The recent outbreak of the Coronavirus disease 2019 (“COVID-19”) declared as a pandemic by the World Health Organization, has significantly disrupted businesses on a global scale. Resultantly, companies are asserting that this pandemic constitutes a force majeure event wherein, they shall be excused from their contractual obligations. On this note, this article considers how force majeure clauses may be engaged in the context of the COVID-19 within the jurisdiction of Pakistan.

Background on Force Majeure

A "force majeure" clause is a contract provision that relieves the parties from performing their contractual obligations when certain circumstances beyond their control arise, making performance commercially impracticable, illegal, or impossible. Black’s Law Dictionary, for instance, defines an Act of God as, “[a]n overwhelming, unpreventable event caused exclusively by forces of nature, such as an earth-quake, flood, or tornado”.

In the case of Transco plc v. Stockport Metropolitan Borough Council, 2003 UKHL 61, his Lordship Hobhouse has explained an Act of God as follows, "59. …Thus 'act of God' was always a common law exception. It was the metaphorical phrase (like "fate") with a religious origin used to describe those events which involved no human agency and which it was not realistically possible for a human to guard against: an accident which the defendant can show is due to natural causes, directly and exclusively, without human intervention and could not have been prevented by any amount of foresight, pains and care, reasonably to be expected of him".

Furthermore, in the case of 2016 PCrLJ 1398, the Act of God was defined as one, “(i) which involves no human agency,(ii) which is not realistically possible for a human to guard against,(iii) which is due to natural causes and (iv) which could not have been prevented by any amount of foresight”. A similar definition was also provided in the case of 1996 SCMR 1713.

Legal implication of COVID-19 concerning Force Majeure in Pakistan

At the onset, it shall be noted that the definition of force majeure in Pakistan is derived from judicial precedents whereby, it is defined as, “Events outside the control of the parties and which prevent one or both of the parties from performing their contractual obligations; A contract provision that stipulates that unforeseen events - wars, acts of God, certain strikes - that will excuse a party from its duty to perform the contract; Standard clause in a contract that absolves either of the parties of the blame for non-fulfillment of obligations caused by events beyond their control, such as earthquakes, floods or acts of war; A contractual provision allocating the risk if performance becomes impossible or impracticable as a result of an event or effect that the parties could not have anticipated or controlled.[1]

Nonetheless, the courts have repeatedly forewarned against the fact that the parties shall not be absolved from their obligations simply because the performance becomes onerous on one party. [2]The parties shall be excused from their obligations on account of the impossibility to perform only where the parties agreed to that effect.[3] Hence, economic profitableness has no bearing on the force majeure clause.

Additionally, in the 2013 C L D 1451, the court referred to the Black's Law Dictionary (Sixth Edition) which stated that,"… Such clause is common in construction contracts to protect the parties in the event that a part of the contract cannot be performed due to causes which are outside the control of the parties and could not be avoided by exercise of due care.” Furthermore, it discussed Mr Justice M.L. Singhal’s definition, in the following words, "…. Where reference is made to "force majeure", the intention is to save the performing party from the consequences of anything over which he has no control...”.

Therefore, the litmus test as to the reliance on a force majeure clause in an agreement would be whether the non-performance could not have been averted by any amount of foresight and reasonable care expected from a party in the context of COVID-19.

Interpretation of Force Majeure by the English Courts

Analogous to the Pakistani Law, there is no statutory concept of force majeure in English Common Law. Unlike frustration, a party shall only be able to rely on force majeure if it is expressly written in the contract. The precise terms of the force majeure clauses are construed strictly by the English Courts whereby, claims for non-performance arising as a result of the COVID-19 outbreak shall be difficult to establish. As mentioned above, that just because a contract becomes uneconomic or non-profitable a party shall not be absolved from its contractual obligations. Customarily, the party shall have to establish that a force majeure event has occurred which is beyond its control; which has prevented, hindered or delayed its performance of the contract; and that it has taken all reasonable steps to avoid or mitigate the event or its consequences.

To demonstrate some of the difficulties concerning COVID-19, two English High Court decisions Seadrill Ghana Operations Ltd v Tullow Ghana Ltd [2018] EWHC 1640 (Comm) (03 July 2018) ("Seadrill Ghana" and  Classic Maritime Inc. v Limbungan Makmur Sdn Bhd & Anor [2018] EWHC 2389 (Comm) (13 September 2018) ("Classic Maritime") are relevant.

In Seadrill Ghana party A claimed force majeure and termination of a contract, involving the hiring of an oil rig, due to certain circumstances preventing performance. The court found that the party was not entitled to rely upon the force majeure clause since the effective cause of the inability to perform was the Government's failure to grant approval. Teare J affirmed that for a party to rely on an event of force majeure, it must be the sole operative cause of the inability to perform. Hence, if this justification is applied to the present scenario it must be established that the COVID-19 was the only reason which resulted in the non-performance. For instance, if a construction company is unable to transport its material to the site because of the current lockdown on transportation than it may well depend on force majeure.

Secondly, in the case of Classic Maritime, a party was unable to perform its contract due to the burst of a dam which it claimed to be a force majeure event preventing it from supplying cargo shipments. A complicating factor in this claim was the fact that the party was unlikely to have performed even in the absence of the dam burst. Therefore, it was found that the force majeure event had not caused the party’s failure to perform and hence it could not rely on it to avoid liability. If there are alternative methods of performance, then the party must explore them. By analogy, it shall be stated that in light of the recent outbreak of the disease the parties shall explore all modes of performance before asserting that a force majeure event has ensued.

Lastly, the party shall have to prove that it has used reasonable steps to mitigate the force majeure event i.e. COVID-19. Parties must evaluate the effect on the other party alongside their own interests when deciding whether steps to overcome the force majeure are reasonable.

Conclusion

In view of the aforementioned, it may be argued that COVID-19 is an unprecedented event that is entirely uncontrollable and could not have been prevented by due diligence, prudence or care. However, as stated in Halsbury`s Laws of England (fourth edition) (9)(1) a force majeure clause should be constructed in each case with due regard to the precise words of the clause. As a general principle, “A force majeure clause should be construed in each case with a close attention to the words which precede or follow it, and with a due regard to the nature and general terms of the contract. The effect of the clause may vary with each instrument”.(Lebeaupin v Crispin [1920] 2 KB 714).

It is imperative to note that the wording of each force majeure provision is important wherein, if it specifies the force majeure events such as earthquakes, floods, plagues, a court may be less likely to conclude that COVID-19 falls within the ambit of the provision. On the other hand, if it is less specific and includes a catch-all phrase such as “Other events beyond the parties reasonable control... including, but not limited to” then it might be easier to conclude that COVID-19 falls within this provision and hence, the parties may be excused from their obligations. To determine whether this phrase covers issues arising out from COVID-19 is a question of interpretation and is fact specific. Nonetheless, the parties will have yet to prove that their non-performance was actually outside their control and could not have been prevented [in Rui Grp., Inc. v. Societe Kamel Bekdache & Fils S.A.L., 621 Fed. Appx. 511, 511 (9th Cir. 2015)].

Additionally, since COVID-19 may not directly impact the parties, they may argue to be excused from their contractual obligations because of some government action or change of law. For instance, if the Act passed by the provincial government of Punjab in light of COVID-19 i.e. “The Punjab Infectious Diseases (Prevention and Control Ordinance) 2020” affects the party causing nonperformance then the parties may be relieved of their obligations.

Moreover, the timing of the contract will play a significant role in determining whether COVID-19 shall be interpreted in the contract. If the parties entered into the contract post the pronouncement of the pandemic than it shall be easier to establish the fact that a force majeure event has transpired and thereby, the contract shall be terminated.

[1] 2016 CLD 1833

[2] AIR 1980 SC 588

[3] Tennants (Lancashire) Ltd. v. CS Wilson & Co. Ltd. [1917] AC 495