Legality of the Covid-19 Force Majeure Circulars Issued by the Indian Executive

Introduction

The Covid-19 pandemic has rendered timely performance of contractual duties virtually impossible. Parties to the contract are either not able to pay due to financial crunch or are incurring penalties for delays. The pandemic has been declared as a natural calamity under the Disaster Management Act, 2005 (Disaster Management Act).

In this context, the Government of India (Govt.) has mainly done two kinds of things. Firstly, it has issued circulars directing its departments and entities under its control to give certain concessions to its customers and contractors and secondly, it has issued clarifications in the form of orders stating that Covid-19 will be considered as a force majeure event in respect of contracts entered by governmental entities, ministries and departments.

While these circulars are issued in good faith by the government, the question remain regarding the legal validity of these circulars and orders. This article discusses two major circulars or orders- a series of Ministry of Shipping as well as Director General of Shipping circulars and a Ministry of Finance circular dated 19/02/2020 [1]. While the discussion is case specific, the principles discussed are applicable to all circulars issued by the Govt. in this regard.

The Ministry of Shipping Circulars

The Controversy:

The Ministry of Shipping issued a series of circulars beginning 31 March 2020 (“31 March Circular”) declaring Covid as a force majeure event and directed the major ports to give various concessions to its customers ranging from relaxations in demurrage, penalties to port users for berthing, loading/unloading operations as well as evacuation of cargo. This relaxation has been given citing section 53 and 111 of the Major Port Trusts Act, 1963. This circular only gives concessions to the port users and the contractual counterparties to the major ports. Therefore, at first look, this circular appears to be a directive given to the ports by the Govt. Later this circular was succeeded by a circular dated 21 April 2020 (“21 April Circular”) containing similar terms extending the period of the previous circular.

The controversy really starts with the Director General of Shipping (“DG Shipping”) order dated 31 March 2020 (“31 March Order”). This order refers to the 31 March Circular above and states that the benefit of such relaxations should reach the end customer. In light of this, it stated that carriers (Shipowners or charterers are referred to as carriers in maritime law) are advised to not charge port storage charges, penalties or demurrage (penalties for delay) from the shippers (Shippers are the consignors or consignees who transport the cargo in ships). This order stated that these relaxations are to be given in spite of any contrary contractual terms between these parties. The legality of this order is in question since it seeks to modify private contractual arrangements between two commercial parties. One could argue that this order is only a guideline and not mandatory due to the use of the word “advised.” However, if one looks at the DG Shipping order dated 22 April 2020 (“22 April Order”), which extends the time period of the 31 March Order, the same instruction is couched in mandatory terms. In the 22 April Order, para 7 reads- “ …. Shipping companies or carriers shall not charge, levy or recover any penal charges, demurrage …..” Therefore, these orders by DG Shipping raise a serious question as to whether the executive or government can modify private contractual arrangements.

The Legal Principles Governing these Circulars:

A twofold question arises regarding these circulars issued by the Ministry of Shipping and DG Shipping:

a. Firstly, its applicability to contracts between two private parties; and

b. Secondly, its applicability to the contracts entered by the parties with the major ports.

a. How do the circulars affect contracts between private parties?

The answer to this question is straightforward. The circulars have been issued under sections 53 and 111 of the MPT Act. Section 53 of the MPT Act allows the ports to exempt the users from payment of certain charges at their discretion. Section 111 of the MPT Act gives power to the Central Government to issue binding directions only to the Major Ports. A circular issued by the Govt. under the MPT Act cannot be ultra vires the act. The MPT Act only governs the major ports and scale of rates charged by them. Therefore, no question arises regarding the demurrage and contractual penalties and damages charged by parties other than major ports.

In relation to the DG Shipping circulars, the DG Shipping is an authority constituted under the Merchant Shipping Act, 1958 (MS Act). A perusal of the MS Act clearly shows that it in no way regulates the charges or penalties agreed between two commercial parties contractually. Therefore, the DG Shipping circulars also seem to be devoid of any statutory backing to modify contractual terms. A delegatee acting beyond its power of delegation and any action de hors the provisions of the act and the regulations is subject to judicial review [2]. Therefore, the Ministry of Shipping and DG Shipping orders may not withstand judicial review on this point.

More importantly, the govt. ministries and executive cannot curb the party autonomy and freedom to contract of private parties. It cannot issue executive directions or circulars to amend a contract entered by two commercial parties voluntarily.

A very similar question came up before the Delhi High Court in the case of M/S Polytech Trade Foundation vs. Union of India and Ors [3]. This case discussed the scope of the Ministry of Shipping circular dated 21 April 2020. The Plaintiff was charged penalty for delay in lifting the cargo from the Central Freight Station (CFS) within the Mundra and Jamnagar port limits. The Plaintiff relied on the relaxations from demurrage provided in the 21 April circular and argued that the CFS was bound by the circular. The Delhi High Court agreed with the CFS and held that the directions given under section 111 of the MPT Act only apply to major ports and CFS within major ports. Since the CFS in the present case was situate at Jamnagar and Mundra ports, it was not bound by the 21 April circular. The court further held that the Ministry of Shipping cannot modify private contractual arrangements entered between two commercial parties. Thus, this Delhi HC judgement rightly upheld the principle of party autonomy. More importantly, it was argued that the Ministry of Shipping cannot modify private contractual arrangements. Interestingly, the counsel appearing for the Ministry of Shipping in this case conceded to this point as well.

Thus, it can be said with great confidence that these Ministry of Shipping circulars cannot modify contractual terms. It seems clear that the DG Shipping circulars dated 31 March and 22 April 2020 directing and mandating carriers or shipping companies from charging demurrages, penal berth hire charges and other penalties is ultra vires their authority and has no legal basis.

b. How do the circulars affect contracts to which the major ports are a party ?

The answer to the second question is slightly more complicated. The major ports can enter into contracts as per section 33 and 34 of the MPT Act. Therefore, a question arises whether the contracts entered into with major ports are statutory contracts and the same are subordinate to the directions and circulars issued under the statute. However, it must be noted that just because an entity derives authority to enter into contracts through a statute, does not mean that the directions given under the statute will override the contractually agreed terms and conditions.

A similar issue arose in the case of India Thermal Power Ltd. vs. State of MP and Ors [4]. This case concerned the clashing of a power purchase agreement and the Electricity Supply Act, 1984. Under the Electricity Supply Act, the government had the power to fix the power tariffs by way of notifications under section 43 A (2). Therefore, the court considered the contract to be statutory to the extent of fixing tariffs and held that the Govt. had the power to notify the same by way of notifications and the terms of the power purchase agreement in derogation of such power will not be enforceable. However, the court noted that statutory contracts also have other terms which are agreed mutually by the parties and are not governed by the statute. To that extent, the court held that the parties will be bound by such mutually agreed contractual terms and the govt. could not modify them.

Statutory contracts can be varied and modified. However, such modification must be in accordance with the terms of the contract or the law [5]. Therefore, there can be no unilateral modification of the contracts by the Ministry of Shipping or DG Shipping unless expressly provided for in the MPT Act or the MS Act or the contractual terms.

Similarly in the present case, the Govt. has the power to decide the scale of rates, demurrage, penal and other charges levied by the major ports. Therefore, a party may be bound by these Ministry of Shipping and DG Shipping circulars to such subjects, which are mandatorily fixed by the executive under the MPT and MS Acts. However, the major ports cannot take benefit of these circulars to conclusively declare Covid 19 as a force majeure event and absolve itself from its contractual obligations. The question of force majeure will still have to be decided by the courts, while the Ministry of Shipping and DG Shipping do not have any binding authority on the subject.

Therefore, while the DG Shipping and Ministry of Shipping circulars can determine issues of tariffs and charges, they cannot modify the mutually agreed contractual terms by the Major Ports with other parties.

Finance Ministry Circular dated 19 February 2020

The Ministry of Finance issued a circular dated 19 February 2020 [6]. This circular refers to para 9.7.7 of the Manual for the Procurement of Goods, 2017 (“Goods Procurement Manual”). Para 9.7.7 is a force majeure clause in the Goods Procurement Manual. The 19 February Circular goes on to add that Covid-19 shall be construed as a force majeure event under the force majeure clause and the parties can invoke force majeure under their contracts whenever considered appropriate.

Before going into the merits of this circular, it is important to understand the nature of the Goods Procurement Manual. The preamble of the Goods Procurement Manual clearly mentions that it is a set of guidelines for the ministries/departments to follow while entering into contracts with private parties. Therefore, it seems clear that the Goods Procurement Manual has no legal binding value by itself. The preamble further mentions that the Goods Procurement Manual has been framed in accordance with the General Finance Rules , 2017 (“General Finance Rules”). General Finance Rules are executive instructions issued to all the departments and organisations under the government. It is trite law that executive instructions do not have any legally binding value. These are organizational and internal instructions issued by the government to its own departments. As the Supreme Court precisely states it- “Executive instructions bind only government departments and not private individuals since freedom of individual can be curtailed only by statute .i.e., a “law”."[7]

Having noted the origin of the Goods Procurement Manual, it seems clear that the 19 February Circular has no binding value on parties. The 19 February Circular purports to clarify a clause in a document, which is used as a template and guideline by the governmental ministries/departments to enter into contracts. There is no legal link between these contracts and the guidelines. Once the parties have entered into the contract, they are bound by the contractual terms and are not in any way affected by such guidelines.

Such contracts entered by the Ministries and departments are mostly executive contracts entered on behalf of the governor or president of India under article 299 of the Indian Constitution [8]. If an argument were to be raised that the 19 February Circular actually sought to modify these contracts and not merely the guidelines, it is clear that under the guise of a clarification, it intends to rewrite the contractual terms. This is true since it is inserting Covid-19 as a specific force majeure event under the force majeure clause in an executed contract. It has been time and again held by the courts that there can be no unilateral alteration by government through notifications and otherwise in executive contracts [9]. Once the executive contract is entered into, the parties are bound by the terms of such contract and are bound by the realm of private contract law. Therefore, if the 19 February Circular purported to automatically make Covid-19 a valid ground for invocation of force majeure under the public procurement contracts, such an attempt will be void.

Civil Court is the appropriate forum for contractual disputes

The major issue with both- the Ministry of Shipping and Ministry of Finance circular is that, they have attempted to conclusively declare Covid-19 as a force majeure event and mandated parties to give concessions. While these may bind the major ports and the governmental departments/ministries, they will not bind the parties not under their authority.

Whether COVID-19 amounts to force majeure in each clause has to be ascertained by going through the contract and the intentions of the party. The disputes about the meaning of a covenant in a contract or its enforceability have to be determined according to the usual principles of the Contract Act[10]. The civil court is the appropriate forum to decide contractual disputes[11]. Exception to this general rule is when a contract expressly provides that a specific authority has the power to interpret rules and the court will be bound by it[12].

These circulars are not in the nature of clarification but rather an interpretation of contractual terms. Clarifications are to rules and not concluded contracts. Also, clarifications cannot add terms which were not intended to be there in the rules themselves[13].

Conclusion

The power of government to issue directions cannot encroach upon party autonomy and freedom to contract. Post contract, parties will be governed by the contract which can only be interpreted by a judicial authority.

Directions are considered binding on administration to the extent it confers benefit on an individual [14]. Hence it needs to be seen whether these circulars can be interpreted by courts to be valid to the extent that they direct government authorities to accept private parties invocation of force majeure and give them benefits, while, the government authorities themselves cannot invoke force majeure to the prejudice of private individuals. The issue relating to the Ministry of Shipping circulars will soon be considered by the Supreme Court in Material Recycling Association vs. Union of India [15].It is hoped that the tenets of party autonomy and the strong pillars of private contractual law jurisprudence will be upheld.

Footnotes :

[1] No. F. 18/4/2020-PPD

[2] Development Authority and another v. Joint action Committee- 2008(2) SCC 672

[3] C.M. No. 10546/2020 in W.P.(C) 3029/2020

[4] India Thermal Power Ltd. Vs. State of M.P. and Ors. AIR 2000 SC 1005

[5] Development Authority and another v. Joint action Committee- 2008(2) SCC 672

[6] https://doe.gov.in/sites/default/files/Force%20Majeure%20Clause%20-FMC.pdf

[7] Iranikkulam Co-operative Society and Ors. Vs. Kuttikkad Service Co-operative Bank Ltd. and Ors. AIR 1975 Ker 4

[8] Manual for Procurement of Goods,2017- Chapter 1, Page 1.

[9] Seven Hill Bytes Pvt. Ltd and Ors. Vs. The State of West Bengal and Ors. 2013(1)C LJ(C AL)54 ; Syed Israr Masood Vs. State of Madhya Pradesh AIR 1981 SC 2010 [10] Kerala State Electricity Board and Anr. v. Kurien E. Kalathil and Ors. AIR 2000 SC 2573

[11] Kisan Sahkari Chini Mills Ltd. and Ors. Vs. Vardan Linkers and Ors. AIR 2008 SC 2160 ; Mahammad Hanif Vs. The State of Assam and Ors. ( 1969 ) 2 SCC 782

[12] Basanta Kumar Pal Vs. Chief Electrical Engineer and Ors. AIR 1958 Cal 657

[13] Oswal Woollen Mills Ltd and Ors. Vs. Union of India (UOI) and Ors. ; AIR 1983 SC 969

[14] Khet Singh v. Union of India AIR 2002 SC 1450

[15] Material Recycling Association of India vs. Union of India Civil Writ Petition No. 487 of 2020.