Background:

The force majeure is the term which initially derives from French civil law and is frequently used in various commercial contracts governed by such common law systems across the world because of the limited remedies otherwise available to the parties when the contract becomes impossible, difficult or onerous to perform due to events outside the affected party’s control.

The rationale behind inserting such clause is to condone parties from performing the contract due to materially changed in normal circumstances owing to reasons in which both the parties had absolutely no control over it.

In India, the concept of “force majeure” is governed by section 32 and 56 of the Indian Contract Act 1872, When an unprecendent event may about to occur in near future, which is neither in the control or beyond the control of any contractual parties than in this extraordinary circumstances, a common clause entered in the contracts that fundamentally frees parties to the perform the said obligation.

Force majeure

For example: Situations like war, strike, riot or any epidemic or any event described as Act of God like flood, earthquake, hurricane etc. which are not in control of both the parties then “force majeure” clause comes into light that prevents one or both the parties from fulfilling their respective obligation under the contract. In such circumstances that such an event is an exception to a breach of contract.

In practical world, Force majeure clauses are common and uniform in corporate contracts, as this clause do not excuse a party from its non-performance entirely, but only suspend it for the duration till situations become normal.

What happen if force majeure clause is not present in a contract?

The purpose to insert Force Majeure clause under the contracts is to provide reliefs to Parties to the contract in terms adaptation or termination of a contract on happening of uncertain event in foreseen future. it has to be clearly understood that force majeure clause can only be enforced when the specific situation under which the said clause is invoke is specified in the agreement.

If, for some reason, the parties have failed to include the force majeure clause or contract doesn’t mention this clause, then the affected party can seek relief under section 56 of the Indian Contract Act 1872 which deals with the doctrine of frustration. However, to claim relief under this section, the parties must prove the absolute impossibility of contractual performance, and not merely any loss or financial difficulty in its execution.

However, there are certain exceptions where Force Majeure clause shall not be applicable:

a) When the contract/ agreement’s effective date is after the force majeure event.

b) When the force majeure is invoked for non-performance of monetary payment obligations (financial transactions).

c) When the force majeure event occurs after the affected party delays performance.

Doctrine of frustration:

The word Impossibility and frustration are often used as interchangeably. This term is being used to deal with unsuccessful transactions which could not be completed due to any reason. The doctrine says that any act which was to be performed after the contract is made becomes unlawful or impossible to perform, and which the promisor could not prevent, then such an act which becomes impossible or unlawful will become void. It lays down a rule of positive law and does not leave the matter to be determined according to the intension of the parties. This section clearly does not apply to a case, in which although consideration of contract is lost, performance of promise on other side is still possible.

When contract was made event can be likely to be performed but due to changes in some circumstances it becomes impossible to perform and on which promisor also has no control on it then such act will become void.

It is rightly said that frustration automatically brings the contract to an end at the time of the frustrating event. This is similar to discharge by breach of contract where the innocent party can choose whether to treat the contract as repudiated. Moreover, a frustrated contract is valid until the time of the supervening event but is automatically ended thereafter, whereas a contract void on the grounds of mistake is a complete nullity form the beginning.

Difference between force majeure and act of god

There is thin line of difference between Force Majeure and Act of God as mostly these two terms can be used interchangeably, both the term makes same sense but in legal world both are different.

Act of god:

Force majeure:

                                                 Definition & Meaning
> It is termed as any Act or force which are occurs outside human control and there is no act or responsibility of any individual or corporation.

> Where act of God includes all such causes of an inevitable accident to be derived by external forces of nature but not connected with any agency of man or any other cause directly or indirectly.

>  “Act of God” is widely used in world of legal practices by defendant side to prevent themselves from getting convicted for the accusation they are facing. The term is one of the defenses present in the case of defense of Inevitable Accident.

> The definition of Force Majeure is more extensive than Act of God because it not only includes the natural forces but also include other forces which may or may not be related to the nature and can be connected to human intervention directly or indirectly, but humans involved in the accident in which they don’t have any control or the incident whose happening was inevitable and which can’t be controlled.

> On the other hand, another defense term used under the clause of inevitable accidents is “Force Majeure”. It is broader term than act of god.

Dharnrajmal Gobindram vs. Shamji Kalidas AIR 1961 SC 1285:

In case of Dharnrajmal Gobindram vs. Shamji Kalidas AIR 1961 SC 1285, the Honorable Supreme Court of India held that if the clause of Force Majeure is not defined then the contract can be deemed void.

This term is used with reference to all circumstances independent of the will of man, and which it is not in his power to control, and such force majeure is sufficient to justify the non-execution of a contract. Thus, war, inundations, and epidemics, are cases of force majeure; it has even been decided that a strike of workmen constitutes a case of force majeure.”

The term ‘Act of God’ is often seen in force majeure clauses in contracts. Act of God is defined as an extraordinary occurrence or circumstance, which could not have been foreseen and guarded against, either due to natural causes, directly and exclusively without human intervention.

Impact of COVID-19 on Indian economy and rest of the world:

The COVID-19 disease which is considered as “Pandemic” by “World Health Organization (WHO)” on March 11, 2020 which shaken the countries and their economy worldwide. Due to occurrence of uncertain event everyone is badly affected as results of such viral outbreak Daily life has been significantly disrupted, many workplaces are shutdown, disruption of production, and suspension of air travel.

Effect of COVID-19 on India and its Economy:

However widespread economic disruptions have been caused as a result of this India’s economy is expected to grow slow significantly in the current financial year due to the adverse impact of the pandemic on manufacturing and service industries. All economic activity in India except some essential services has also forced companies in manufacturing and distribution supply chains to cut their output.

In India the effect of the outbreak on everyone is perhaps most obvious. As it is impacting on supply of goods and services, daily wage workers and logistics industry and several big and small companies irrespective of any sector are effected. Whereas many suppliers are unable to fulfil their contractual obligations within the prescribed time limit. But invoking force majeure may also be of interest to buyers, either because taking delivery under the contract has been impacted or due to disruptions in downstream markets the shutdown of nearly of all activities it leads to fear in parties to the contract. Big companies in India have invoked “Act of God” clauses to halt payments to suppliers and other counterparties as a national lockdown pummels demand.

The impact of the coronavirus pandemic could lead to economic slowdown in terms of domestic demand and supply, less purchasing ability due to pay cuts as result of this it will have a longer impact which might leads to job cuts in some crucial sectors. COVID-19 impact directly on commercial contracts like operational, Employment, Services and financial contracts which will have affect employments, business operations at large scale.

On account of COVID-19, following are the categorization of sectors in three classes that are affected: –

> Highly affected sectors:- Aviation Industry, Hotels and Restaurant Industry, Jewellery, Retail Business, Shipping & Ports and their related services.

> Medium affected sectors:- Automobiles Sector, Real Estates Sector.

> Less affected sectors:- Day to Day Products like Dairy Products & Essential Services , FMCG and Healthcare Facilities.3

The Ministry has issued clarification on doubts raised whether the supply chains affected due to coronavirus will be covered in the Force Majeure Clause. in awake of this ministry clarified by issuing a memorandum and extract of which given below :-

“On February 19, 2020, the Ministry of Finance under Government of India, notified that COVID-19 will be covered under the above force majeure clause (FMC) and should be considered as a case of natural calamity. Further, the ministry has stated that this clause can be invoked wherever appropriate, subject to due procedure being followed. It is to be noted, the clause does not excuse a party’s non-performance entirely but only suspends it for the duration of a period. If the performance in whole or in part or any obligation under this contract is prevented or delayed by any reason of FM for a period of exceeding 90 days either party may at its option terminate the contract without any financial repercussion on either side.

One of the conditions for this clause is that during any such extraordinary event, the entity must notify force majeure as soon as it occurs and the same cannot be claimed retrospectively.”

Measures taken to combat with COVID-19 by Indian government:

> To avoid Covid-19 from spreading and to curb the impact in India, Government of India takes precautionary measures and announces complete lockdown from March 24, 2020 under Disaster Management Act across the country for the period of 21 days till April 14, 2020 further Government of India announced extension of lockdown from April 14 to May 3, 2020 including travel restrictions through any mode i.e. air, water, rail and road route which doesn’t include supply of essential commodities and some institutions.

> In this tough situation where economy is struggling, there are certain reliefs and relaxations granted by various institutions like:

  • Reserve bank of India grants relief to all banks and NBFC’S which permits to grant moratorium of 3 months on payments of all installments between March 1 to May 31, 2020.
  • In Insolvency and Bankruptcy code 2016 amount of minimum default requirement increased to Rs.1 crore from current limit of Rs. 1 lacs.
  • SEBI in its circular dated on March 30, 2020 said any delay in payment of interest/ principal arising due to lockdown credit rating agency shouldn’t consider same as default.
  • CBDT & CBIC also grants relief to taxpayers by extending date of filing of returns.

> Government of India announced relief package amounting to Rs.1.70 lacs crore that give reliefs to every section of the society.

> Government extended various Due dates and waived off additional fees in filing of various forms as required under Income Tax Act 1961, Companies Act 2013 etc.

(Note: – In case of financial contracts typically they do not have force majeure clause.)

Acts invoked by Indian central government or state governments:

In wake of COVID-19 Diseases, Central Government with State Government and Union Territories have invoked certain national acts and some state acts that provides relief measures and regulations that may put curb on wide spreading of this pandemic diseases in their jurisdiction. following is the general list of acts that are implied by governments:

♦ Essential Service Maintenance Act 1968:- To ensure essential services like police, fire, defence, pharma & power don’t stop;

♦ Disaster Management Act 2005:- This law “provides for an exhaustive administrative set up for disaster preparedness”;

♦ Essential Commodities Act 1955:- Used to control hoarding and profiteering in agri commodities;

♦ The Delhi Epidemic Diseases, COVID-19 Regulations, 2020;

♦ The Maharashtra Epidemic Diseases COVID-19 Regulations, 2020;

♦ Punjab Epidemic Diseases, COVID-19 Regulations, 2020;

♦ The Himachal Pradesh Epidemic Disease (COVID-19) Regulations, 2020

These Act & regulations contains precautions and measures that may vary but includes basic provisions on duties and obligations of hospitals, powers of district administrations to implement containment measures (sealing off geographical areas, barring entry or exit of containment area, designating quarantine facilities, and closure of schools, offices, etc. and banning mass gatherings), and combatting COVID-19 related misinformation.

Conclusion:

Interpretation the clause of Force Majeure has got its ambit wider and now is even including Act of God in itself, hence both the clauses in a broader meaning are not separate any more. whether Covid-19 would be considered as a force majeure? The answer will probably dependent on drafting of this clause in the contract and how courts interprets the same.

If the clause clearly defined the words epidemic or pandemic in the language then in most parties would be at free to terminate the contract. Therefore, parties have to follow practical approach to compromise in between rather to go for litigation.

Bibliography:

https://economictimes.indiatimes.com/news/politics-and-nation/covid-19-antique-laws-return-to-fight-a-modern-disease/articleshow/74741315.cms

https://www.business-standard.com/article/economy-policy/covid-19-impact-indian-economy-likely-to-grow-2-in-fy21-says-icra-120040701598_1.html impact of covid-19

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

https://en.wikipedia.org/wiki/Force_majeure

Understanding the differences between Act of God & Force Majeure

https://www.mondaq.com/india/CorporateCommercial-Law/407868/Doctrine-Of-Frustration

Disclaimer:

Absolute Care is taken to prepare this article however inadvertently if any errors occurs then the Author shall not be held responsible for any such cause. The Content published is only for educational purpose and shall not be construed as rendering of any Professional Advice in any manner whatsoever. The Readers must exercise their own Judgement and refer the original source before any implementation. Further the content is an original work of the author and may be used only after written permission.

“Force majeure”is also known as “cas fortuity”in French or “casus fortuitous”in Latin which means “superior force, unavoidable accident”. ‘Force Majeure’ means an event that can be neither anticipated nor controlled. circumstances where human doesn’t have any control on the event. It is a common essential clause entered by the parties in the contract to save from performing their obligation if any uncertain event may happen in future which are beyond control.

Jaya Sharma-Singhania & Ayush Maheshwari

Jaya Sharma-Singhania
Founder- Jaya Sharma & Associates
jaya@jsa-cs.com

Ayush Maheshwari
Associate
Jaya Sharma & Associates
bodha@jsa-cs.com

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