Introduction
In a recent decision handed down on
Background Facts
The Buyer is an Indian entity involved in importing steel products. The Buyer had entered into a number of contracts with the Seller to import these steel products. The terms of payment provided were by way of certain confirmed and Irrevocable LCs, which were payable at sight.
The goods were duly shipped by the Seller in furtherance of its contractual obligations. While such goods were still in transit, the Buyer sought to terminate the contract and revoke its acceptance of the said LCs by invoking the Force Majeure Clause in the contracts and citing frustration, impracticability and impossibility in performance of the contracts owing to the COVID-19 Pandemic. The Seller did not accept this revocation and asked the Buyer to comply with its contractual obligations.
The Buyer, however, filed a Petition under §9 of the Arbitration and Conciliation Act 1996 ('the Arbitration Act'), before the
Issues Arising & Contentions Raised
The primary issues which arose for consideration before the
(i) Whether the sales contracts between the Buyer and Seller could be declared as unenforceable, void or voidable solely on the grounds of frustration, impracticality or impossibility, as claimed; and
(ii) Whether the dispute under the underlying sales contracts would entitle the Buyer to an injunction against the encashment/invocation of Irrevocable LCs.
The contentions that were raised by both parties in this matter are primarily as under:
Buyer's Contentions:
(i) The sales contracts are unenforceable/ void/voidable as the 'Force Majeure' clause in them exempts only the Seller from performing its contractual obligations, thus contravening the rule of mutuality of the obligation.
(ii) The Buyer's contractual duty to make payments to the Seller, stands discharged due to impossibility since the onward selling of the steel products was not categorized as an 'essential service'.
(iii) The Buyer's contractual duty stands discharged as their performance has become impractical and consequently frustrated as they cannot be expected to perform the contracts by assuming the risk of occurrence of such an unforeseen event.
Seller's Contentions:
(i) The LCs were independent contracts which were unaffected by any dispute between the Buyer and Seller in the underlying contract. Only in cases of egregious or established fraud or irretrievable injury can a LC be injuncted.
(ii) On a factual basis, the Buyer's contention on frustration/impossibility/impracticality of the sales contracts due to the prevailing COVID-19 situation was erroneous as there a number of government circulars/notifications, which demonstrate that distribution of steel had been declared as an "essential service".
(iii) The contention of the COVID-19 pandemic being a force majeure event or leading to frustration of the contract was baseless. The Buyer had to demonstrate that the terms of the contract and its very foundation had been fundamentally altered.
Summary of the Decision
The Court held that various notifications/circulars cited by the Seller clearly demonstrate that steel is an "essential service" and, therefore, the situation arising from the pandemic cannot assist the Buyer. The Seller had already shipped the goods and fulfilled its obligation. The fact that the Buyer would not be able to perform its obligations in so far as its own customers were concerned or it would suffer damages was not a factor which could be held against the Seller.
The Court also discussed principles of §56 of the Indian Contract Act 1872 and certain leading Indian authorities on Force Majeure and frustration of contract such as Energy Watchdog v CERC2 and
Concluding Remarks
With the on-going situation in relation to the COVID-19 pandemic, this is most certainly the tip of the iceberg in terms of the disputes in relation to Force Majeure clauses that are likely to be seen in
Footnotes
1 4 similar petitions were listed together.
2 (2017) 14 SCC 80.
3 AIR 1954 SC 44.
4 Tuli & Co represented the successful Seller in the
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Mr Rajat Taimni
Tuli & Co
513 B-Wing
MV Road Andheri East
Tel: 1145934000
Fax: 1145934001
E-mail: C.Jenkins@Tuli.biz
URL: www.tuli.co.in
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