Force Majeure and the Coronavirus – The performance of contracts during a debilitating pandemic

The coronavirus has taken the demand and supply balance of the world by a storm and continues to cripple businesses and economies that are struggling to continue in the midst of shutdowns, disruptions, supply deficits and labour shortages. In light of this, this post discusses the effect of coronavirus on contracts and contractual arrangements between parties on a national and global level. This post discusses whether affected parties can successfully invoke a force majeure event i.e. an unforeseen event that prevents a party from fulfilling a contract that would, thereby, enable them to be released from their contractual obligations or allow them more time.

Background

The first case of the COVID-19 coronavirus was reported in Pakistan two weeks ago and has since gripped the nation in a mesh of panic, fear-mongering, propaganda and confusion. The rest of the world first heard of this virus in December last year and since then it has developed into a global threat and has been declared by the World Health Organization as a public health emergency of international concern.

As a response to the news of the outbreak in Pakistan, schools and colleges in Sindh were shut down at a first instance and recently, the offices of Engro Corp, a multinational conglomerate company, situated in an expensive area in Karachi was closed for three days.

It is foreseen that the outbreak will have substantial effect, over the coming days, upon businesses, workplaces, supply and distribution channels, labour and demand. In this light, it is important to discuss the impact that the outbreak will have on contracts and the application of the force majeure clause in such contracts.

1. Force majeure as per the laws in Pakistan

(1) Although the doctrine/term of force majeure does not have a statutory definition in Pakistan; the Islamabad High Court discussed the definitions of the same in Atlas Cables (Pvt.) Limited vs. Islamabad Electric Supply Company Limited, 2016 CLD 1833 (Islamabad). In the judgment they relied on the Advanced Law Lexicon by P. Ramantha Aiyar, 3^rd ed., that explained force majeure as “events outside the control of the parties and which prevent one or both of the parties from performing their contractual obligations; A contract provision that stipulates that unforeseen events… will excuse a party from its duty to perform the contract; A contractual provision allocating the risk if performance becomes impossible or impracticable as a result of an event or effect that the parties could not have anticipated or controlled”.

The judgment further discussed the Halsbury’s Laws of England and several cases from the superior courts in India particularly Dhanrajamal Gobindram vs. Shamji Kalidas, AIR 1961 Supreme Court 1285, where it was stated that “where reference is made to “force majeure”, the intention is to save the performing party from the consequences of anything over which he has no control”. The judgment of the Islamabad High Court concluded that “force majeure refers to legal or physical prevention and not economic profitableness”.

(2) Force majeure provisions are usually standard provisions in most contracts. In such standard provisions, a list of certain force majeure events may be provided but the lists are deemed to be inclusive and recognise that there may be such events that are not specifically part of the contract but are, nevertheless, unforeseeable and unavoidable. For example, “pandemics” are usually not specifically provided for but may be covered or addressed within other force majeure events such as government order, national emergency of Acts of God.

(3) In light of the above, what constitutes a force majeure event depends on the wording of the provision. For example, if the provision provides that the force majeure event has affected the ability of a party to perform, then such party is required to demonstrate that its performance became impossible due to the force majeure event and not just that it was difficult or costly to do so. Such provisions also, usually, require that the affected party show that it took all reasonable attempts to mitigate the event and its consequences.

2. Force majeure as per the laws of other jurisdictions

(1) English courts have consistently focused on the actual language of the provisions in contracts and have adjudicated on a case to case basis. In this regard, English courts have also found that the words in a contract, such as “prevent” or “delay” have a wider scope and force majeure may be satisfied if performance has become substantially more onerous. In this regard, the onus to prove the difficulty faced by the affected party is purely such party itself. This includes establishing that the party would have been “ready, willing and able” to perform the contract if it was not for the force majeure event. Additionally, the drafting of such provisions also includes that the affected party has taken all reasonable attempts to mitigate the event and its effects.

(2) In India, force majeure is recognised under Section 56 of the Indian Contract Act, 1872 which provides for an “”agreement to do impossible act” and gives the affected party more time to perform its obligations when events are beyond its control. In this regard, certain requisites have to be fulfilled to ensure that the event is in fact a force majeure event; these include, inter alia, that the act is beyond the control of the party, it is unforeseen and inevitable, it has rendered the contract wholly impossible, and that the suffering party exercised caution.

The superior courts in India have illustrated force majeure in different manners and on a case to case basis; some examples are as follows:

(a) In Energy Watchdog vs. Central Electricity Regulatory, Civil Appeal Nos.5399-5400 of 2016, the Supreme Court held that:

“In so far as a force majeure event occurs de hors the contract, it is dealt with by a rule of positive law under Section 56…The performance of an act may not be literally impossible but it may be impracticable and useless from the point of view.”

(b) In Alopi Parshad & Sons Ltd. vs. Union of India, 1960 (2) SCR 793, the Supreme Court observed that:

“the [Contract] Act does not enable a party to a contract to ignore the express covenants thereof and to claim payment of consideration, for performance of the contract at rates different from the stipulated rates, on a vague plea of equity. Parties to an executable contract are often faced, in the course of carrying it out, with a turn of events which they did not at all anticipate, for example, a wholly abnormal rise or fall in prices which is an unexpected obstacle to execution. This does not in itself get rid of the bargain they have made.”

(3) With respect to the coronavirus being deemed to be a force majeure event in India, the Ministry of Finance vide an office memorandum on 19 February 2020 directed that all ministries treat disruptions of the supply chain due to the outbreak as a case of natural calamity and a force majeure clause may be invoked in appropriate cases.

4. Conclusion

On 3 March 2020, the China Council for the Promotion of International Trade issued more than 4,000 force majeure certificates to companies that applied for them enabling businesses in China to invoke force majeure provisions in their contracts. This, however, may have limited applicability in such contracts that are governed by other laws, for example English laws, that require specific contractual provisions and for the affected party to prove that their ability to perform the contract was made impossible by the outbreak. In recent news, Total S.A, a French multinational integrated oil and gas company, has already rejected a force majeure notice from a liquefied natural gas buyer in China (see, https://www.cnbc.com/2020/03/06/coronavirus-impact-china-invokes-force-majeure-to-protect-businesses.html).

Therefore, nations may proceed to declare the outbreak a force majeure event but the enforceability of the particular provisions continue to be governed by the governing law in the contract which may require certain requisites to be met before an affected party is provided any relief.

Photograph credit: thesun.co.uk

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Myra Khan is a Bar-at-Law from the Honourable Society of Lincoln’s Inn and Ex-Vice Chairperson Women Rights Committee of the Lahore High Court Bar Association. She is currently practicing law in Karachi, Pakistan.

Any queries may be directed to lawyereadia@gmail.com

 

The Contra Proferentem Rule

22 July 2014

The contra proferentem rule states, broadly, that where there is doubt about the meaning of the contract, the words will be construed against the person who put them forward. The courts only apply the principle in cases where the clause under question is ambiguous. The principle operates against the drafters of the contract for two (2) reasons:

First, they rely upon the [impugned] clause to exclude or to limit the liability alleged against them; and

Secondly, they are responsible for introducing during the negotiating process the particular parts of the clause on which they now rely on.

The principle is applied to encourage the drafter of a contract to be as clear, precise and explicit as possible and to take into account as many foreseeable situations as possible. The rule reflects an inherent rejection of standard-form contract and allows room for negotiation and a balanced document. The contra proferentem rule further places the cost of losses on the party that was in the best position to avoid the harm (by drafting the contract intelligently).

The courts, therefore, emphasize on scrutinizing the plain and clear meaning of the words with particular care before applying the principle, if required (see, BHP Petroleum Limited vs. British Steel Plc, [2000] 2 All ER (Comm) 133).

The superior courts in Pakistan have discussed this rule as follows:

(1) Munib Akhtar, J, in Muhammad Shahnawaz vs. Karachi Electric Supply, 2011 PLC (C.S.) 1579 (Sindh High Court) explained the principle of contra proferentem.

Under this principle, the court held that “any ambiguity or doubt in the scope of the power should be construed against the employer and in favour of the employee” where the employer was the drafter of the contract. 

(2) In Muhammad Amin Brothers (Pvt.) Limited vs. Pakistan Agricultural Storage and Services Corporation Limited, 2007 CLD 1445 (Lahore), and Bari Rice Mills Limited vs. Passco, 2007 CLD 857 (Lahore), the Lahore High Court highlighted the scope of the principle:

… Principle of contra proferentem can be resorted to if there is an ambiguity which makes the contract difficult to ascertain the intention of the contracting parties ….

(3) In Muhammad Shahnawaz vs. Karachi Electric Supply Company, supra, Clause 1.2 of the contract conferred a power on Karachi Electric Supply Company to alter the termination clause of the contract. The Court held that the rule of contra proferentem would apply in order to remove the ambiguity in the Clause.

(4) In Bari Rice Mills Limited vs. Passco, supra, applying the same rule, the courts held that the words under question were considered to be sufficiently clear in order to not apply the principle of contra proferentem.

 … There is no warrant whatsoever for construing the term “as is where is” as overriding the clear and unambiguous obligation of the respondent to supply Basmati Special Rice. In this view of the matter, I do not need to consider the argument advanced on behalf of the appellant that the principle of contra proferentem be applied for interpreting the contract (Exh.P.2) which was drafted by the respondent. This principle can be resorted to if there is an ambiguity which makes it difficult to ascertain the intention of the contracting parties…. (emphasis added)

The principle of contra proferentem has been discussed by the similar jurisdictions of India and the United Kingdom and in the writings of legal publicists and scholars. It has also been codified in international instruments such as the UNIDROIT Principles and the Principles of European Contract Law.

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Myra Khan is a Barrister-at-Law from the Honourable Society of Lincoln’s Inn and Vice Chairperson Women Rights Committee of the Lahore High Court Bar Association. She is currently practicing law in Lahore, Pakistan.

Any queries may be directed to lawyereadia@gmail.com

Are emails considered “original documents”? Can they be used as official documents or as evidence in court?

24 March 2014

Are emails/faxes considered “original documents” for the purposes of record keeping or as evidence in court or is it essential to provide a traditional certified/attested hard copy of the same?

TL;DR: Yes. Emails etc. are considered original documents provided that they meet a certain legibility and authenticity criteria.

Detailed Response:

The relevant authority vis-à-vis this query is the Electronic Transactions Ordinance, 2002 (the “ETO”):

1. Section 4 of the ETO  provides as follows:

4.         Requirement for writing.—The requirement under any law for any document, record, information, communication or transaction to be in written form shall be deemed satisfied where the document, record, information, communication or transaction is in electronic form, if the same is accessible so as to be usable for subsequent reference. (emphasis added)

2. The requirement under the law if that any document (including record, information, communication or transaction) should be in “written form”.  The requirement under Section 4 of the ETO for, inter alia, a document or communication to be in “written form” shall be deemed to be satisfied, provided that the same is accessible for any future reference.

3. Section 5, of the ETO, provides the requirement for original form:

5.         Requirement for original form.—(1) The requirement under any law for any document, record, information, communication or transaction to be presented or retained in its original form shall be deemed satisfied by presenting or retaining the same if:

(a)        there exists a reliable assurance as to the integrity thereof from the time when it was first generated in its final form; and

(b)        it is required that the presentation thereof is capable of being displayed in a legible form.

(2)        For the purposes of clause (a) of sub-section (1);

(a)        the criterion for assessing the integrity of the document, record, information, communication or transaction is whether the same has remained complete and unaltered, apart from the addition of any endorsement or any change which arises in the normal course of communication, storage or display; and

(b)        the standard for reliability of the assurance shall be assessed having regard to the purpose for which the document, record, information, communication or transaction was generated and all other relevant circumstances. (emphasis added)

The requirement of the law is that a document should be in its “original form”. Under Section 5 this requirement is deemed to be satisfied if the integrity of such document or communication is assured and if the same is capable of being presented in legible form. The criteria for integrity and legibility is provided in Section 5(2).

4. In view of the provisions of Section 5 of the ETO, a fax/ email shall be considered to be an original document provided that there is reliable assurance from the recipient that the content of such fax/ email has remain unaltered from the time it was generated by the sender. Furthermore, the recipient shall be required to produce the fax/ email in legible form to be able to have the same treated as an original document.

5. The ETO further provides for the criteria required for retention of any electronic document. Section 6 provides as follows:

6.         Requirement for retention.—The requirement under any law that certain document, record, information, communication or transaction be retained shall be deemed satisfied by retaining it in electronic form if:

(a)        the contents of the document, record, information, communication or transaction remain accessible so as to be usable for subsequent reference;

(b)        the contents and form of the document, record, information, communication or transaction are as originally generated, sent or received, or can be demonstrated to represent accurately the contents and form in which it was originally generated, sent or received; and

(c)        such document, record, information, communication or transaction, if any, as enables the identification of the origin and destination of  document, record, information, communication or transaction and the date and time when it was generated, sent or received, is retained. (emphasis added)

6. In light of Section 6 of the ETO, if a fax/ email is retained by the recipient in a form that such fax/ email: (1) remains accessible so as to be available for subsequent reference; and (2) represents accurately the content and form in which the same was originally generated; (3) while clearly providing the particulars in respect of its origin, destination, date and time, then the criteria laid down in Section 6 of the ETO shall be sufficiently satisfied.

7. The ETO by virtue of Section 29, read with the Schedule attached thereto, has amended the Qanun-e-Shahadat Order, 1984 (law of evidence) (the “Order”), the relevant amended Articles of which are provided/ discussed hereunder:

(a)                Certain expressions provided in the Order are to bear the meanings as provided in the ETO, including the expressions “automated”, “electronic”, “electronic document”, “information”, “information system” and “security procedure”. 

“security procedure” means a procedure which :

(i)                 is agreed between parties;

(ii)               is implemented in the normal course by a business and which is reasonably secure and reliable ; or

(iii)             in relation to a certificate issued by a certification service provider, is specified in its certification practice statement; for establishing the authenticity or integrity, or both, of any electronic document, which may require the use of algorithms or codes, identifying words and numbers, encryption, answer back or acknowledgment procedures, software, hardware or similar security devices.

(b)               Article 73 of the Order has been amended by inclusion of the following new explanations:

Explanation 3. A printout or other form of output of an automated information system shall not be denied the status of primary evidence solely for the reason that it was generated, sent, received or stored in electronic form if the automated information system was in working order at all material times and, for the purposes hereof, in the absence of evidence to the contrary, it shall be presumed that the automated information system was in working order at all material times.

Explanation 4. A printout or other form of reproduction of an electronic document, other than a document mentioned in Explanation 3 above, first generated, sent, received or stored in electronic form, shall be treated as primary evidence where a security procedure was applied thereto at the time it was generated, sent, received or stored.

(c)                A new Article 78-A has been inserted, in the Order, by virtue of the ETO as follows:

78-A. Proof of electronic signature and electronic document.—If an electronic document is alleged to be signed or to have been generated wholly or in part by any person through the use of an information system, and where such allegation is denied, the application of a security procedure to the signature or the electronic document must be proved.

8. As per the aforementioned relevant amendments to the Order, if a fax/ email is reproduced and presented in court, the same would be deemed to be evidence in primary form if the automated information system used by the recipient for obtaining the output of the fax/ email is in working order or if the same has been subject to a security procedure i.e. (i) has been obtained through a mechanism which has already been agreed between the recipient and its sender; or (ii) has been subject to implementation of a secure and reliable procedure carried out in the normal course of business; or (iii) which in relation to a certificate issued by a certification service provider, is specified in its certification practice statement, for establishing the authenticity or integrity, or both, of any electronic document, which may require the use of algorithms or codes, identifying words and numbers, encryption, answer back or acknowledgement procedures, software, hardware or similar security devices.

9. Furthermore, in the event a sender challenges the authenticity of the fax/ email received by the recipient, then as provided under the new Article 78-A of the Order, the application of any of the security procedures (as provided above) to the relevant fax/ email shall have to be proved by the recipient.

*italics have been used to differentiate the quotations from the rest of the text and to avoid confusion in the numbering. Italic and Underlined form is only to avoid confusion and provide emphasis, respectively.

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Myra Khan Qureshi is a Barrister-at-Law from the Honourable Society of Lincoln’s Inn and Vice Chairperson Women Rights Committee of the Lahore High Court Bar Association. She is currently practicing law in Lahore, Pakistan.

Any queries may be directed to lawyereadia@gmail.com

Can I be stopped from undertaking competitive work after resignation from a company?

Restriction in a Contract: Professional / Employment / Trade Freedom

13 March 2014

Companies and firms in Pakistan usually contain a non-compete clause in their agreements. The wording of such clause can range from restricting another company from partaking in competitive work while engaged with the restricting party to restricting an employee from working with a competing firm after resignation.

Is such a clause valid and enforceable in Pakistan?

Yes, provided that it is reasonable.

Although Section 27 of the Contract Act, 1872 provides that any agreement that restrains a person from exercising a lawful profession, trade or business is void to that extent; the courts in Pakistan have held that a restraint of trade clause or a non-compete clause in an agreement is valid and is not hit by Section 27 provided that it is “reasonable”.

The test then falls simply on the question of whether such clause is “reasonable” which is evaluated on a balance of probabilities and evidence.

The High Court of Sindh in Exide Pakistan Limited vs. Abdul Wadood, 2008 CLD 1258 (Karachi) provided that:

reasonableness of the clause will vary from case to case and will inter alia, depend upon the following:–

the extent of duration;

the extent of the geographical territory.

The case law in Pakistan, briefly, illustrates the following principles:

(1) The restraint of trade clause should only be aimed at protecting interest of the employer and not aimed at penalizing the employee or causing him inconvenience.

(2) The clause should not be vague and generalized but should be rather specific.

(3) The clause shall only be the applicable to the particular type of business in which the employer is actually engaged in and not to any business activity in which the employer would possibly engage in the future.

(4) The restriction cannot be termed to be unreasonable as to time and scope i.e. “for eleven (11) months in XYZ Company”. By such covenant the defendant is not restrained from getting employment in an organization other than XYZ Company which is neither fair nor reasonable (see, Al-Abid Silk Mills Limited vs. Syed Mudassar Rizvi, 2003 MLD 1947 (Karachi)).

(5) A restriction may be placed as a form of good-will on the part of an ex-employee and to protect the ex-employer from having to compromise the fruits of his business because an ex-employee has opened up a competitive business in the same neighbourhood (see, generally, Shabih Haider Zaidi vs. Muhammad Zahoor Uddin, 2001 CLC 69 (Karachi)).

(6) In global contracts, incorporation of a restraint clause cannot be said to be hit by doctrine of restraint of trade, provided it is reasonable, on equal bargaining strength, is not unilateral and operates during the currency of the agreement (see, generally, Pak China Chemicals vs. Department of Plant Protection, 2006 CLD 210 (Lahore)).

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Myra Khan Qureshi is a Barrister-at-Law from the Honourable Society of Lincoln’s Inn and Vice Chairperson Women Rights Committee of the Lahore High Court Bar Association. She is currently practicing law in Lahore, Pakistan.

Any queries may be directed to lawyereadia@gmail.com

Back-dated Agreement – Legal or illegal?

As a lawyer there appears little wisdom is permitting, encouraging or advising back-dated agreements/contracts.

Back-dated contracts are contracts that for some reason have been signed after the parties commenced work on the subject matter.

Under the laws of Pakistan, back-dated contracts compromise the authenticity of the document which may cause difficulty in the enforcement of rights and liabilities under the contract.

The document may amount to forgery under the Pakistan Penal Code, 1860.

The non-availability of back-dated stamp paper (on which is it mandatory that a contract be printed) would cause another hurdle in the way and again compromise or cast doubt on the authenticity of the contract.

Finally, the date of the contract can not change the factual circumstances under which it came into being and any effort to promote the same may well be discarded by the competent courts.

Conclusively, back-dated contracts/agreements may compromise the authenticity of the document and be deemed illegal under the laws of Pakistan.

An option in respect of amending a contract/agreement is providing an Addendum, duly executed, to the same.

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Myra Khan Qureshi is a Barrister-at-Law from the Honourable Society of Lincoln’s Inn and Vice Chairperson Women Rights Committee of the Lahore High Court Bar Association. She is currently practicing law in Lahore, Pakistan.

Any queries may be directed to lawyereadia@gmail.com

How to use www.pakistanlawsite.com

3 January 2014

New entrants in the field of law often find themselves struggling with basic research tools. For the internet raised generation, http://www.pakistanlawsite.com (the “Law Site”) provides an easy, efficient and comprehensive first step to researching law, precedents, judgments, commentaries, articles etc.

Usually law firms and lawyers maintain an account with the Law Site (much like an email account) by making periodic payments for the permission to use the same.

To subscribe for a new account, you have to register on the website.
The details, payment terms and terms and conditions are provided on: http://www.pakistanlawsite.com/RegistrationHelp.asp

If there is already an account maintained then the user may insert the “username” and “password” and tick the box next to “I accept the terms and conditions” on the homepage to login to the website.

Once logged in, the left side of the Law Site offers “Case law Search”, “Advance Search”, “Statute Search”, “Courtwise Search”, “Citation Search” and “Article Search”.

1. Case Law Search
To search the relevant case law on a matter, click the tab “Case law Search” and insert the matter that you require case law on. For example, insert “ultra vires” in the search box and click enter.

The search engine will provide all those cases/judgments that have mentioned “ultra vires” in the document. To get an idea of the judgment read the “Case Notes”, however, it is standard and good practice to read the complete judgment before providing reference to the same.

If you know the particular Section of an Act/Ordinance or Rules or Regulations (the “Statute”), you may access the Statute and click on “Cases” under the relevant Section.

Access to Statutes is provided below.

2. To search for a Statute, click the tab “Statute Search”. The Statutes (Acts, Ordinances, Rules and Regulations) are provided alphabetically. However, if you are unsure about the name, you may search the statute by inserting the year in the search bar.

An easier way is however to type out the statute name (or as much as you know of it i.e. Contract Act Pakistan) in http://www.google.com and find out the correct/complete name of the same including the year. It is then easier to find it alphabetically on the Law Site.

Google also generally has the popular statutes however, the completeness and the authenticity of the same can not be verified. It is often safer to rely on the Law Site.

3. If you are aware of the citation of the case (i.e. PLD 2003 Karachi 1) then you may access the case notes of the judgment in “Citation Search”.

For beginners, the above three (3) provide the easiest and most effective research ability online.

Be sure to always confirm whether a judgment or statute is still valid and always provide the citation of the same.

Good luck!

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Myra Khan Qureshi is a Barrister-at-Law from the Honourable Society of Lincoln’s Inn and Vice Chairperson Women Rights Committee of the Lahore High Court Bar Association. She is currently practicing law in Lahore, Pakistan.

Any queries may be directed to lawyereadia@gmail.com