Standard Retail Pvt. Ltd. v G. S. Global Corp (2020)

This is the first Indian decision of the COVID-19 lockdown to refuse a buyer the shelter of force majeure, and it is short enough to be learnt whole. It is the case that teaches three things an examiner will look for: that a force majeure clause protects only the party it is drafted for; that a pandemic which makes a bargain unprofitable is not a pandemic which makes it impossible; and that a letter of credit is not a hostage to the dispute underlying it.

It is best read beside Energy Watchdog v Central Electricity Regulatory Commission and Satyabrata Ghose v Mugneeram Bangur & Co., both of which the buyers cited here and both of which the Court held to be distinguishable on facts.

Five petitions were filed under s. 9 of the Arbitration and Conciliation Act, seeking directions restraining the Respondent-Bank from negotiating or encashing the Letters of Credit. The petitioners were Indian buyers of steel; the first respondent, with its head office in South Korea, was to supply certain steel products, the shipments being despatched from South Korea to the petitioners at Mumbai.

The buyers' case was that because of the COVID-19 pandemic and the lockdown declared by the Central and State Governments their contracts with the first respondent stood terminated as unenforceable "on account of frustration, impossibility and impracticability". They relied on s. 56 of the Indian Contract Act.

The contracts were subject to General Terms and Conditions. Article 11, the force majeure clause, provided that on an Act of God — the clause naming "floods, earthquake, typhoons, epidemics and other natural calamities" — or on war or armed conflict, a "government order or regulation, labor dispute or any other similar cause beyond the control of" the Seller or its suppliers or sub-contractors, which "seriously affects the ability of" the Seller or its suppliers or sub-contractors "to manufacture and deliver the" Goods, the Seller might, at its sole discretion and on written notice to the Buyer, either terminate the contract or the affected portion of it, "or delay performance of the Contract, in whole or in part, for a reasonable period of time." Article 12 carried the governing law and a foreign-seated arbitration clause.

The Court set out its reasons compactly, and every one of them is examinable.

The letter of credit stands apart. "The Letters of Credit are an independent transaction with the Bank and the Bank is not concerned with underlying disputes between the Petitioners who are buyers and the Respondent No. 1 who is the seller."

The clause was the seller's, not the buyer's. "The Force Majeure clause in the present contracts is applicable only to the Respondent No. 1 and cannot come to the aid of the Petitioners." This follows straight from the drafting: Article 11 speaks throughout of the Seller's ability to manufacture and deliver, and gives the election to the Seller alone.

The seller had already performed. The contract terms being on Cost and Freight basis, the seller "has complied with its obligations and performed its part of the contracts and the goods have been already shipped from South Korea." That the buyers could not in turn perform towards their own purchasers, or would suffer damage, "is not a factor which can be considered and held against the Respondent No. 1."

Performance was not in fact obstructed. The notifications and advisories placed before the Court suggested that the distribution of steel had been declared an essential service, that there were "no restrictions on its movement" and that ports and port-related activities, the movement of vehicles and manpower, Container Freight Station operations, warehouses and the offices of Custom House Agents had also been declared essential services. The Director General of Shipping, Mumbai, had notified that there would be no container detention charges on import and export shipments during the lockdown period.

The interruption was temporary. "In any event, the lockdown would be for a limited period and the lockdown cannot come to the rescue of the Petitioners so as to resile from its contractual obligations with the Respondent No. 1 of making payments."

Ad-interim reliefs were rejected, and the petitions were directed to be listed in the ordinary course. The buyers were not entitled to restrain encashment of the Letters of Credit; the force majeure clause availed the seller only; and the authorities relied on, Energy Watchdog and Satyabrata Ghose, did "not assist the case of the Petitioners and are distinguishable on facts".