Saturday, May 18, 2024

Force Majeure takes centrestage during Covid-19

As economic activities come to a standstill, companies in various sectors are falling back on this clause to get released from contractual obligations and apex court judgments have shown the way forward. By Srishti Ojha

While the world is crippled by the coronavirus outbreak, an important concern among different industrial sectors is the force majeure clause and whether it will excuse parties who are otherwise bound by a contract from performing their obligations. Is the Indian law well-equipped to deal with a situation like this, especially as economic activities and commercial transactions globally have come to a standstill?

Force majeure is a standard clause in most contracts. If invoked, it exempts a party from performing his obligations due to an event that has not been foreseen and which he has no control over. It’s generally added to the contract to cover incidents. The Indian Contract Act does not expressly refer to the term force majeure, but the essence of the concept can be found in Section 32 and Section 52 of the Act.

Section 32 talks about “contingent contracts” where the performance of the contractual obligations is contingent on the happening or non-happening of an event. Section 52 deals with the frustration of a contract and states that any act which was to be performed after the contract became unlawful or impossible to perform and which the promisor cannot prevent will become void. Therefore, applicability of both force majeure and frustration of contract require a supervening event which is not foreseeable and is not attributable to either party.

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, 1960, 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.

So how does this clause affect various sectors? 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.

Meanwhile, gencos are required to make payment for monthly supplies of coal, but they have been defaulting in their payment to Coal India Limited (CIL) due to the lockdown. Despite this, CIL is ensuring smooth supply to gencos. 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. The ministry stated: “Considering the unprecedented and force majeure situation, it has been decided that power may be scheduled even if payment security mechanism is established for 50 percent of the amount for which payment security mechanism is to be otherwise established contractually.

This order shall be in effect till June 30, 2020.”

Meanwhile, the Central Electricity Regulatory Commission (CERC) passed an order reducing the late payment surcharge imposed on discoms for delay in payment to power generators and transmission companies. It lowered LPA to 1 percent per month from 1.5 till June 30. The order was passed following directions from the power ministry under Section 107 of the Electricity Act, 2003. CERC has, however, provided relief only on late payment surcharge.

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.

However, according to the gencos, these units cannot use force majeure to deny payment, and notices sent by discoms invoking the force majeure clause are violative of the PPA. According to the Association of Power Producers, these discoms may have misinterpreted a press release issued by the ministry asking CERC to specify a reduced rate of late payment surcharge and grant discoms a longer window for repayment, which was not intended to absolve them of their obligations.

In response to a notice by the UP Power Corporation Limited invoking the force majeure clause, 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, it said.

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.

FICCI has also recommended that the government mandate force majeure in all civil aviation contracts to save the industry from this crisis. “Epidemic” is mentioned as the cause in the agreements between the Airports Authority of India and airline companies, putting the burden on the government to bail out these companies.

Similarly, 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, it had clarified that the event will be classified as a force majeure of concession contracts.

In the real estate sector, if the current scenario of Covid-19 is treated as force majeure, the lessees will be allowed to not make payments or defer payments under existing lease agreements for income-generating properties. As this is part of the Real Estate Investment Trusts structure, such disruption in income generation will eventually impact them and its unit holders.

However, the Department of Expenditure has issued a memorandum stating that Covid-19 should be considered as a “natural calamity” and force majeure may be invoked wherever considered appropriate. This may not apply to all contracts as force majeure clauses are to be interpreted strictly in terms of the contract. These clauses may be specific (flood, war, etc) or general (events outside the reasonable control of a party to the contract) or a combination of both. However, where Covid-19 is not specifically stated as a force majeure event or the contract itself does not have such an express clause, the party may claim relief on the grounds provided under the Indian Contract Act.

If this issue is not amicably resolved between parties in various sectors, it could lead to a new set of legal cases.

Lead picture: UNI


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