Force majeure means extraordinary events, situations or circumstances beyond human control such as an event described as an act of God or superior force. They obstruct the continuation or lawful existence of a contract amidst the parties.
A force majeure clause in a contract is an expressed provision to identify those circumstances or situations in which performance under the contract by either one or both the parties become impossible to be carried out.
“Force Majeure” or “Act Of God”- this standard clause present in most contracts, which is not commonly invoked, is in the minds of most corporates and commercial lawyers, as economic actitvities and commercial transactions world over have come to a standstill in the wake of COVID-19 pandemic.
‘Force Majeure’ clause is a provision in a contract that exempts a party from performing his contractual obligations which have become impossible or impracticable due to an event or effect which the parties could not have foreseen or controlled. This clause is usually couched in general, inclusive terms to cover unforeseeable incidents such as natural calamities, war , sudden change of government policies etc.
It will be interesting to note that the Indian Contract Act,1872- the 148 year old law governing contracts in India- does not expressly refer to ‘Force Majeure’. However, there are two Sections which can become relevant in such situations- Section 32 and Section 56.
Section 32 deals with “contingent contracts”, in which the performance of the contractual obligations is contingent on the happening or non- happening of an event. If the event becomes “impossible”, the contract becomes “void” under this section.
Where there is no force majeure clause, contracting parties may be able to argue that the impact of COVID-19 has “frustrated” the contract.
The principle of frustration in English law does not depend directly on the drafting of the contract, and applies when an unforeseen event renders the performance of a contract physically impossible, or transforms the obligation to perform into something radically different.
For example, it is largely impossible at the current time to travel around Italy, due to the lockdown imposed by its government. This could physically prevent performance of many contracts.
If a contract has been frustrated, it is automatically discharged and the parties are released from any future obligations, and thus would not have to pay damages for non-performance. However, if the parties have made express provision in a contract for a particular event (for example, if they have allowed for it in a force majeure clause), the relevant contract will not be frustrated.
Conditions to establish force majeure
- An event is “unforeseeable” if a prudent and diligent person placed in the same circumstances could not reasonably have foreseen its occurrence. However, an exceptional situation is not in itself necessarily unforeseeable.
- The “irresistible” event leads to the absolute impossibility for the debtor to fulfill its obligation or to take reasonable measures to avoid the occurrence of the event. If performance becomes such that it is more difficult or onerous rather than impossible, this condition is not satisfied.
- External causes
- Although it does not appear in the text of the CCQ, Québec courts have generally required the presence of a third condition, namely that of “exteriority” event. Exteriority consists of the non-participation of the debtor in relation to the occurrence of the event. It must have occurred independent of the counterparty’s will.
“Force Majeure” means an exceptional event or circumstance:
(a) which is beyond a Party’s control,
(b) which such Party could not reasonably have provided against before entering into the Contract,
(c) which, having arisen, such Party could not reasonably have avoided or overcome, and
(d) which is not substantially attributable to the other Party.
What if there is no force majeure clause?
Since force majeure is a creature of contract rather than a rule imposed by the general law, if there is no force majeure clause, an affected party will have to look to other provisions of the contract for potential routes out of its difficulties. If the contract does not provide any such routes, it may in certain circumstances be possible to rely on the doctrine of frustration of contract.
However, it is very difficult to show that a contract has been frustrated. Frustration requires that an unforeseen subsequent event outside the control of the parties has made the contract impossible to perform, or has transformed performance of the obligations under the contract into something so radically different from that which the parties intended that it would be unfair to hold the parties to their obligations. One extreme situation where the courts have held that a contract was frustrated was when war broke out and the government banned the works and seized and sold the necessary equipment.
As with the test for “prevention” of performance under force majeure clauses, the fact that performance has been made more difficult or costly is not enough. In addition, it is questionable whether an epidemic, or even a pandemic, would be considered to be unforeseeable, given previous recent epidemics and warnings that further epidemics or pandemics are likely to occur. However, it might be possible to argue that the extent of the global government enforced lockdowns was unforeseeable.
Frustration may also be commercially undesirable in some circumstances, since its effect, regardless of the wishes of the parties, is to bring all parties’ obligations under the contract to an end immediately.
Performance is more difficult or expensive now – is that enough?
Even if the Covid-19 pandemic or a related consequence such as government action is a type of event covered by the force majeure clause in question, the next question to consider is the impact on the affected party’s ability to perform its contractual obligations.
It is common for force majeure clauses to specify the impact that the event or circumstances in question must have in order for the clause to be triggered. Reference may be made, for example, to the event or circumstances having “prevented”, “hindered” or “delayed” performance. These terms require different levels of impact on performance before a party will be relieved from liability.
“Prevented” means that it must be physically or legally impossible to perform. This is a high bar. It is not enough that performance is more difficult, more expensive, or less profitable. Even where the word “prevented” has not specifically been used, the courts have interpreted force majeure clauses as only applying where performance is impossible in circumstances where such clauses state that a party is to be excused on the occurrence of causes beyond their control, and where a contract provided for delivery “unforeseen contingencies excepted”. Similarly, it is common to see wording such as “unable to perform” and this is likely to be treated in a similar fashion by the courts.
For example, a shortage of raw materials caused by a force majeure event may hinder the performance of a manufacturing contract if those materials can be obtained at a higher cost but performance would mean breaking other contracts. However, the fact that performing would simply be less profitable due to higher costs, for example in sourcing alternative supplies of materials or labour, is generally unlikely to be sufficient to absolve the party in question of liability to perform.
Parties seeking to rely on a force majeure clause should follow the following practical steps:
- Consider in detail the precise wording of the force majeure clause, the contract as a whole and the circumstances that have arisen. Determining whether performance is excused by a force majeure clause can be a difficult and highly fact-sensitive exercise, so early legal advice should be sought.
- Explore alternative means of performing, reducing delay, or minimising any loss to the other party. This may require considering alternative suppliers, or alternative methods of delivery, even if at higher cost.
- Serve any notices as required under the contract, as soon as possible and in accordance with the notice provisions. Consider carefully what event or circumstance you allege constitutes the force majeure event, taking into account the wording of the clause and the timescales required for service of notice: the outbreak of Covid-19 itself, or subsequent government restrictions put in place.
- Do not attempt to rely on increased costs to excuse non-performance or delay, as this will not usually be sufficient.
The coronavirus is having a significant and harmful impact on businesses and their ability to perform under their contracts. However, whether a claiming party can successfully invoke a force majeure clause, an impossibility/impracticability defense, or a frustration of purpose defense in order to excuse performance due to the coronavirus is a fact intensive inquiry and must be assessed on a case-by-case basis. Contractual parties must look to the specific language of the contract, including the applicable law, to determine their likelihood of success.
Whether COVID-19 is found to be a force majeure event will thus depend on a number of factors, such as the specific agreement in question, the force majeure provision (if any) and the factual matrix behind the agreement. Further, uncertainty remains in terms of the scope of its application, as demonstrated in the Bombardier decision, which provides an important reminder that organizations cannot necessarily invoke a force majeure event as an umbrella for the release from all of their obligations. As mentioned above, force majeure is mentioned in several Québec laws affecting a wide array of organizations’ relationships (employees, customers, third parties, etc.). For further information relating to an organization’s specific situation, it is highly recommended that the appropriate legal experts be consulted.
About the authors
Jahnvi Agnihotri is a student of BA -LLB Hons, Galgotias University, Greater Noida. She is from Etawah. Her hobby is reading. My favorite law subjects include IPC and CRPC and her area of interest is in criminal law and wants to go into litigation in the future.
Ayush Upmanyu is a student of BBA LLB Hons from Galgotias University, Greater Noida. He is from Delhi. His hobbies include singing and drawing. He is more inclined to criminal law and his fav law subjects include IPC, legal methods, CRPC, etc. My area of interest is criminal law and want to do litigation.