1. Meaning
Force majeure’, also called ‘vis majeure’ meaning ‘superior force’ which refers to an unforeseen event or condition which occurs beyond the control of the parties to a contract, and hence the parties are prevented from performing their obligations arising out of that contract.
2. Events qualifying as force majeure
Force majeure events typically include government action, war, terrorism, strikes, civil unrest, acts of god, floods, earthquakes, hurricanes and other natural calamities. Such events are essentially characterized by being unforeseeable by and being beyond the control of contracting parties, and have inevitable, unprecedented and material effects on the performance of contract. The effects and consequences of these events are such that they fundamentally alter circumstances which the parties did not contemplate to be bound by at the time of making the contract. They are totally unanticipated conditions that arise during the contractual obligations.
3. Force Majeure under the Indian contract.
The law relating to force majeure is embodied under sections 34 and 56 of the Indian Contract Act ,1872. It is a contractual provision agreed upon by the parties and the occurrence of force majeure events protect the parties from liability towards its failure in order to comply or abide by the obligations arising out of the contract. The intention of such a clause is to save the performing party from the consequences of something which is beyond their control. This is a form of exception that exempts the parties from their obligations, the absence of which would be treated as a breach.
The law of force majeure has been laid down in the decision of the supreme court case in Satyabrata Ghose vs Mugneeram Bangur & Co. (AIR 1954 SC 44). Since then the jurisprudence of force majeure in India has grown and developed strongly. However in the most recent decision of supreme court in Energy Watchdog v CERC (2017) 14 SCC 80.
This decision given by a bench comprising Justices P C Ghosh and R F Nariman summarizes the jurisprudence on the doctrine of frustration.
Some key points from this judgment are :
1. If contract has an express or implied ‘force majeure’ clause, it will apply over the principles under Sec 56.
2. Application of the doctrine of frustration must always be within narrow limits.
3. A rise in cost or expense will not frustrate a contract.
4. Doctrine of frustration will not apply so long as the fundamental basis of the contract remains the same.
5. Force majeure clause will not apply if alternative modes of performances are available.
So, Ultimately to invoke force majeure clause it must be ensured that all possible modes of performance of the contract has become impossible and there is no way out to perform the obligations arising out of the contract.
4. What happens if the contract does not have a force majeure clause?
If the contract does not include a force majeure clause, the affected party could claim relief under the doctrine of frustration under Section 56 of the Indian Contract Act, 1872. However, in order to claim that the contract is frustrated, it must be established that the performance of the contractual obligations has become impossible by reason of some event which the claiming party could not prevent and that the impossibility is not self-induced by the claiming party or due to his negligence.
5. Can a Force Majeure clause be interpreted to cover a ‘Pandemic’, if not provided expressly?
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; and which could not by any amount of ability have been foreseen, and if foreseen, could not have been resisted. This could include floods, hurricanes, earthquakes etc.
However, force majeure is held to have a more extensive meaning than the oft-seen ‘Act of God’ term, and includes occurrences such as strikes, riots, wars, breakdown of administrative machinery, lockdowns, and effects of such events such as shortage of supply owing to war, war-time difficulty in shipping, refusal of export license etc. Some force majeure clauses could contain generic terms such as “any other happening”.
Whether a pandemic such as Covid-19 can be interpreted as an ‘Act of God’? Whether the effects of shutdowns due to Covid-19 trigger the force majeure clause in contracts? As stated above, this would depend on the language of the clause and the rules of legal interpretation of force majeure clauses.
6. Application of force majeure in the present context of COVD-19
Yes, the Indian Government has considered the outbreak of COVID19 as Force Majeure. The Ministry of Finance of India has issued a clarification through an office memorandum vide F.18/4/2020-PPD as below:
“A doubt has arisen if the disruption of the supply chains due to spread of corona virus in China or any other country will be covered in the Force Majeure Clause (FMC). In this regard it is clarified that it should be considered as a case of natural calamity and FMC may be invoked, wherever considered appropriate, following the due procedure as above.”
So, it is clear that the present condition of COVID-19 is a situation of force majeure as notified by the government.
7. Applicability and impact of Force majeure.
To invoke force majeure, the force majeure event must have materially affected the contracting parties’ ability to perform the contract. The invocation of force majeure has to be in accordance with the terms of the force majeure clause and its consequences as may be mutually agreed upon by the contracting parties. In most scenarios, the affected party is required to notify the other party that a force majeure event has occurred and has delayed the performance of the contract or has rendered the contract impossible to perform. In light of the COVID-19 pandemic, contracting parties will have to establish that the outbreak and its effects have had unforeseeable consequences on the performance of their contractual obligations.
In case of contracts which contemplate the force majeure events and their consequences, such agreements usually provide for a suspension or delay in the performance of the contract during the subsistence of the force majeure event. Such contracts most often also provide for termination of the contract if the force majeure subsists beyond a stipulated period of time. However, in the absence of a force majeure clause, if the contracting parties claim that the contract is frustrated under Section 56 of the Contract Act, the contract will be automatically voided and terminated in its entirety.
In case of contracts which contemplate force majeure events and their consequences, courts will first look into whether the force majeure event or condition claimed falls under the purview of the clause, as such clauses are generally viewed as exhaustive in nature. Courts also look into the other provisions of the contracts to determine whether such contingencies have been provided for in any other manner. Even if the occurrence of a force majeure event has been established, courts will not accept a claim of force majeure if the performance of the contract has not been materially affected or prevented by such an event. With respect to claims under Section 56 of the Contract Act, and in the absence of an express or implied force majeure clause, courts have rejected claims where the delay in performance or inability to perform the contract is attributable to the fault of the contracting party making such claim. Further, the courts do not generally allow claims of force majeure and frustration of contracts, where there has only been a mere inconvenience or difficulty in performing the contract, where the performance of the contract has become expensive or where there exists a valid and practical alternative for the performance of the contract. Where a claim of force majeure or frustration has been rejected, the courts may also order specific performance of the contract or award damages if losses have been incurred on account of the non-performance of the contract or any delay in the performance of the contract.
8. Force majeure clause in case of irrevocable and unconditional bank guarantee.
It is to be noted in this regard that, if the contract contains the clause of force majeure and such force majeure clause expressly provides of the list of ground qualifying as force majeure then in that case the plea of force majeure will be accepted in not furnishing such bank guarantee such unforeseen conditions which is beyond the control of the guarantor and by taking all possible and prudent measures it is not at all possible to comply by the stipulated terms and conditions of the contract.
The recent decision in of the Appellate tribunal for electricity New Delhi in the matter of Shapoorji palloni Energy(Gujarat) Pvt. Ltd. v. Gujarat Electricity Regulatory Commission and Gujarat Urja Vikas Nigam Ltd., the tribunal has aptly pointed out the importance and relevance of force majeure clause in a contract of guarantee and has provided that the same can only be invoked if expressly provided by the way of contract.
i. Is force majeure an excuse for him in case the contract does not stipulate the breakout of an epidemic or disease or its outbreak?
As discusses above force majeure is held to have a more extensive meaning than the oft-seen ‘Act of God’ term, and includes occurrences such as strikes, riots, wars, breakdown of administrative machinery, lockdowns, and effects of such events such as shortage of supply owing to war, war-time difficulty in shipping, refusal of export license etc. Some force majeure clauses could contain generic terms such as “any other happening”.
Whether a pandemic such as Covid-19 can be interpreted as an ‘Act of God’? Whether the effects of shutdowns due to Covid-19 trigger the force majeure clause in contracts? As stated above, this would depend on the language of the clause and the rules of legal interpretation of force majeure clauses.
ii. Is force majeure an excuse for him if the contract does not stipulate for such a clause?
The plea of force majeure can not be taken if the contract does not stipulate a force majeure clause. The Indian Contract does not allow for this. However the plea of frustration can be taken under section 56 of the ICA, however the same is yet a scope of interpretation and the courts will examine that the occurrence of the event made the performance impossible in such a way that even by taking prudent and plausible steps the same can not be completed.
9. Conclusion
As it has been declared by the government that COVID-19 constitutes force majeure so this epidemic, COVID-19 outbreak would qualify as an event of force majeure.
Even if epidemics, diseases, and public health emergencies are not expressly specified as events of force majeure in the contract, the COVID-19 outbreak may nevertheless fall within the general force majeure wording as an unforeseeable event beyond the parties’ reasonable control and if the force majeure provision covers “acts of government” as a force majeure event, it can also be argued that the travel bans and restrictions, city lockdowns, and mandatory business closures imposed by the government constitute “acts of government” beyond the parties’ reasonable control that are preventing the performance of contractual obligations.
The party seeking to invoke force majeure will typically need to show a causal connection between the force majeure event and its failure to perform its contractual obligations, and it must show the COVID-19 outbreak has made it effectively impossible for it to perform its contractual duties. It is unlikely that a party will be able to rely on force majeure simply because performing its contractual obligations has now become more expensive, onerous, or time-consuming as a result of the COVID-19 outbreak. For example, a party seeking to rely on force majeure may need to show that it was impossible for it to source for alternative suppliers, contractors, materials, or personnel.
Ultimately it is to be noted that in case a party invokes a force majeure clause the grounds laid down in the Energy Watchdog case must be complied in order to get relief.
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