Interim measure under the Arbitration Act in the time of COVID-19

The year 2020 began with the world economies coming to a standstill vis-à- Coronavirus aka. COVID-19.  With lockdown being put in place the country has come to a standstill. The State borders have been shut, commercial transportation is hit, goods neither moving in nor moving out, unless they are on the essential commodities list. Such abrupt halt in transportation and other crucial ancillary services for businesses to thrive are leading to business contracts being unenforceable on account of frustration.

One of the key elements and a standard clause in a contract is a “Force Majeure” clause. Force Majeure means unforeseeable circumstances that prevent someone from fulfilling a contract. As a clause it is usually a provision in a contract that exempts a party from performing his contractual obligations which have become impossible or impracticable due to an event or effect which the parties could not have foreseen or controlled.

Force Majeure is not defined under the Indian Contract Act, 1872, but Sections 32 and 56 of the Indian Contract Act, 1872 (“the Act”) play an important role when such a situation arises. Section 31 of the Act defines a contingent contract. A contingent contract is a contract to do or not to do something, if some event, collateral to such contract does or does not happen. Section 32 of the Act provides that contingent contracts to do or not to do anything of an uncertain future event happen cannot be enforced by law unless and until that event has happened. For any contingent contract to be contingent, the event has to occur before fulfillment of the conditions of the performance of the contract.

The second relevant provision is Section 56 of the Act. Section 56 provides that any act which was to be performed after the contract is made becomes unlawful or impossible to perform, and which the promisor could not prevent, then such an act which becomes impossible or unlawful will become void, this is also called the doctrine of frustration. In simpler words, the section would apply, either if the object of the contract has become impossible to perform or an event has occurred making the performance of the contract to be impossible beyond the Control of promisor.

Keeping the abovementioned situation and the principles in mind, we will analyses the interim order dated 08.04.2020 passed by the Hon’ble High Court Judicature at Bombay in the matter of Standard Retail Pvt. Ltd. vs M/s G.S. Global Corp & Ors. (COMMERCIAL ARBITRATION PETITION (L) NO. 404 OF 2020).

Petitioner sought directions restraining the Respondent–Bank from negotiating/ encashing the Letters of Credit in a petition filed under section 9 of the Arbitration and Conciliation Act. The Petitioner set out a case that in the tumultuous time of COVID-19 pandemic and the lockdown declared by the Central/State Governments, the Petitioners’ contracts with Respondent were terminated as unenforceable on account of frustration, impossibility and impracticability. The Respondent submitted that it had complied with its obligations and performed its part of the contracts and the goods have been already shipped from South

Korea. The fact that the Petitioner would not be able to perform its obligations so far as its own purchasers are concerned and/or it would suffer damages, is not a factor which can be considered and held against the Respondent.

After hearing both the sides, the Court declined to award any interim relief to the Petitioner. The court observed

  1. that the Letters of Credit are an independent transaction with the Bank and the Bank is not concerned with underlying disputes between buyer and the seller;
  2. that the Government notifications and advisories suggest that the distribution of steel has been declared as an essential service and there are no restrictions on its movement and all ports and port related activities including the movement of vehicles and manpower, operations of Container Freight Station and warehouses and offices of Custom Houses Agents have also been declared as essential services;
  3. lastly and most importantly, that the lockdown would be for a limited period and the lockdown cannot come to the rescue of the Petitioners so as to resile from its contractual obligations with the Respondent No. 1 of making payments.

The Hon’ble Court has efficiently analyzed the facts in hand, have then distinguished it from the land mark judgments on Force Majeure, Energy Watchdog Verus CERC (2017) 14 SCC 80 and Satyabrata Ghose Versus Mugneeram Bangure & Co. (1954) SCR 310, and have clearly held that the Petitioner could not abandon its obligation under the Contract blaming the Covid-19 lockdown, as the subject matter fell within the essential goods list thus not hampering its movement. Further the court did not fritter its effort in realizing that the Petitioner could go back to business as soon as the lockdown, which is for a limited period, is lifted.

Based on aforementioned it can be clearly made out that interim measures in the time of Covid-19 or in any other pandemic would be based on Government notifications and advisories for that period and whether or not the same would frustrate the completion of the contract.

Published by Pushkar Taimni

Pushkar Taimni is a lawyer with a pan India practice based out of Jodhpur, Rajasthan. He can be contacted at taimnico@gmail.com.

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