Disruption of Supply Chains due to COVID-19 – Can a Virus Give You an Excuse for the Delayed Performance of a Contract?

By: Aashna Jain


INTRODUCTION

This article gives an Indian perspective on the categorisation of the disruption of supply chains due to the occurrence of the Coronavirus pandemic (hereinafter ‘COVID – 19’), as a natural calamity and seeks to discuss the adversely affected counterparties to the contracts in cases of such calamities, where time is of the essence. Additionally, it discusses the lessons to be learnt from the Chinese government in dealing with COVID -19 as a Force Majeure (hereinafter ‘FM’) event. 

When the supply of raw materials and other finished products is disconnected to and from other countries due to natural calamities and other similar reasons, it leads to the disruption of supply chains. 

COVID-19: A NATURAL CALAMITY?

On 19th February 2020, Government of India, Ministry of Finance, Department of Expenditure Procurement Policy Division issued an office memorandum with the subject Force Majeure Clause (hereinafter ‘FMC). In this memorandum, attention has been brought to paragraph 9.7.7., of the ‘Manual for Procurement of Goods, 2017’, which defines FM as an extraordinary event or circumstance which is beyond human control. Instances of wars, riots, strikes, natural calamities amongst others are described as FM events. These instances are distinguished from wrong-doings, seasonal rains and negligence of the parties. It is clarified in the memorandum, that FMC may be invoked by following the due procedure as prescribed. It is further stated that the FM event only suspends the performance of a contract for the time being and does not absolve the parties entirely, from the obligations under the contract. Lastly, it is clarified that if the performance of the contract is stretched beyond 90 days, then either party may at its option, terminate the contract without any financial repercussion on either side. 

LAW RELATING TO FORCE MAJEURE IN INDIA

The Indian Contract Act, 1872 (hereinafter ‘ICA), is equipped to deal with such FM events. The Apex courts and other courts in India starting from the early 20th century till as late as the year 2017 have variedly interpreted sections 9, 32 and 56 of the ICA. 

Express/ Implied Force Majeure Clauses in a Contract

Section 9 of the ICA, gives validation to implied contracts. Section 32 deals with performance/ non-performance of contracts on certain contingent events. Therefore, the court upon construction may reach a conclusion that a contract stands discharged on the basis of an implied contingent event. However, such construction cannot be against the express provisions of the contract as has been laid down in the case of Naihati Jute Mills Ltd v Hyaliram Jagannath. Courts must observe caution while constructing the contract and should not overstep in finding that the implied term was such a necessary term that the parties must have intended to include such terms in the contract. This principle has been laid down in the case of Pradgas Mathuradas v Jeewanlal. In other words, courts should not imply a term merely because it is a reasonable term to include.  

Doctrine of Frustration 

Moving further, section 56 deals with the impossibility to perform a contract. This includes within its ambit the events which go to the root of the matter and which frustrate the entire object for which the contracts were executed in the first place. The Apex court in the year 1953 in the case of  Satyabrata Ghose v Mugneeram Bangur & Co, interpreted section 56 as an untoward event or change of circumstances that totally upsets the very foundation upon which the parties rested their bargain. The court went on to interpret the doctrine of frustration as supervening impossibility or illegality of the act agreed to be done. This case also laid down a distinction between sections 32 and 56 of the ICA. In cases where there are express or implied terms in the contract itself, to determine if the contract stands discharged or not, those contracts will fall under the purview of section 32 and outside the scope of section 56. 

Overlap of Section 32 and Section 56 of the ICA

In 2017, Justice Rohinton Fali Nariman rendered a judgment in Energy Watchdog and Ors v Central Electricity Regulatory Commission and Ors, which further strengthened the distinction between sections 32 and 56 as laid down in Satyabrata Ghose. It was held that when a contract contains an FMC, which on construction by the Court is held attracted to the facts of the case, Section 56 can have no application. It was also held that the FM clauses must be narrowly construed and the events hindering the performance of the contract must be construed with regard to the nature and general terms of the contract. Further, the court stated that only because the contract becomes commercially onerous to perform, it does not mean that the doctrine of frustration can be invoked. 

ENSUING LITIGATION

Once, the contracting parties invoke FMC, endless litigation is a foreseeable consequence. There might be cases where certain petitions, appeals and other applications need to be filed in the court of law, where time is of the essence. In wake of the COVID-19 pandemic, the Apex court took suo moto cognizance of the hardships being faced by the litigants across the country, and on 23rd March 2020 ordered that a period of limitation in all such proceedings, irrespective of the limitation prescribed under the general law or Special Laws whether condonable or not shall stand extended w.e.f. 15th March 2020 till further order/s to be passed by this Court in present proceedings 

After the Prime Minister of India, on 24th March 2020, announced a complete national lockdown till 14th April 2020, with no conclusive suspension of the contractual obligations that the people have to perform, the aforementioned order of the Supreme Court dated 23rd March 2020, seems relevant and necessary for the effectiveness of the quarantine measures being deployed by the Indian government. 

LESSONS FROM NEIGHBOURS?  

India has many contemporaries who are dealing with the invocation of the FMC due to COVID-19, with a more practical approach. The stance of the Chinese government becomes relevant for our discussion, as it is one of the most affected countries and is one of the world’s largest economies. The China Council for the Promotion of International Trade has issued more than 1600 FM certificates to industries across 30 sectors which will have an effect on the trade approximately amounting to a whopping 15 Billion USD. These certificates will provide a breather to the companies in China, and they will be able to suspend their contractual obligations temporarily. 

CONCLUSION

In conclusion, arguably, the jurisprudence on the aspect of invocation of FMC in India has been uniform and has strengthened with time. Interpretations are clear and comprehensive. These decisions do not hold a soft corner for the parties invoking the FMC, rather deals with these cases with a balanced approach based on constructive interpretation of the statute. It is now on the parties, to justify whether they could not have in reality, performed their part of the obligation, because of the outbreak of COVID-19. Additionally, it is relevant to note that the leading global economies are taking practical and realistic measures in dealing with contracts where time is of the essence and for the litigation that might ensue in future due to breach of such contracts. It is on India to learn timely lessons from such economies.


(Aashna Jain is an advocate, currently employed with Dua Associates, India. She has graduated with Business Honors from National Law University, Jodhpur, India. She may be contacted at jainaashna95@gmail.com.)

Cite as: Aashna Jain, ‘Disruption of Supply Chains due to COVID-19– Can a Virus Give You an Excuse for the Delayed Performance of a Contract?’ (The RMLNLU Law Review Blog, 22 April 2020) <https://rmlnlulawreview.com/2020/04/22/disruption-of-supply-chains-due-to-covid-19-can-a-virus-give-you-an-excuse-for-the-delayed-performance-of-a-contract> date of access.

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