As COVID-19 has spread to almost all parts of the world, the World Health Organization declared COVID-19 as a pandemic on 11 March 2020 with the observation that governments, businesses, and individuals still have substantial ability to change the virus’ trajectory. The Government of India has actively started taking precautionary steps in this regard. This note sets out a brief overview of some of the issues which are being faced by companies in India on account of COVID-19 in line with the initiatives of the Government of India undertaken to address these issues.
A. Can a contract be terminated on the ground that the pandemic COVID-19 has resulted in a force majeure event?
Force Majeure meaning "superior force" refers to such situations which obstruct the continuation or lawful existence of a contract amidst the parties. The inclusion of a force majeure clause in a contract allows a party to suspend or terminate its duties and obligations in case of occurrence of an act which may be classified as force majeure.
Under general principles of contract law, a party has a defence against performing a contract if the performance becomes impossible due to unforeseeable events outside of the party’s control. These unforeseeable events are called “force majeure events” or “acts of God”. Force majeure clauses vary substantially and depend on what events are covered at the time of entering a contract. Some clauses include a finite list of force majeure events in an attempt to narrow the clause’s applicability and thereby excuse performance less often. Other force majeure clauses attempt to broaden the applicability to any unexpected eventuality outside the parties’ control by including an open-ended catch-all provision at the end of the force majeure clause which may read as “all other acts beyond the parties’ reasonable control”. Alternatively, the force majeure event is made an ‘inclusive’ clause, rendering its applicability more subjective. Some commonly listed force majeure events include natural disasters such as floods, earthquakes, hurricanes, epidemics, quarantines, war, terrorist acts, government action such as eminent domain or changes in laws; union activities such as strikes and slow-downs, and shortages of necessary materials.
On 19 February 2020, the Department of Expenditure, Ministry of Finance declared that this pandemic situation will be considered as a force majeure event and therefore, the force majeure clause (FMC) can be invoked under the Manual for Procurement of Goods, 2017 (being the guidelines for procuring goods and services by government organisation). Accordingly, the Government owned procuring entities and public sector enterprises to whom the said manual is applicable, can terminate/suspend a contract, if the contract has a provision relating to termination/suspension of contract due to a force majeure event.
Frustration of Contract
As per Section 56 of the Indian Contract Act, 1872 (“Contract Act”), an agreement to do an impossible act is described as being void. The said provision also relieves a party from the obligation to discharge of its duties in event of an intervening act (such as a force majeure event) which renders the performance of the contract impossible or unlawful.
In Energy Watchdog vs Central Electricity Regulatory, the Supreme Court of India held that force majeure is governed by the Contract Act. The Supreme Court held that "in so far as a force majeure event occurs de hors the contract, it is dealt with by a rule of positive law under Section 56 of the Contract Act. The performance of an act may not be literally impossible but it may be impracticable and useless from the point of view".
It is important to note that the impossibility stated in the section 56 of the Contract Act, does not cover situations in which a contract becomes commercially undesirable for a party. Any event which has rendered the contract commercially undesirable will not be considered a force majeure event and doctrine of frustration cannot be invoked under such circumstances. Courts have found that generalized economic hardship or increase in expenses, without more, do not constitute a force majeure event. As a result, it will be difficult to avoid an obligation to purchase goods or services merely because the prices have increased. Also, even if an unforeseeable and extreme disaster occurs, unless it is covered under the contract’s force majeure provision, it won’t provide a party an opportunity to avoid the performance of the contract.
Prior to terminating a contract by invoking force majeure event, the below mentioned points need to be considered:
- The definition of force majeure event in the contract will need to be examined to confirm which events (for instance any slowdown due to COVID-19) will be considered a force majeure event for the purposes of the contract.
- The force majeure clause will need to be examined to determine if the party has the right to terminate the contract or merely suspend the contract temporarily in the event of force majeure event.
- In the absence of contractual right to terminate the contract invoking force majeure event, a party may need to evaluate invoking doctrine of frustration, in the event that the circumstances render it impossible for a party to fulfil its obligations under the contract (for instance, that if there is ban on certain goods due to COVID-19). However, loss of business, loss in revenue or any such similar reasons cannot be considered a valid ground for invoking the doctrine of frustration.
Hence, prior to terminating any contract, it is imperative to interpret the specific provisions of the force majeure clause in the contract.
B. How can directors attend board meetings especially for taking decisions which require their physical presence?
Due to the travel restrictions, certain provisions relating meetings of the board of directors of a company(“Board”) under the Companies Act, 2013, have been relaxed.
Rule 4 of the Companies (Meetings of Board and its Powers) Rules, 2014 (“Rules”), provides a list of matters which cannot be dealt with in a meeting done through video conferencing and specifically requires the physical presence of directors. These include approval of annual financial statements, Board’s report, prospectus; decisions regarding amalgamation, merger, demerger, acquisition and takeover; and audit committee meetings for consideration of financial statements, among others. The Ministry of Corporate Affairs (MCA), by its notification dated 19 March 2020, has relaxed the requirement of physical presence of the directors at Board meetings of any company till 30 June 2020. These meetings can be done through video-conferencing or other audio-visual means by duly ensuring compliance with the procedure for the same as set out of rule 3 of the said Rules.
C. Employee related issues and Government measures:
In order to control the spread of COVID-19, the Central Government and some State Governments have issued certain notifications to safeguard the interest of both the companies and its employees. On 19 March 2020, the Ministry of Personnel and Public Grievances of India issued a notification instructing the Central Government employees to work from home. This is however not applicable to employees working in essential/emergency services or workers employed in containing the spread of COVID-19. Various State Governments have also issued notifications advising companies to grant work from home. Some commonly asked questions by companies in relation to COVID-19 vis-à-vis their employees are set out below.
a. Whether declaring work from home for employees is mandatory for every employer?
No, it is not required to be mandatorily given. While the notifications by some State Governments (such as Maharashtra, Karnataka and Kerala) advise companies to offer work from home for their employees, the said notifications are not mandatory, nor binding upon companies.
b. Whether work from home can be set-off with the annual leave of employees?
No, days of work from home cannot be set off against the annual leaves provided to the employees by a company. The option to work from home will not be construed as leave.
c. Whether salary of employees can be deducted on the grounds of COVID-19?
No, salary of employees cannot be deducted on the grounds of adverse impact on the business of a company on account of COVID-19 and must be paid in accordance with the terms of employment of the employee.
d. Whether lay-off of employees is possible on the grounds of COVID-19?
There is no prohibition on laying off employees due to economic hardships being faced by companies. However, employees can be laid off on such grounds subject to the employers following all the requirements set out in Industrial Disputes Act, 1947 including those in relation to notice period or payment in relation to the notice period and the terms of employment of the employees.
Should you have any questions or queries in relation to the legal developments in these VUCA (Volatile, Uncertain, Complex, and Ambiguous) times, please drop us an email at firstname.lastname@example.org.
If you wish to download this note so that you can share it with your teams, please download the PDF here.
The content of this article is intended to provide a general guide to the subject matter and is not intended to be a legal opinion. Specialist advice should be sought about your specific circumstances.