majeure’ provision include the following:

1. Occurrence of an event which affects a party’s ability to perform a contract, either in entirety or in a timely manner;
2. Occurrence of event which is beyond reasonable control of parties;
3. Events which albeit may not render an act to be literally impossible but make an act impracticable and useless in terms of the object and purpose of the contract; and
4. Difficulty in performance of any obligation under a contract is not sufficient for invocation of a force majeure provision.

False Majeure in India:

In India, the Department of Expenditure, Procurement Policy Division, Ministry of Finance issued an Office Memorandum on February 19, 2020, in relation to the government’s ‘Manual for Procurement of Goods, 2017’, which serves as a guideline for procurement by the government. The Office Memorandum effectively states that the COVID-19 outbreak could be covered by a force majeure clause on the basis that it is a ‘natural calamity’, caveating that ‘due procedure’ should be followed by any government department seeking to invoke it.

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. It is a contractual provision agreed upon between the parties. The occurrence of a force majeure event protects a party from liability for its failure to perform a contractual obligation.

However, COVID-19 is unlikely to give rise to a valid force majeure defense under every contract and in every circumstance, as different contracts and governing laws stipulate different requirements for different situations. Companies are, therefore, well advised to proactively manage the related legal risk and carefully assess which party must ultimately bear the financial losses caused by COVID-19.

The law in India has been laid down in the seminal decision of the Supreme Court in the case of Satyabrata Ghose vs Mugneeram Bangur & Co.

The entire jurisprudence on the subject has been well summarised by Justice RF Nariman of the Supreme Court in the recent decision in the case of Energy Watchdog vs CERC (2017).