The COVID-19 pandemic struggle is still on with a bleak chance of things coming to normal in the near future.The business operations, as a result are facing unprecedented disruptions due to the break in the supply chain giving effect to their inadequacy in maintaining customer agreements. The arbitrariness in the longevity of this pandemic has made the corporations to assess their as well as counterparties rights, obligations, remedies as entered into under the contract where the performance is delayed or becomes too difficult to perform in the given situation. In this light, the concept of Force Majeure comes into picture to rescue the parties from performance in such difficult time. This article will give an understanding on the concept of force majeure, general provisions in the legislation, specific provisions in the force majeure clause, invoking the cause in the contemporary situation with substantial precedents.
Concept of Force Majeure
Force Majeure is a French term that means ‘Superior Force’. The Black Law Dictionary defines the term as ‘an event or effect that can be neither anticipated nor controlled’.Upon reading, it can be understood that force majeure can be:- (1)An act of God such as earthquake, tsunami, flood, epidemic, pandemic, etc. (2)Human initiated events such as war-like situation, labour unrest, lockouts, etc. Thus the scope of force majeure is wide enough to cater to any event which portrays the incapacity of the parties to a contract because of the unforeseeable circumstances that cannot be controlled. In this regard, it can be mentioned that the Central Electricity Regulatory Commission had, in the year 2016, held demonetization as a valid threshold to invoke the force majeure clause entered by the parties. This decision goes against the one taken by the Honourable Supreme Court in Energy Watchdog v CERC where the scope of force majeure was kept strictly narrow. Force Majeure is an exception to what may be otherwise a breach of contract as the main aim is to save the parties from invoking breach of contract which may have been done in case of non-performance.
Force Majeure in Indian Contractual Jurisprudence
The term ‘force majeure’ is absent in its skeletal form, however, upon interpretation, it is placed under Sections32, 56 and 65 of The Indian Contract Act, 1872. Section 32 states that contingent contracts to do or not to do anything if an uncertain future event happens, cannot be enforced by law until and unless that event has happened. Such contracts become void if the event becomes impossible. Thus it can be said that where there is a force majeure clause in the agreement or a similar clause to that effect, Section 32 will be applicable. Section 56 deals with the underlying ‘doctrine of frustration’. It says that where a contract becomes impossible, unlawful, or by reason of any event which the promisor could not prevent, it becomes void when the act becomes impossible or unlawful. Section 65 provides the remedy where a party has received any advantage under a contract that subsequently became void under section 56, which is: 1. To either restore the advantage received or 2. To make compensation for the advantage received Though there are provisions and the applicable remedies, however, there may be issues between the contracting parties regarding resolving disputes on the manner and mode of payment of the compensation, expenses incurred if any, compensation on service performed, etc. and in this light arises the importance to incorporate force majeure clause in the contract when made.
Importance of Force Majeure Clause in the prevailing situation
Force Majeure clauses are basically mentioning the set of circumstances under which contract performance will be either excused or delayed or any other consequence as agreed. The force majeure clause can be made as descriptive so as to ameliorate the protection to the parties and reduces any ambiguity where a party feels that the counter party is evading its performance unreasonably.In the case of Philips P.R Core, Inc., it was held that “The main objective of force majeure clauses is to relieve the parties from its contractual obligations where the performance has been prevented by a force beyond its control or where the purpose of contract is frustrated.” There are a few considerations that can be kept in mind while crafting the clause amidst the pandemic. Few of them are discussed as under – (1)Inclusion of the list of events to be covered: It can be done by way of listing expressly the events which can trigger the clause or keeping it general by following “ejusdem generis.”The parties mutually agree upon this and it is needless to say that the language is very important whether it indicates the list as exhaustive or generic. In the case of Tandrin Aviation Holdings Ltd., it was held that “Where a clause contains non- exclusive list of events, followed by general language such as ‘any other cause beyond party’s control’, to fit within its general wording, must be of similar nature to the specified events listed.” Let us consider the current scenario i.e. Covid-19. Where the clause expressly mentions “pandemic” amongst the list, it will automatically get covered, otherwise it would depend on the facts of the case and whether the event hampers the performance, which is again subjective. (2)Effect on the Contract: It is to be seen whether the event can hinder the performance of the contract in entirety or partly or can prevent the performance. The clause must be drafted to decide the possibilities i.e. termination of contract or deferring it for some specific period. The clause must also cover situations such as where the payment or performance is partly carried out. (3)Burden Of Proof: The burden is on the person claiming the event as force majeure. While establishing the event as force majeure, it can be claimed that the event was unforeseeable, beyond the control to control the execution. This is a critical part as the proving is difficult. (4)Dispute Resolution: The clause may provide for any arbitration provision or litigation where there are unresolved disputes. The importance of the force majeure clause can also be felt where the parties entering into a contract or the place of performance is a civil unrest area or which has extreme weather conditions, labour strikes, etc.
Force Majeure: When Invoked
The Courts generally satisfy themselves about when to invoke the clause after analysing and reviewing the following:- (1)The precise language in the clause. (2)Evidence which establishes that the event was unforeseeable when the contract was entered. (3)Nexus between the event and the non-performance by the parties due to the happening of the event. (4)Evidence which establishes that the event was of such nature that performance could not be performed. (5)Whether the performance can be made in an alternative manner. The International Chamber of Commerce (ICC) also provides for the underlying test that the required party invoking the force majeure clause needs to prove which is as follows – (1)That the event is beyond the party’s control. (2)The event could not have been foreseen when the contract was entered. (3)The effects of the impediment could not have been avoided by the party. ICC states that, where the party invokes the clause after giving timely notice, the party can be relieved of obligations and can do away with the liability for breach of contract. Also, the “ICC Model Force Majeure Clause, 2020” provides that plague and epidemic are examples of presumed impediments and hence the party only needs to prove that it could not have been avoided or overcome.
Events not considered as Force Majeure
There can be situations where the performance of the contract is possible however with bearing high cost or gaining less profit than intended and what would have been received otherwise sane the presence of the force majeure. The parties may argue that the performance is impracticable due to the involvement of risk of injury to either or both the parties or to their property which is disproportionate to the ends which will be achieved by the performance. Such arguments are not tenable and hence the events cannot take the blanket of force majeure event. There are judgments to substantiate this concept, couple of them being discussed under – In the case of Dorn v Stanhope Steel, Inc., it was observed that “Impracticability means more than impracticality. A mere change in the degree of difficulty or expense due to such causes as increased wages, prices of raw materials, or costs of construction, unless well beyond the normal range, does not amount to impracticability since it is this sort of risk that a fixed-price contract is intended to cover.”
In Transatlantic Financing Corp. v. U.S, the Court of Appeals affirmed that there was no impracticability where a party seeking to recover damages only because its wheat shipment was forced to be re-routed due to the closing of the Suez Canal. It was held that “because the contract was not rendered legally impossible and it could be presumed that the shipping party accepted “some degree of abnormal risk,” there was no basis for relief.” Therefore it needs to be understood that even if the parties assume such situations to fall under force majeure and include them in the clause, they cannot receive any relief and their non- performance will be considered a breach of contract.
Insisting on what can be considered as force majeure, Honorable Supreme Court, in the matter of SatyabrataGhose v. MugneeramBangur& Co., held that, “The term ‘impossible’ has not been used in Section 56 to mean physical or literal impossibility. A mere impracticality of performance, from the viewpoint of parties, and considering the object of the agreement, will also be covered.” Subsequently in Naihati Jute Mills Ltd. v. HyaliramJagannath.Supreme Court held that “A contract is not frustrated merely because circumstances in which it is made is altered. Courts, in general, have no power to absolve a party from performance of its part of a contract merely because performance has become onerous on account of unforeseeable turn of events.” The foreseeability of Covid-19 is subject to debate. Where some argue that the pandemic is ‘inevitable’ but ‘quite unpredictable’ and can hence be counted in the category of force majeure events, Counter views are that the “SARS” outbreak in 2005 could make such epidemic and pandemic as foreseeable and to be contemplated in the contract. The Ministry of Finance issued an Office Memorandum dated February 19, 2020, which effectively states that the Covid-19 outbreak is covered under Force Majeure as it is a natural calamity, the however due procedure is to be followed while invoking the clause. This cannot be applied stringently for every contract as the performance of every contract needs to be assessed independently considering its nature, type of obligations, etc. and in that case, the parties need to interpret before invoking the clause.
In my view, the absence of the force majeure clause cannot take away the rights of the parties, but limit the protection to the extent of the application of Section 32, 56 and 65 of The Indian Contract Act. Where there is a clause incorporated, it adds to the protection of the parties, provides clarity as to the enforcement of the contract, the events to be covered, the compensation manner, whether there can be an option to delay the performance without any adversity, amongst others. Also upon reading, it can be said that the future of all contracts hit by force majeure cannot be terminated. For instance, where X and Y enter into a contract for the sale of furniture to be executed on 25th March 2020. The Covid-19 situation will not allow the parties to perform it on the scheduled date, but instead of termination, the parties can defer the sale for some specified period. There can be seen a flurry of disputes and litigations once the parties start invoking the clause. Force Majeure and its application would have to be then looked at individually at the stage of arbitration or litigation. There must be ample proof, however, to show that there were no alternatives available for performance to the parties under the contract.
About the author
Khushboo Tibrewal is a 2nd year LLB student at ILS Law College, Pune. She completed her graduation in the field of B.Com ( Finance Hons.) from St. Xavier’s College, Kolkata. Her interest lies in the area of Corporate and Commercial laws and to ameliorate her interest, she is pursuing Company Secretaries course and is at her Professional level. She is also active in her college by volunteering in committees such as the Legal Aid Society, Human Rights Cell, Corporate law Cell, and keeps herself updated by participating in various legal opportunities. Apart from academics, she spends her time in music, art, and reading books on mythology.