Covid-19| Courts may be saddled with surge in force majeure disputes after lockdown

By Tejas Karia

As India enters the second phase of lockdown due to global outbreak of COVID-19, the performance on contracts amid this crisis have been seriously impacted. This has a potential of increase in contractual disputes due to invocation of Force Majeure provisions under the contract.

Force majeure suspends the performance of contractual obligations temporarily during the event as expressly provided that is beyond the reasonable control of the affected party.

To determine if COVID-19 would be covered as the force majeure event, language of the definition in the contract would play a vital role. If the definition is inclusive, it would include COVID -19 pandemic provided events similar to that are specified.

In case force majeure is defined narrowly to mean only limited eventualities, it would include only such situations as expressly stipulated. Contract will also have to be examined as a whole to see if there are other clauses, such as limitation of liability, material adverse effect due to government action or frustration for impossibility of performance. Interpretation of contract would also depend upon the governing law chosen by the parties.

If the provision in contract requires a procedure to be followed for invocation of Force Majeure event, such as timely notice providing the nature and period of suspension, it should be strictly followed and any failure, would take the benefit away.  Duty to mitigate the loss continues even in these circumstances.

It is extremely important that the performance under the contract is directly impacted due to the event of force majeure and a party is not trying to take an advantage of the situation.

Recently the Bombay High Court decided this issue by video conferencing in case of Standard Retail Pvt. Ltd. v. M/s. G. S. Global Corp & Ors where an interim injunction of restraining from encashing letters of credit in light of COVID -19 lockdown was not granted as the contract related to supply of steel which was declared as an essential service with no restriction on the movement during lockdown.

This also indicates that benefit of force majeure will be available only for those cases where the contract specifically provides for the same and performance is actually impaired due to COVID-19 lockdown.

A sudden spurt in disputes due to inability of performing the contract during COVID-19 is inevitable. Given that this is a global phenomenon, it is possible that both parties seek to take shelter of force majeure for their respective performances and disputes may get resolved amicably through mutual negotiations and mediation for not affecting the long-term relationship.

Remaining disputes would need to be resolved with help of arbitration or the court. With the recent amendments in the Indian Arbitration Act and pro-arbitration approach of Indian Courts, the arbitrations seated in India have become more efficient.

Since the issue to be decided by the Court or Arbitral Tribunal may be very narrow in the given facts, the disputes may not take very long to resolve or may be settled midway.

In any event, the assistance of dispute resolution mechanism in the contract will be helpful to resolve the impasse arising from this unfortunate situation. For protecting the subject matter of the dispute, an interim protection is crucial. Due to limited functioning of the courts across India, getting an urgent interim relief through hearing by video conferencing is a challenge.

After the lockdown, the backlog of cases and rise of new cases relating to force majeure may be overwhelming for the Indian Court system. Indian Courts are always responsive and have embraced technology quickly in this need of the hour.

Many Courts have also planned to cancel the summer vacation this year to compensate restricted working during lockdown. For Indian Courts to function at a maximum capacity, timely appointment of judges and improvement of technological infrastructure would be vital.

From an international perspective, cross border disputes especially multi-party contracts, will require examination of facts of each case and governing law of contract to resolve the disputes. This is an unprecedented and sensitive situation.

Adopting less confrontational approach and using effective tools like mediation to resolve the disputes would really help in a long run for the benefit of the economy by preserving the contractual relationships.

(Tejas Karia is Partner, Head-Arbitration, Shardul Amarchand Mangaldas & Co. Views are personal)