FORCE MAJEURE CLAUSE - IMPACT ON INDIAN CONTRACTS IN COVID-19 PANDEMIC


FORCE MAJEURE CLAUSE - IMPACT ON INDIAN CONTRACTS IN COVID-19 PANDEMIC

By- Samriddhi Rai, Associate at Sabkuch Legal Private Limited

As businesses across countries struggle to mitigate the economic after-effects of the pandemic-induced lockdowns, not much-used force majeure clause in contracts is being widely relied upon for relief. Businesses have been impacted and so have operations and consequently contracts and obligations under contracts are being revisited to assess these impacts. The term that has assumed relevance in contractual context today for businesses and heard most often is “force majeure”

The term force majeure has been defined in the in Black’s Law Dictionary, as ‘an event or effect that can be neither anticipated nor controlled. It is a contractual provision which allocates the risk of loss if performance becomes impossible or impracticable, especially as a result of an event that the parties could not have anticipated or controlled.’ While force majeure has neither been defined nor specifically dealt with, in Indian statutes, some reference can be found in Section 32 of the Indian Contract Act, 1872 (the "Contract Act") envisaging that if a contract is contingent on the happening of an event which event becomes impossible, then the contract becomes void.  

An Force Majeure clause in the contract frees both parties from contractual liability or obligation when prevented by such events from fulfilling their obligations under the contract. This clause does not excuse a party’s non-performance entirely, but only suspends it for the duration of the FM. The firm has to give notice of FM as soon as it occurs and it cannot be claimed ex-post facto.

Force Majeure clause present in the Contract

In a contract a force majeure clause would typically include an exhaustive list of events such as acts of God, war, terrorism, earthquakes, hurricanes, acts of government, explosions, fire, plagues or epidemics or a non- exhaustive list wherein the parties simply narrate what generally constitute force majeure events and thereafter add “and such other acts or events that are beyond the control of parties”. “Section 32: Enforcement of Contracts contingent on an event happening - Contingent contracts to do or not to do anything if an uncertain future event happens, cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contracts become void.”

Force Majeure clause absent in the Contract

If a contract doesn’t include a force majeure clause, the parties would have to ascertain in light factors such as the nature of the contract, the nature of event and so forth, as to whether Section 56 of the Contract Act which basically deals with doctrine of frustration and states that an agreement to do an act impossible in itself is void and also talks about agreements between the parties to do an impossible act; can be applied to such contract so as to discharge parties from contractual obligations. The courts in India have held that the word ‘impossibility’ used in Section 56 of the Contract Act must be interpreted in a practical form and not in its literal sense. “Section 56: Agreement to do impossible act - An agreement to do an act impossible in itself is void.

COVID-19 Impact

COVID-19 has affected cross-border trade, real estate market, specifically the developers, the home-buyers and the commercial lease arrangements, EPC (engineering, procurement & construction), joint-venture agreements as well as M&A deals in India. It has also impacted the party’s ability to meet their contractual obligations due to restriction in movement, stoppage of production, increase in costs due to scarcity of raw materials components, labor shortages, shortage of funds etc. With widespread disruption in business, manufacturing and transport, due to COVID-19 the stage seems set for India to see a flood of ‘force majeure’ invocations. It is expected that over a period of time more and more Indian companies may invoke ‘force majeure’ clauses in their contracts resulting perhaps in a spew of litigations should parties not come to a workable understanding.

Force majeure is not intended to excuse negligence or other malfeasance of a party, as where non-performance is caused by the usual and natural consequences of external forces, or where the intervening circumstances are specifically contemplated. It would also be important to note that force majeure cannot be invoked just because the contract has become financially or commercially more difficult to perform.

Conclusion

When it comes to interpretation of force majeure provisions, a 'one size fit all' approach has not been taken by the Courts in India, as each case has been examined in light of the language of the relevant contractual provisions applicable thereto. Therefore, questions as to whether an event constituted force majeure, or if an event was beyond the control of the parties, or did an event prevent or hinder performance, etc., have been ascertained by the Indian Courts on a case to case basis.

 

 

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