India and Force Majeure: Is COVID-19 Frustrating Shipping Operations?
The coronavirus (COVID-19) pandemic continues to disrupt global trade, due in part to reduction in distribution capacities and delays in evacuation or arrival of goods in transit or at ports. To address this adverse impact on the ability of stakeholders in discharging their contractual obligations, the Indian Ministry of Shipping issued guidelines that the pandemic may be considered as a valid ground for invoking Force Majeure (FM) clause on port activities and port operations.
This supplements the Ministry of Finance’s clarification which described COVID-19 as a case of natural calamity and stated that an FM clause may be appropriately invoked in accordance with the Manual for Procurement of Goods 2017 where FM means “extraordinary events or circumstance beyond human control such as an event described as an act of God (like a natural calamity) or events such as a war, strike, riots, crimes (but not including negligence or wrong-doing, predictable/seasonal rain and any other events specifically excluded in the clause).”
Meaning and character of Force Majeure
FM is a doctrine established under French Law whereby a promisor is relieved from the responsibility of non-performance in certain unforeseeable and irresistible circumstances. This position is now recognized in English Law whose earlier stance was of the absolute sanctity of the contract. Today, FM is often used in contracts worldwide, including in the shipping industry.
An FM clause in a contract captures the nature of the FM and its invocation procedure. It may enlist events that constitute an FM event, and/or broadly include events beyond the control of the parties’ through ‘catch-all’ phrasing such as:
“FM event includes any event due to any cause beyond the reasonable control of either party including, without limitation, unavailability of any communication system including Internet, breach or virus in the processes or payment mechanism, sabotage, fire, flood, explosion, acts of God, civil commotion, strikes or industrial action of any kind, riots, insurrection, war, epidemics, acts of government.”
The operation of the FM clause is not automatic and is influenced by its contractual terminology. Thus, it is contractual, i.e. an outcome of a legally enforceable agreement between the parties.
To claim the existence of the FM event and the consequent remedy (such as termination or extension of time or delay to honor the contractual terms), the party invoking an FM clause is to abide by the notice period and the procedure for serving such notice, as specified in that particular FM clause. The party invoking the FM clause is required to show that its inability to perform the contractual obligation was a result of the event covered by the FM clause. It is important that there is a causative link between the occurrence of the FM event and the hindrance or delay in the contractual performance by the party invoking the FM clause.
In a recent case before the Bombay High Court, the Petitioners sought to terminate the contract claiming impossibility of performance due to the lockdown consequent to COVID-19. The Court ruled in favor of the Respondents by reasoning that the FM clause in the contract was only applicable to the Respondents and despite the circumstances, the Respondents had complied with their contractual obligation and shipped the contracted steel products, whose distribution is declared as an essential service, and there existed no restrictions on port operations.
Force Majeure and Frustration
The civil law doctrine of FM shares affinity with the common law doctrine of frustration. Frustration is recognized in Section 56 of the Indian Contract Act, 1872. The Supreme Court of India has remarked that the doctrine of frustration captures an exhaustive arena of FM under which non-performance stands excused by reason of an impediment beyond the control of the parties which could neither be foreseen at the time of entering into the contract nor can the effect of the supervening event could be avoided or overcome.
Despite such striking similarities, the doctrines differ in their operation and consequences. Unlike FM, frustration operates automatically, i.e. even in the absence of an agreement between the parties and renders the contract void, i.e. unenforceable by law. The Manual for Procurement of Goods 2017 explains that an FM clause only suspends the contractual performance for the duration of the FM event, but if the performance is prevented or delayed beyond a period of 90 days, the choice of termination of the contract without financial repercussions is available to either party.
Further, Courts have applied a higher threshold in applying frustration than an FM clause invoked by a party. Interestingly, case law clarifies that, when incorporated in the contract and applicable to the case, the FM clause supersedes frustration.
Force Majeure Clauses and COVID-19
The contractual implication of COVID-19 is to be drawn based on the terminology of the FM clause (if incorporated) in that contract, where epidemics/pandemics/natural calamity/act of God may be:
A. explicitly enlisted; or
B. explicitly excluded; or
C. neither specified nor excluded.
In situation A, invoking the FM clause for COVID-19 is straightforward since the World Health Organisation has classified the outbreak as a “pandemic” and the Government of India has classified it as an “epidemic” and a “natural calamity” in their advisory—which carry a persuasive value.
In situation B, the FM clause cannot be invoked for the outbreak of COVID-19. This position resonates the ruling in Energy Watchdog vs Central Electricity Regulatory Commission and Ors., where rise in the fuel price could not be regarded as an FM event because the FM clause had specifically excluded it, and the Sunborne Energy Rajasthan Solar Pvt. Ltd. vs NTPC Vidyut Vyapar Nigam Ltd., where the suspension of debt facility did not qualify as an FM event as “insufficiency of finances or funds” was excluded in the FM clause. Besides, judicial position indicates that, in situation B, there can be no recourse to frustration available for COVID-19 as well.
Situation C can result in two possibilities since the FM clause does not preclude epidemics/pandemics/natural calamity/act of God. Firstly, the rationale in Nabha Power Ltd. vs PSPCL conveys that the all-inclusive character of such FM clause may imply COVID-19 as an FM event for purposes of business efficacy of the contract. Secondly, the ratio of Satyabrata Ghose vs Mugneeram Bangur & Co. suggests the possibility of frustration of the contract owing to impossibility of performance due to COVID-19 - an event beyond the parties’ control and contemplation.
Force Majeure Clauses in shipping industry and COVID-19
The position in situation A applies to excuse performance due to COVID-19 in case of shipbuilding agreements, based on the standard contracts such as Shipbuilders Association of Japan and the NEWBUILCON, and ship management agreements, based on BIMCO Standard Ship Management Agreement, which expressly specify epidemics in the FM clause, or otherwise provide so. However, the BIMCO Standard Crew Management agreement, which uses “catch-all” phrasing in its FM clause, is a case illustrated in situation C.
Conventionally, no excuse is available for delay in cargo operations due to circumstances beyond charterer’s control where the fixed period of loading and discharging has been agreed. However, the exceptions to this position are of frustration of contract, exceptions specified in the charter, or the fault of the shipowner. Where the charter incorporates the provisions of the Hague-Visby Rules, the ship and the carrier may seek to be excused from the responsibility for loss or damage arising or resulting from COVID-19, by virtue of events covered under Article IV (2) such as “act of God,” “quarantine restrictions,” “restraint of labor from whatever cause, whether partial or general” and “any other cause arising without the actual fault or privity of the carrier, or without the fault or neglect of the agents or servants of the carrier.”
Several charters include some form of FM clause wherein laytime, i.e. the contractual time in which the vessel is to be loaded or discharged, will not run when time is lost due to circumstances beyond the charterer’s control. Subject to the charter language, laytime starts when the ship has reached its contractual destination which is ‘safe’, i.e. reachable, usable and returnable. In case of a time charter, Courts have observed, that in a situation where a port, which though prospectively safe at the time of nomination, becomes unsafe subsequently due to some unexpected and abnormal event, the charterer is to discharge a secondary obligation of ordering the ship to another port prospectively safe for her.
However, in case of a voyage charter, where the charterer does not exercise complete control, the position remains uncertain and the doctrine of frustration may be possibly resorted to. Thus, during continuing operation of commercial ports in times of COVID-19, risks to the crew and port safety measures are to be assessed before calling at a particular port while having in mind the character and wording of the subject charter.
The implication of FM in the COVID-19 world of shipping is dependent on the scrutiny of elements of the FM clause, Governmental position, applicable law and the nexus with the impediment faced in performing the contractual obligation. Further, it is advisable to determine the insurance coverage for losses resulting from COVID-19.
However, in case of the standard marine insurance policies, alternative means may be required for risk management since they may generally be ineffective due to exclusion of delays from their coverage. For that purpose, relevant governmental policies may be effective, in addition to ascertaining clarity on the duty to mitigate contractual non-performance and protection of acts done in good faith.
Sindhura Natesha Polepalli is a Maritime Legal Consultant at the Directorate General of Shipping (Ministry of Shipping, Government of India). She holds a Master of Laws in International Maritime Law from IMO-International Maritime Law Institute, Malta. Note: The opinions expressed are personal.
The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.