Case Study: Hindu Auto, a manufacturer of auto parts in India entered into a supply contract with Cino Motors, an auto manufacturing company in China, and under such supply contract, Hindu Auto provides a monthly supply of auto parts to Cino Motors. Up until the month of March, Hindu Auto had fulfilled its contractual obligations, however, in the months of April and May, on account of COVID-19, Hindu Auto failed to supply auto parts to Cino Motors which considerably hampered the manufacturing of Cino Motors. Cino Motors subsequently sued Hindu Auto for breach of contract and damages, however, the supply contract between Hindu Motors and Cino Motors provides for a clause on “force majeure” with the governing law of the supply contract the laws of India.
Can Hindu Motors invoke “force majeure” on account of COVID-19 to justify the temporary inability to meet its contractual obligations?
Yes, Hindu Motors should be able to invoke “force majeure” on account of COVID-19 as a “force majeure” provision which has been specifically included in its supply contract. However, Hindu Motors will have to provide sufficient evidence that: (i) it had timely notified Cino Motors about its inability to meet its contractual obligations; (ii) established the manner in which COVID-19 has hindered Hindu Motors ability to perform the contract; and (iii) Hindu Motors has taken all reasonable steps necessary to ensure that the impact of such an event on the business of Cino Motors is limited.
- The Law of Force Majeure in India
Unlike in China, where the force majeure exemption is encapsulated within the law itself, in India, a force majeure exception has not been statutorily provided. The Indian courts have held that a force majeure exception must be specifically included within the contract, and have relied on Section 32 of the Indian Contract Act, 1872 (Contract Act), to enforce this exception. Section 32 recognizes a force majeure event as a contingency to discharge the performance of a contractual obligation.
The force majeure clause included in any contract will have to be analyzed on a stand-alone basis to ascertain the extent of the exemption available. The applicability of force majeure to a particular event is a matter of factual determination.
- Doctrine of Frustration
In the event a force majeure provision has not been included in a contract, parties may rely on the doctrine of frustration under Section 56 of the Indian Contract Act, 1872. Section 56 provides that a contract is frustrated when the act to be performed by a party becomes impossible or illegal due to the occurrence of an event which could not be prevented.
COVID-19 in India has led to the closing of establishments in India and restricted the movement of individuals and parties may seek to rely on Section 56. Previously, The Indian courts have permitted parties to rely on Section 56 only when the performance of the contract becomes impossible and not temporarily hindered. Therefore, whether parties shall be able to succeed claiming relief under Section 56 is something which will have to be tested.