MEP v. SDMC - The Changing Threshold of Providing Notice While Invoking Force Majeure Clauses
[Eeshan and Shubhaankar are students at NALSAR University of Law, Hyderabad.]
Any unforeseeable event which is entirely beyond the control of the parties is categorized as a force majeure event. The conditions for invoking a force majeure clause in a contract are stringent, for they impose a strict obligation on the parties to perform due diligence, and only after that, if they are unable to determine the happening or non-happening of the said event, the clause may be invoked.
In the recent decision of MEP Infrastructure Developers Limited v. South Delhi Municipal Corporation, the Delhi High Court upheld the validity of a force majeure clause in a contract between the disputing parties citing disruption of business due to the spread of COVID-19 as being classified as a force majeure event.
The dispute arose due to a toll collection contract entered between the parties. The contract stipulated that the petitioner will make weekly payments to the respondent for availing the right to collect toll on a particular stretch of road. However, after the declaration of the nationwide lockdown due to the COVID-19 pandemic, the petitioner failed to generate revenue under the contract and also defaulted on the weekly payments. The High Court, in its order dated 2 March 2020, allowed the respondent to collect the arrears on debts in three monthly installments and asked the petitioner to continue with the future weekly payments as per the prescribed schedule. Thereafter, the petitioner approached the Delhi High Court on the ground that the contract had become temporarily non-operational on account of the force majeure event, i.e. COVID-19-occasioned lockdown.
The court relied upon the office memorandum (Memorandum) dated 19 February 2020 to hold that the disruption caused was beyond the control of the petitioner. The Memorandum categorized the disruption in business caused due to COVID-19 as a force majeure event. Thus, the court concluded that the obligations of the petitioner were to stand suspended with effect from 19 February 2020.
While passing the judgment, the court made a novel interpretation which may potentially open a floodgate of litigation in the future. The court stated that as COVID-19 was declared to be a force majeure event under the Memorandum by the Central Government itself, the official date for recognizing the event would also be the same as has been stipulated in the Memorandum. Even though the force majeure clause got acknowledged by the petitioner at a later date, its applicability, according to the court, would be from the date of issuance of the Memorandum.
The present ruling acts divergently from the established position concerning the force majeure jurisprudence.
The position, as laid down in Energy Watchdog v. Central Electricity Commissioner, clearly states that force majeure clauses are to be interpreted as narrowly as possible. It has been noted that the force majeure clause would come into action only when the operations of the entity are actually ‘hindered’. The hindrance here should be severe in nature concerning the contract as a whole. Therefore, any petition seeking the invocation of a force majeure clause needs to be interpreted with particular attention to the wording of the provision.
In this case, the force majeure clause was rendered to be operational before it was actually intended by the parties, i.e. the date when the operations carried out are hindered due to the force majeure event, and not the date on which the force majeure event starts without impacting the business operations in any manner.
This new approach adopted by the court could potentially allow applicants to seek relief based on a prospective force majeure event, before they face any difficulty by the onset of the said event itself.
In the present case, as per sub-clause 15.3 of the contract, there was a pre-condition stipulating that notice needs to be given by either party for the force majeure clause to be legally invoked. Even the Memorandum, which the court relied upon, cites an explicit requirement of furnishing a notice, as discussed below. However, it appears that the court, in arriving at its conclusion, wrongly interpreted that the Memorandum itself would serve as a notice for the invocation of the force majeure clause.
In this context, an interesting question comes up for consideration i.e. could the Memorandum issued by the Central Government., in the instant case, be taken as a valid ground to circumvent the requirement of notice, in the event of force majeure, as stipulated in the contract?
In MEP, sub-clause 15.3 of the contract laid down the procedure to be followed upon the occurrence of a force majeure event. The sub-clause specifically provided that “[i]mmediately upon any occurrence of an event of Force Majeure or, in any event, no later than 5 (five) days following such occurrence, the Party affected by such event of Force Majeure event shall…notify the other Party and provide documentary proof (if any) of the existence of an event of Force Majeure…”
Thus, it can be observed that the contract explicitly provided for the requirement of a notice to invoke the defense of force majeure.
The importance of a proper notice has been particularly highlighted in SNB Farms Inc. v. Swift & Company, wherein the court categorically held that force majeure would not be invoked as due notice was not provided to the opposing party. The same view has been accepted under Indian jurisprudence, where force majeure notifications have been held to be not maintainable due to lack of due procedure in communicating the notice.
In the present case, the court’s holding has resulted in lowering the required threshold of rendering a notice for invocation of a force majeure clause. The court relied upon the Memorandum, which acted as a general notification to the people of the country that the COVID-19 pandemic could be construed as a force majeure event. However, in doing so, the court had stated, under paragraph 29, that the force majeure event, with respect to the present contract, starts from 19 February 2020 instead of 19 March 2020, the date on which the petitioner mentioned the effect of COVID-19 lockdown on the business of the respondent.
The ruling of the court works to circumvent the failure of the petitioner to render proper notice of the happening of the force majeure event, as specified under sub-clause 15.3 of the contract. Furthermore, the decision seems to have breached the contractual rights of the petitioner as the court wrongly construes the applicability of the Memorandum. The Memorandum explicitly states that “[t]he firm has to give notice of FM as soon as it occurs and it cannot be claimed ex-post facto.”
The content of the Memorandum was not to act as a substitute to the force majeure clauses present in the contract, as construed by the court. Rather, the Memorandum’s content explicitly re-affirmed the need of proper notice and also the fact that such force majeure events cannot be claimed ex-post facto, which the petitioner, in the present case, had failed to fulfil.
The present case may, therefore, lead to establishing a new threshold when it comes to fulfilling the requirement of notice to invoke force majeure clauses. The decision may imply that if an event has received official recognition categorizing it as a force majeure event, then the requirement of notice, even if explicitly stipulated in the relevant agreement, may not be met. The decision may open several frontiers for future application.