Bombay High Court: No benefit to Petitioners seeking Force Majeure owing to Covid-19 outbreak

Seema JhinganPartner, LexCounsel

Judgment: Standard Retail Pvt. Ltd. V/s M/s. G. S. Global Corp & Ors. with Integral Industries Pvt. Ltd. V/s M/s. G. S. Global Corp. & Ors.; Vinayaga Marine Petro Ltd. & Anr. V/s M/s. G. S. Global Corp. & Ors.; Hariyana International Pvt. Ltd. V/s M/s. Hyundai Corporation & Ors. and Prabhat Steel Traders Pvt. Ltd. V/s M/s. Hyundai Corporation & Ors. [Commercial Arbitration Petition Nos. 404, 405, 406, 407 and 408 of 2020],

Forum: Hon’ble High Court of Judicature at Bombay (“Court”)

Judgment delivered on: April 8, 2020

Act/Law: Arbitration and Conciliation Act, 1996 (“Act”).

Ratio: Distribution of steel is an “essential service” during the lockdown period; a force majeure clause, contained in the contract, specifically providing for termination at the hand of one party, cannot be invoked by the other party and cannot be enforced against any third party to the said contract. 

Background: Petitions were filed under Section 9 of the Act by Petitioners (Standard Retail Pvt. Ltd, Integral Industries Pvt. Ltd., Vinayaga Marine Petro Ltd, Hariyana International Pvt. Ltd. and Prabhat Steel Traders Pvt. Ltd.) who were importing steel from South Korean entities, viz. G. S. Global Corp (in first three petitions) and Hyundai Corp (in the remaining two petitions) (“Respondent No. 1”), seeking relief of restraining Wells Fargo bank (“Respondent No. 3/Respondent Bank”) from negotiating/encashing letters of credit. The Petitioners in the instant petitions while relying upon Section 56 of the Indian Contract Act, invoked Force Majeure clause in the contracts with G.S. Global Corp and Hyundai Corp, claiming that in view of the COVID-19 pandemic and the lockdown declared by the Central/State Government in India, their contracts with Respondent No. 1 were terminated as unenforceable on account of frustration, impossibility and impracticability. The contracts were subject to general terms and conditions including force majeure clause and governing law clause. Article 11 of the contracts embodied the force majeure clause, which gave the Respondent No. 1, inter alia, the right to terminate the contract or part thereof by way of a written notice in the event of act of God including epidemics, other natural calamities, war or armed conflict, etc. for a reasonable period of time.

Analysis: The question before the Court for adjudication  was whether the force majeure clause contained in the contracts can be invoked the present situation of COVID-19 against a third party, i.e. the Respondent No. 3 bank (not  being a party to the contracts inter se Petitioners and Respondent No. 1) and that whether the force majeure clause be invoked by the Petitioners in view of the fact that the Respondent No. 1 had already complied with their part of the contracts and had shipped steel (goods under the contracts whose movement have not been restricted by the Indian authorities during lockdown) from South Korea despite the prevailing epidemic of COVID-19.

The Court, holding that the Petitioners are not entitled to any ad interim reliefs against the Respondent Bank, observed that:

i. The Letters of Credit are an independent transaction with the Respondent Bank and the Respondent Bank is not concerned with underlying disputes between the Petitioners (buyers) and the Respondent No. 1 (seller);

ii.The force majeure clause contained in the contract, by its language, is only applicable upon the Respondent No. 1 and not the Petitioners and that the Petitioners cannot use lockdown as an excuse to resile from its contractual obligations of making payments to the Respondent No. 1;

iii. The fact that the Petitioners 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 No. 1, who had complied with their part of the contracts;

iv. Notifications/advisories relied upon by the Respondent No. 1 stating that there is no restriction upon movement of steel on all ports and port related activities including the movement of vehicles and manpower, operations of container freight station, warehouses and offices of custom houses agents have also been declared as essential services and the Notification of Director General of Shipping, Mumbai declaring that there would be no container detention charges on import and export shipments during the lockdown period – leads to the inevitable conclusion that distribution of steel has been declared as an essential service.

v. The judgments of Energy Watchdog Vs. CERC (2017) 14 SCC 80 and Satyabrata Ghose Vs. Mugneeram Bangure & Co. (1954) SCR 310 as relied by the Petitioners are inapplicable to the present matter.

Conclusion: In our view the Court has rightly refused to grant benefit of force majeure to the Petitioners and rejected the grant of ad interim relief to the Petitioners against the Respondent Bank holding that force majeure clause cannot be invoked against the Respondent Bank, the latter not being a party to the sale contract between Petitioners and Respondent No. 1. The Court’s view that the Petitioners cannot use the situation of lockdown to avoid their obligations under the contract with the Respondent No. 1 and that the Respondent Bank is well within its rights to encash the letters of credit, which otherwise is also an independent transaction with the Respondent Bank, is to re-emphasise the established principle that to claim the benefit of a force majeure event the performance of the party should be adversely impacted by the force majeure event itself. While the notifications/advisories issued by the government suggest that distribution of steel has been declared as an essential service during the lockdown, the Petitioners had little ground to claim frustration and impossibility of contract. 

For Covid 19 related articles, please refer to https://lexcounsel.in/articles-2020/ and for Covid 19 related legal updates, please refer to https://lexcounsel.in/newletters/newsletters-2020/.

If you have questions or would like additional information on the material covered in this Newsletter, please contact the authors:

Parul Parmar, Senior Associate

pparmar@lexcounsel.in