Dispelling the myth: Impact of Government Memorandums on interpretation of Force Majeure Clauses

Surbhi Gupta & Abhishek Puri

As the COVID-19 pandemic continues to increase its grip over the world population, it seems that the lock-down measures taken by various countries, in varying degrees, to effectuate social distancing practices and to prevent the spread of COVID-19, are here to stay. The magnitude of its impact on business and contractual concerns are increasingly coming into focus, with several companies having already invoked force majeure clauses in their contracts.

This rush to invoke force majeure clauses in their respective contracts, is largely attributable to the procedure applicable for invocation of these clauses which mandates issuance of notice by the affected party, generally, within a week or so, from the date of occurrence of the force majeure event. In India, this move for invocation of force majeure contracts by business concerns, was bolstered on account of the Office Memorandum dated 19.02.2020 issued by Ministry of Finance, Government of India. The MoF while citing a sample Force Majeure Clause which is provided in the Manual for Procurement of Goods, 2017 issued a clarification that “disruption in the supply chains due to spread of Coronavirus to any other Country” should be covered as a case of natural calamity and FMC may be invoked, wherever considered appropriate, following the due process. Following this, Office Memorandum dated. 20.03.2020 has also been issued by Ministry of New & Renewable Energy (MNRE) whereby MNRE has, inter-alia, directed that:-

“(a) All Renewable Energy implementing agencies of the Ministry of New & Renewable Energy (MNRE) are hereby directed to treat delay on account of disruption of the supply chains due to spread of coronavirus in China or any other country, as Force Majeure.

(b) The Renewable Energy implementing agencies may grant suitable extension of time for projects, on account of coronavirus, based on evidences / documents produced by developers in support of their respective claims of such disruption of the supply chains due to spread of coronavirus in China or any other country.

(c) Further, all project developers claiming aforesaid disruption and desirous of time extensions, shall make, a formal application to SECI/ NTPC/ other implementing agencies, giving all documentary evidence(s) in support of their claim. SECI/ NTPC/ Implementing agencies shall examine the claim objectively and grant appropriate Extension of Time (EoT) based on facts. While considering the requests for grant of extension of time on account of disruption of the supply chains due to spread of coronavirus in China or any other country, SECI/NTPC/any other implementing agency may fully satisfy itself that the claimants were actually affected due to disruption of the supply chains due to spread of coronavirus in China or any other country in the period for which extension of time has been claimed.” However, companies including Foxconn, the world’s largest electronic maker, and component manufacturers based in China and Taiwan claim that most of their factories resumed production between the end of February 2020 and midMarch 2020.

Just as “China resumed production” (sic), the COVID-19 pandemic hit India with considerable force and with the numbers rising, the Government of India declared lockdown for a period of 21 days with effect from 25.03.2020. Effectively, all Commercial and Private establishments have been closed down during this period, with an exception of "essential services". Given the continued spread of the COVID-19 pandemic, Ministry of Home Affairs (MHA) vide their Order No. 40-3/2020-DM(l)(A) dated 14.04.2020 extended the lock-down period in all parts of the Country upto 03.05.2020. Subsequently, MHA vide their Order No. 40- 3/2020-DM(l)(A) dated 15.04.2020 and order dated 16.04.2020 issued Consolidated Revised guidelines allowing some additional activities w.e.f. 20.04.2020 to mitigate the hardship to the public. Most recently, on 01.05.2020, MHA vide Order No. 40-3/2020-DM(l)(A) has directed that the lockdown measures are to be continued in all parts of the Country for a further period of two weeks with effect from 04.05.2020. This order is accompanied by New Guidelines granting various relaxations with respect to permitted activities during the lockdown, based on assessment and identification of the risk profile of different zones and districts.

During the lockdown on account of COVID-19,Ministry of Finance has not issued any Office Memorandum specifying whether the entire “period of lockdown” on account of COVID-19 will be considered as a “Force Majeure Event” or not. However, individual Ministries have made an attempt to address such concerns. For instance, MNRE vide Office Memorandum dtd. 17.04.2020, MNRE, has categorised the “period of lockdown” as “Force Majeure” and has granted blanket extensions of time for RE Projects for the period of lockdown plus 30 (thirty) days for normalisation after the end of the lockdown. The “blanket extension” in the Office Memorandum dtd. 17.04.2020 signifies that “there will be no requirement of case to case examination. There will be no need to ask for any evidence for extension due to lockdown.” This mandate of MNRE only extends to those RE Projects where Implementing Agencies of MNRE are a party to the Contract. State implementing agencies have merely been advised to act in terms of this Office Memorandum for granting extensions in their respective contracts for RE Projects.

On the other hand, certain Ministries/ Departments of the Government of India are categorising the industries and activities which fall within their administrative concern to be “essential activities” or “additional activities” that are permitted during the period of lockdown by the Government. One such example is the Ministry of Power which is the administrative authority for a significant number of Energy projects including Thermal and Large-Scale Hydel Power Projects. Vide Circular No. DO No. 12/15/2017- Trans dtd. 17.04.2020, the Ministry of Power clarified that “laying/ erection of transmission lines” was an additional activity which would be allowed both, interstate and intrastate, in terms of the Consolidated Revised Guidelines issued by MHA along with the Circular dtd. 15.04.2020 w.e.f 20.04.2020. Again, relying on the Consolidated Revised Guidelines dtd. 15.04.2020, the Ministry of Power vide Circular No. No.FU-18/2017- IPC(pt.) dtd. 20.04.2020, has clearly stated that “construction of all kinds of industrial projects in rural areas, i.e., outside the limits of municipal corporations and municipalities have been allowed to be carried out with effect from 20th April, 2020. This is also applicable for ongoing construction activities in Thermal/Hydro Power Generation Projects outside the limits of Urban Local Bodies (ULBs).” As per the Circular, the intrastate and interstate movement of construction materials, equipment, spares & consumables etc., for these under-construction power projects is also an activity which is permitted as an “additional activity”.

Given these conflicting views of different Ministries, invocation of Force Majeure Clauses and the period of existence of “Force Majeure” events on account of COVID-19, will definitely emerge as a contentious issue between the Contractual Parites, not only for Private Contracts but even for Government Contracts. The Party providing the Service in these Contracts, may vociferously contend that construction, commercial or industrial activities were a practical impossibility or were severely hindered during a lockdown of this extraordinary scale, due to labour migration, social distancing measures, disruption in production and supply etc. , inspite of the selective relaxations issued by MHA.

Therefore, ultimately, in the event of dispute, the interpretation and existence of a “Force Majeure Event” due to COVID-19 and the determination of the period of the Force Majeure Event cannot be left to these Government Circulars and Office Memorandums. This is necessarily, a question of interpretation of Contracts, which will ultimately be decided by the Courts or through Dispute Resolution Mechanism on a case-to-case basis.

In view of the same, at this juncture, it is crucial for Parties who have invoked or are about to invoke the Force Majeure Clauses of their respective Contracts, to understand:-

1. The effect or possible fallout of invocation of Force Majeure Clauses;

2. The Scope of the aforementioned Government Office Memorandums; and

3. The judicial principles which continue to apply to events categorised as “Force Majeure”.
   

II. THE EFFECT OF INVOCATION OF FORCE MAJEURE CLAUSES

Generally, the effect of invocation of Force Majeure Contracts is that non-performance of certain contractual obligations by the Parties may not treated as a breach of the Contract, upon occurrence of the events such as Act of God, Vis major etc. which are expressly or impliedly provided by the Parties in the Contract. However, the effect of invoking the Force Majeure Clause on the contractual rights and obligations between the Parties varies in different Contracts such as entitling the Affected Party to seek extension of the Contract, exempting a Party from performance of the Contract, or in certain cases, where time is of essence to the Contract, a Force Majeure Clause may contemplate termination of the Contract. In fact, if the Force Majeure Clause extends beyond a particular time limit, most Contracts may provide that the Agreement will be automatically terminated. Where the Contract contains Force Majeure Clauses, it is treated as a contingent contract, in Indian Law, under Section 32 of the Indian Contract Act, 1872.

Invocation of these clauses, amongst other things, impacts the continuity of the Contract itself, the reciprocal rights and obligations of the Parties and most essentially, the payment of compensation/ consideration. In some cases, invocation of Force Majeure Clause or Change in Law Clause, may contractually entitle the affected party to seek compensation for this period.

Improper invocation of these clauses may lead to massive claims for loss and damages, against the “Affected Party”. Furthermore, even upon invocation of FM and other like clauses, various obligations in law, may continue to subsist. Therefore, interpretation and invocation of the FM Clause and other like Clauses ought to approached, judiciously. In light of this, we enquire into the scope of the Government Office Memorandums which have been issued by the Central Government, the judicial tests laid down with respect to the invocation of FMC and the effect that invocation of FMC may have on various Contracts.

III. SCOPE OF THE GOVERNMENT OFFICE MEMORANDUMS

It may be tempting, at the first brush, to apply the Government Office Memorandums and Circulars as a tool of interpretation of one’s Force Majeure Clause, especially with these Memorandums being commonly reported as a “Declaration of a Force Majeure Event by the Government”.

Foremost, one must keep in mind that the aforementioned Office memorandums issued by the Government of India on 19.02.2020 and on 20.03.2020, apply only to a select Government bodies. In case of the Memorandum dtd. 19.02.2020, the same is applicable only to Government agencies and Companies which have entered into tenders modelled on the “Manual for Procurement of Goods,2017”. Similarly, the Memorandums issued by MNRE are applicable only to Renewable Energy implementing agencies of MNRE, and State Renewable Energy Department (falling under the Power/ Energy Department of the States, which are dealing in renewable energy) are merely requested to consider the events stipulated by MNRE as “Force Majeure Events” in their respective contracts.

Moreover, even where the concerned Government entities may give the benefit of “Force Majeure” on account of COVID-19 to excuse non-performance by the Service Provider in their contracts with these persons, these benefits may not necessarily transcend to the other players in the same supply chain who have Agreements with the said Service Provider, since these Agreements are not in the strictest sense be back-to-back agreements i.e. the said Agreement may not refer back to the Agreement entered into by the concerned Service Provider with the Government Party.

For Parties which are not directly under the control of these Ministries, these Memorandums cannot be said to have any force of law while interpreting their respective Contracts, unless both Parties consent to this interpretation of FMC as supplied by the Ministries, either expressly or impliedly or by conduct. This is because principles of interpretation of Contract, give precedence to, the intention of the Parties which is expressed through the terms of the Contract. The manner and agreement of the Parties overrides the strict letter of law. This principle is best expressed by the legal maxim “Modus et Conventio Vincunt Legem”. Therefore, for instance, though Government Circulars and Memorandums may specify certain activities as “permitted”, it will still be open to the Contractor/ Developer/ Service Provider to plead and prove, that the “period of lockdown” resulted in such supervening circumstances, which as per the implied or express terms of the Contract and the intention of the Parties, still fell into the category of the Force Majeure Events specified in its Contract.

For all these reasons, Contracts will still have to be evaluated on a case-to-case basis by Courts of Law or through dispute resolution mechanism, and the conduct of the Parties operating under such a Contract will be an essential factor.

Secondly, these Office Memorandums only contemplate “disruption of supply chain due to spread of coronavirus in China or other Countries” or “period of lockdown plus thirty days” to be included with the ambit of a “Force Majeure” Event. However, the mere categorisation of these events as Force Majeure may not enough. Where invocation of the FM Clause by the Contractor/ Developer/ Service-provider is disputed by the Counter-Party, the onus would be on the Party invoking the FM Clause to plead and prove before a Court of Law, that such an event not only fell within the FM Clause but further also “disrupted”, “prevented” and/ or “hindered” performance of the Contractual obligations by the Party.

IV. JUDICIAL TESTS APPLICABLE TO “FORCE MAJEURE CLAUSES”

In view of the above, in cases of dispute raised upon invocation of the Force Majeure Clause, the judicial tests laid down by the Courts will continue to be applied.In these cases, for interpretation of the Contract, the terms of the Contract read as a whole, will be sacrosanct.

The Party who claims discharge of obligation under an FM Clause would have to show that such circumstances as contemplated under the FM Clause have arisen. Therefore, the test laid down in Energy Watchdog v. CERC, (2017) 14 SCC 80 by the Hon’ble Supreme Court of India will still hold field. The “Affected Party” i.e. the Party invoking the FM Clause in case of a dispute, may have to plead and prove before the Court or Tribunal, that:-

1. The performance of the said obligation for the purpose of which the FM Clause is invoked, was either “disrupted”, “prevented” and/ or “hindered”. For instance, that no other functioning alternative mode of supply available for the said product, other than the Country from whom material was being procured;

2. That the fundamental basis of the contract was dislodged and not merely that the Contractual obligations had become onerous or lead to rise in costs; and

3. That such an event was not expressly or impliedly excluded from the Contract.

The aforementioned principles enunciated by the Hon’ble Supreme Court in Energy Watchdog [supra] have been followed by the Courts for similar cases, to reject the invocation of FM Clauses by the affected party on the ground that supply of coal from Indonesia could not be obtained due to exorbitant increase in prices. In view of this, obligations such as failure to perform an activity when supplies were available from elsewhere, or failure to perform services on the ground that usual shipping route was not open when an alternative route was available, may not be covered under the Force Majeure Clause. This of course, depends upon the wording of the Clause itself in respective contracts.

Furthermore, even if Force Majeure Clause is invoked, Parties who have received an advantage/ service under the Contract may still be bound to restore it to the other Party in terms of Section 65 of the Indian Contract Act. Where the performance of its contractual obligations is already delayed by the Party, invocation of Force Majeure Clause, in such cases, may not be of any avail, in as much as damages can still be sought from the “Affected Party” on account of the nonperformance of the Contract being prior to the occurrence of the contingent event. Conclusion

The extent of the effect of the COVID-19 pandemic on respective contracts, will unfortunately, only be evident once the industry resumes its operations completely. For now, Business Concerns ought to analyse the Force Majeure Clauses and their effects as per their respective contracts, carefully. Most contracts provide that if a FMC event continues beyond a prescribed period, it may lead to automatic termination of the Contract. This may be one of the major fallouts of the invocation of Force Majeure Clause which will be caused on account of the longevity of the global and national shutdown on account of the COVID-19 pandemic.

Furthermore, the Affected Party may also have to see whether the Force Majeure Event provided in their Contract, expressly or impliedly, makes provision for activities such as re-mobilisation of resources and getting the supply chain and work site in order, all of which may take considerable amount of time even after the lock-down on account of the COVID-19 pandemic is over.

The opinion expressed in this Article is generalised and based on standard contracts. Only the test of time will tell, whether the judicial treatment of Force Majeure Clauses, will follow the same line of understanding as has been expressed by the Government of India in its Office Memorandums. Business Concerns are, therefore, advised to have their individual contracts carefully vetted by an Advocate, before proceeding with any legal action.