The COVID-19 pandemic generated more contract disputes than any event in recent commercial history. Indian courts were asked, repeatedly and urgently, to answer a question that most commercial lawyers had never seriously considered: does a global pandemic excuse a party from performing its contractual obligations? The answers that emerged from these cases have permanently altered how Indian commercial lawyers draft force majeure clauses.
Indian law offers two separate routes to excuse non-performance of a contract due to an external event.
The first is a force majeure clause in the contract itself. This is a privately negotiated provision that lists specific events (war, natural disaster, government action, pandemic) and specifies the consequences of those events, typically suspension of obligations, with termination permitted if the event persists beyond a defined period.
The second is Section 56 of the Indian Contract Act, 1872, which provides a statutory doctrine of frustration: a contract becomes void when its performance becomes impossible by reason of some event that the parties did not contemplate and cannot be held responsible for.
These are distinct doctrines. A force majeure clause operates within the contract; Section 56 frustration operates outside it, by operation of law. The COVID-19 cases forced courts to work through both.
Standard Retail: The First and Most Cited COVID Judgment
In Standard Retail Pvt Ltd v M/s G.S. Global Corp & Ors (Commercial Arbitration Petition Nos. 404-408 of 2020, Bombay High Court, decided 8 April 2020), the Bombay High Court was the first court in India to comprehensively examine force majeure claims arising from COVID-19.
The petitioners were Indian steel importers who had purchased steel from Korean exporters. When COVID-19 struck and the national lockdown was declared, the petitioners sought to restrain the Korean sellers and their bank from encashing letters of credit, arguing that COVID-19 and the lockdown constituted a force majeure event and had frustrated the contracts.
Justice A.A. Sayed dismissed the petitions. The key findings were:
- Force majeure clauses are party-specific. The FM clause in the contracts applied only to the seller (who had already shipped the goods), not to the buyer. A party cannot invoke an FM clause that, by its own language, does not apply to it.
- Steel was an essential service. Government notifications declared the movement of steel and port operations as essential services during the lockdown, so the FM premise (inability to perform) did not apply to these specific contracts.
- Letters of credit are independent obligations. An LC is an independent undertaking by the issuing bank; the underlying contract’s FM clause cannot be used to restrain a bank from honouring an LC.
The Standard Retail judgment established the principle that force majeure claims are fact-specific and contract-specific, courts will examine the precise language of the FM clause and the precise nature of the performance allegedly affected.
The Impossibility Threshold: What the Supreme Court Had Already Held
The Supreme Court’s pre-COVID jurisprudence on frustration set a high bar that COVID-era courts consistently applied.
In Energy Watchdog v Central Electricity Regulatory Commission (2017) 14 SCC 80, the Supreme Court held that for Section 56 frustration to apply, performance must have become “impossible”, not merely more difficult, more expensive, or commercially less advantageous. A change in economic circumstances or a rise in input costs does not frustrate a contract. The Court affirmed the classical position that commercial hardship, without impossibility, does not discharge contractual obligations.
This principle was directly applied in COVID cases. Courts consistently held that COVID-19 did not automatically frustrate contracts because:
- The lockdown was temporary, not permanent
- Most business activities resumed within weeks or months
- Commercial difficulty (reduced revenues, delayed supply chains) does not constitute legal impossibility
Rental and Lease Disputes During COVID
The most commercially significant category of COVID force majeure litigation in India concerned whether tenants, particularly retail and restaurant operators, were required to pay rent during the lockdown period.
Courts in Delhi, Bombay, and other High Courts consistently held that:
- A general force majeure clause does not automatically suspend rent obligations. Rent is a payment obligation, and payment obligations are typically carved out from FM clauses by express language (e.g., “FM events do not excuse payment obligations”).
- The “purpose frustration” argument, that a lease is frustrated because the leased premises cannot be used, was available in theory but applied narrowly. Courts were reluctant to hold leases void under Section 56 when the premises themselves remained physically intact and accessible.
- Section 108(B)(e) of the Transfer of Property Act, 1882, which allows abatement of rent in certain circumstances of property destruction, was held inapplicable to COVID closures since the property was not destroyed.
The net result: most COVID-based rent relief claims in Indian courts failed or resulted in negotiated partial relief rather than judicial abatement.
What a Robust Post-COVID Force Majeure Clause Must Include
The COVID litigation has produced clear drafting lessons:
1. Define force majeure events explicitly and exhaustively. Post-COVID, the definition should include: acts of God, natural disasters, floods, earthquakes, epidemics, pandemics, government-declared public health emergencies, lockdowns, quarantine restrictions, war, civil unrest, strikes, and actions of governmental authorities. “Pandemic” should be named expressly, several pre-2020 FM clauses covered “epidemics” but not “pandemics.”
2. Specify obligation-to-mitigate. The affected party must take all reasonable steps to mitigate the effects of the FM event and to resume performance as soon as possible.
3. Notice requirements. Notice of the FM event must be given within a specified period (typically 5-10 days of the event becoming known). Failure to give notice may prevent reliance on the clause.
4. Suspension versus termination. Clearly state whether the FM event (a) suspends the affected obligations, (b) extends the time for performance, or (c) allows termination if the event persists beyond a threshold period (e.g., 60 or 90 days).
5. Payment obligation carve-out. Decide expressly whether payment obligations are excluded from FM relief. Most commercial contracts exclude payment obligations, a buyer cannot refuse to pay merely because an FM event has occurred unless the clause expressly includes payment obligations.
6. Insurance. Require each party to maintain appropriate insurance and to cooperate in claims under relevant business interruption or force majeure insurance policies.
Key Takeaways
- Indian courts have consistently held that COVID-19 did not automatically frustrate commercial contracts, the impossibility threshold under Section 56 of the Indian Contract Act, 1872 requires literal impossibility of performance, not mere commercial hardship, as the Supreme Court confirmed in Energy Watchdog v CERC (2017).
- Force majeure clauses must be present in the contract for a party to rely on them, courts do not read an FM clause into a contract that does not contain one, and the clause must, by its own language, apply to the party seeking to invoke it.
- Post-COVID best practice requires FM clauses to explicitly list pandemics, specify notice obligations, distinguish between suspension and termination, and address whether payment obligations are excluded from FM relief.
This article is for informational purposes only and does not constitute legal advice. Readers should seek appropriate professional counsel for their specific circumstances.
META TITLE: Force Majeure After COVID: What Indian Courts Held