The outbreak of COVID-19 in Wuhan, China was first reported to the World Health Organization-WHO Country Office in China, on 31 December 2019. Within three months, COVID-19 has affected more than 100 countries and been characterised as a pandemic by the WHO. As the virus spreads, it is believed that it will have a far-reaching impact on the global economy and international trade. Companies will need to be prepared for the pandemic and circumstances where the outbreak brings an adverse impact on business generally and, more importantly, on the performance of commercial contracts. In particular, companies should consider whether they are entitled to invoke force majeure under the contracts, and thereby defer the performance of their contractual obligations without penalty.
A force majeure event means an extraordinary event or circumstance which is beyond the control of the contracting parties such as an act of God (like a natural calamity) or events such as a war, strike, riots etc. A successful invocation of a force majeure clause generally relieves the parties from their respective contractual obligation and/or liability. A force majeure clause does not excuse a party’s non-performance entirely, but only suspends it for the duration of the force majeure event. If properly drafted, the force majeure clause may provide that where a force majeure event continues for more than a stipulated period then either party may, at its own option, terminate the contract without any financial consequences to each other.
Under English Common Law, the applicability of force majeure is purely contractual. It is understood that a generalised doctrine of force majeure does not exist and it is up to the parties to define the events as to what constitutes force majeure events and the parties’ rights and obligations upon the occurrence of such events. In Bangladesh, the position is similar as there is no direct statute that directly governs the doctrine of force majeure or gives effect to it in express terms. Since the doctrine of force majeure does not have any direct statutory basis under the laws of Bangladesh, its reliance is based primarily on the parties’ agreement and the respective terms of the contract entered into between the contracting parties. A typical force majeure clause would read as follows:
“Notwithstanding the provisions of this Agreement, the Parties agree that this Agreement shall not be terminated for default, if any delay in performance or other failure to perform any obligation under this Agreement is the result of an event of Force Majeure. If a Force Majeure situation does arise, the defaulting Party shall notify the other Party in writing, within 10 (ten) days of such occurrence, the existence of such condition and the cause thereof. Unless otherwise directed by the innocent Party in writing, the defaulting Party shall try and continue to perform its obligations under this Agreement as far is reasonably practical and shall seek all reasonable alternative means for performance not prevented by the Force Majeure event.”
However, not all commercial contracts may contain a force majeure clause and, in today’s situation of COVID-19, parties may be in an uncertain position as to whether they can perform their respective obligations under the contract in a timely manner or, if at all. It is therefore essential to understand whether parties in Bangladesh can successfully claim a force majeure event or be relieved from their respective responsibilities due to COVID-19 under the existing legal framework in Bangladesh.
All contracts, which are governed by Bangladeshi law, are regulated by the Contract Act 1872 (the “Act of 1872”). The doctrine of frustration is enshrined in Section 56 of the Act of 1872 which provides that a contract becomes void when it becomes impossible to perform or, by reason of some event, it becomes unlawful after it was entered into. So, if the contract becomes impossible to perform for any reason whatsoever, it shall be treated as void under the laws of Bangladesh, provided that the defaulting party did not know, or with reasonable diligence, could not have known that the contract would be so frustrated. The effect of a void contract, in simple terms, is that it cannot be enforced by law and the parties are relieved from their respective obligations.
It is clear that, to attract the doctrine of frustration, the performance of the contract must become absolutely impossible due to the happening of some unforeseen event. This was clearly held by the Supreme Court of Bangladesh where it stated with clear observations that
“[w]here plea of frustration is raised on the happening of a certain event, the real question is whether the event which has accrued is such and whether its relation to the contract is such that in considering the contract and the surrounding circumstances it must be held that it would not be just and reasonable to hold the parties any longer to the terms of the contract. To attract the doctrine of frustration of contract the performance of the contract must become absolutely impossible due to the event, where in spite of intervention even subsequent to the making of the agreement which are not in contemplation of the parties and which could not be foreseen with reasonable diligence, the contract could still be performed in substance then it could not be said that the contract has become impossible of performance within the meaning of section 56 of the Contract Act.”
The position is similar in India as well where the Indian Supreme Court has articulated that force majeure events are governed by the Indian Contract Act 1872.
Therefore, in the absence of an appropriately worded force majeure clause in a contract, the parties in Bangladesh may have the option of relying on the existing provisions of Bangladeshi law – in particular, Section 56 of the Act of 1872 – in order to excuse itself from the timely performance of their respective obligations under the contract. However, in order to avoid unscrupulous parties from taking advantage of COVID-19 as a force majeure event and escape from their respective obligations, it must be remembered that a valid claim under a force majeure clause due to COVID-19 is likely to depend on strict considerations, and the contracting party should be prepared with clear evidence to support its claim. There has to be a clear nexus between the force majeure event and the non-performance of the contractual obligation. The burden of proof is on the party seeking to rely upon the force majeure provisions, and the provisions are usually construed narrowly against that party. In particular, the Courts have been reluctant to interpret such provisions so as to excuse non-performance where there is evidence of negligence or a breach of duty by the party affected. Even if it is established that there is a causal link between the force majeure event and delay, parties are likely to have to show that they have taken all reasonable endeavours to circumvent the force majeure event. For example, if the delay in delivery of materials has caused a delay in a party’s performance of the contract, it will have to show that it has taken reasonable efforts to avoid the force majeure event by, for example, considering other options such as obtaining the materials from alternative suppliers.
It follows that, when considering claims for force majeure events, parties should diligently review and consider the precise wording of the relevant force majeure clauses of each contract and check the time limits and/or notification obligations of the same. The parties should ensure strict compliance with the notice provisions of such a clause and monitor closely the development of the COVID-19 situation and how it has affected and/or caused the delay in performance of the contract. The affected party should also formulate and record any emergency plans to mitigate the effect of such a force majeure event, and gather evidence to demonstrate that they have acted reasonably in the circumstances.
Lastly, it is important to mention that, in order to avoid any ambiguity on the subject, the Government of different countries have already issued circulars clearly stating that COVID-19 is to be treated as a force majeure event. For example, the Government of India has issued a notice on 19 February 2020 that “[a] doubt has arisen if the disruption of the supply chains due to spread of corona virus in China or any other country will be covered by the Force Majeure Clause” and that COVID-19 “should be considered as a case of natural calamity” meaning that force majeure clauses in contracts can be invoked for such events. On the other hand, the China Council for the Promotion of International Trade, a quasi-Governmental body, announced on 26 February 2020 that it had issued more than 1600 force majeure certificates covering contracts worth tens of billions of yuan. It is also advisable that our Government of Bangladesh should consider the current situation and also take appropriate steps in defining this pandemic as a force majeure event, where applicable.