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Ergo

16-Apr-2020

Introduction

A single bench of the Bombay High Court has refused ad-interim reliefs to the Petitioners who were seeking to restrain the Respondent bank from negotiating / encashing the letters of credit, on the ground that the contracts with the Respondent seller were terminated as unenforceable on account of frustration, impossibility and impracticability caused due to the coronavirus disease (COVID-19) and the government lockdown.

Brief Facts

The Petitioners had entered into contracts with the Respondent seller, a company with its head office at South Korea, that was to supply steel products from South Korea to the Petitioners in Mumbai.

The contracts with the Respondent seller were on cost and freight basis and subject to certain general terms and conditions, Article 11 whereof contained the Force Majeure clause which inter alia stated that in the event of an Act of God (including epidemics) or government order or regulation beyond the control of the seller (being Respondent No 1) which affects the ability of the seller to manufacture and deliver goods, the seller may terminate the contract or delay performance of the contract. Further, that the seller will not be liable to the buyer (being the Petitioners) or any third party for costs or damages arising from such non-fulfilment or delay of performance.

The Respondent seller had performed its part of the contract and shipped the goods from South Korea. However, the Petitioners on the grounds of frustration, impossibility and impracticability sought to resile from their contractual obligations of making payments to the Respondent seller. As such, the Petitioners filed petitions in the Bombay High Court under Section 9 of the Arbitration and Conciliation Act, 1996 seeking to restrain the Respondent bank from encashment of the letter of credits.

Arguments

The Petitioners argued that in view of COVID-19 and the imposed lockdown, their contracts with the Respondent seller were terminated as unenforceable on account of frustration, impossibility and impracticability. In support thereof, the Petitioners relied upon Section 56 of the Indian Contract Act, 1872 and judgments of the Supreme Court in the case of Energy Watchdog versus CERC (2017) 14 SCC 80 and Satyabrata Ghose versus Mugneeram Bangure & Co (1954) SCR 310.

Decision

The court held that the Petitioners were not entitled to ad-interim reliefs as the letters of credit were an independent transaction with the Respondent bank, who is not concerned with the inter se dispute between the Petitioners and Respondent seller and that the force majeure clause in the contracts was applicable only to the Respondent seller and not to the Petitioners as buyers.

The court also held that the Petitioners’ inability to perform their obligations towards their own purchasers and damages therefrom, cannot be used to withhold payment to the Respondent seller. Further, that the government notifications relied upon by the Respondent seller suggest that distribution and movement of steel was an essential service. Besides this, the imposed lockdown was only temporary and cannot aid the Petitioners in shying away from their contractual obligations towards the Respondent seller. The court also held that the judgments cited in support of the Petitioners were distinguishable on facts.

Comments

Judicial decisions in cases of contractual disputes due to COVID-19 are still at a nascent stage. In the present case, the court has strictly interpreted the doctrine of frustration, while bearing in mind the nature of the contractual obligation that the Petitioners were seeking to not perform due to COVID-19 as well as the non-applicability of the force majeure clause in the present case. The court appears to have not given much credence to the challenges being faced by the Petitioners with respect to their other contracts with their own purchasers, and as such has rightly rejected ad-interim reliefs. It could be interpreted from this that courts would be less willing to consider extraneous factors while deciding such matters.

Thus, parties to a potential dispute should be mindful and aware of their contractual terms, especially the force majeure clause, if it exists, before coming to courts. The scope and ambit of a force majeure clause, invocation thereof and consequences arising therefrom will depend on the terms of the force majeure clause. Additionally, when a contract contains a force majeure clause and if the occurrence of a force majeure is established, then Section 56 of the Indian Contract Act, 1872 will not be applicable.

Further, while deciding any claims, courts may consider the government notifications and advisories to understand how the subject matter of the claims is being treated during COVID-19. Parties should avoid frivolously using the temporary lockdown as an excuse to neglect their contractual obligations as the courts are likely to adopt a strict approach in entertaining such claims.

While the law surrounding COVID-19 is still uncertain, it appears that courts are taking a strict approach while deciding cases. The facts and circumstances of each case would play a role in deciding the applicability of force majeure or frustration, and as such parties should try to the fullest extent possible in the prevailing times to comply with their contractual obligations.

This decision of the court sets a good precedent, insofar as parties are likely to think twice before approaching courts seeking directions towards relaxation of their contractual obligations. This may aid in preventing unnecessary litigation at a time when courts are already burdened with settling into the ‘new normal’ of conducting hearings virtually.

-       Chakrapani Misra (Partner), Kathleen Lobo (Principal Associate) and Saasha Malpani (Associate)

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