What is force majeure?
The #Pandemic, #Covid-19, has seen to a rise in #forcemajeure cases. What is force majeure is a question that pops up often in several minds. Typically, force majeure would mean an unforeseen and unstoppable event that prevents parties from performing their obligations under a #contract. It is sometimes also known as an act of God.
It can also be explained as an event that could not have been anticipated or controlled and effects the contractual performance by the parties making it #impossible or impracticable to continue with the contract. The event is temporary in nature. However, the affected parties must ensure that they have taken all measures under the contract to mitigate the damage.
Is force majeure clause mandatory in a contract?
A force majeure clause is not mandatory in a contract. Generally, a force majeure clause incorporates all presumed events that the parties have identified. It is a possibility that a force majeure clause may not contain all presumed events as events like the Pandemic are new to the world. However, the use of epidemic would probably suffice in such a clause for invocation of force majeure during Covid-19.
It can only be invoked if there is a provision in the contract that has listed out the particular force majeure event. Therefore, many contracts contain a force majeure clause that limits damages or excuses performance when an “act of God” or circumstances beyond the parties’ control, prevent either party from fulfilling its obligations.
However, courts typically construe force majeure clauses narrowly and literally and it will only excuse performance, if the contract expressly includes the particular event. In order for COVID-19 to be considered as a force majeure event, it should explicitly contain a specific reference to a “pandemic,” “3epidemic,” “virus,” “disease,” “#quarantine,” “#lockdown”, “travel restriction,” or “state of emergency”, “national emergency”.
In many force majeure clauses, many of these words would not have been included, as the Pandemic is unique in its nature. However, that is not to say that all the above words should be there in the clause. Even the use of one of the words would suffice for invocation of force majeure. It is now a given that post-Pandemic, all force majeure clauses will have to be well-worded and should include all situations that are unforeseen, unstoppable and beyond the control of the parties.
What happens if there is no force majeure clause in the contract?
The Supreme Court of India has held that force majeure clauses have to be narrowly construed; many instances of invocation of force majeure may not fall within the force majeure clause. However, that is not to say that in the event of impossibility to perform one’s contractual obligations due to an unforeseen and unstoppable event that is beyond the control of the parties, there is no remedy.
In such cases, parties can plead frustration of contract under Section 56 of the Indian Contract Act 1872 and seek discharge. The Section provides that where a party to a contract finds it impossible to perform its obligations due to some event which is unforeseen and unstoppable and prevents it from performing its obligations, then such a contract will be deemed to be frustrated. In an important Judgment of the Supreme Court Satyabrata Ghose vs Mugneeram Bangur & Co., and Another 1954 SCR 310,the Apex Court held that the word ‘impossible’ does not have to be taken only in its literal sense and can mean impracticability of performance from the point of view of the parties. Essentially, frustration would be deemed to have occurred when it makes the performance impossible as it strikes the very root of the matter.
In M/S. Alopi Parshad & Sons, Ltd vs The Union of India AIR 1960 SC 588, the Petitioner sought to invoke force majeure as the price of ghee that had to be supplied had gone up substantially. The Court, however, declined to give relief to the Petitioner as it held that commercial impossibility or hardship was no ground for discharge from contractual obligations.
In another important case of The Naihati Jute Mills Ltd vs Hyaliram Jagannath AIR 1968 SC 522, the Supreme Court once again referred to ‘frustration’ and relied upon the English law of frustration. It further held that a party can be absolved from performance of its part of contract, if it is impossible to perform.
In the most recent Supreme Court Judgment of Energy Watchdog vs Central Electricity Regulatory Commission (2017) 14 SCC 80,the invocation of force majeure was again taken up. In the said case, the Petitioners held that they were invoking the force majeure clause, as there was a change in the laws of Indonesia, which made the price of coal go up. Thus, making it impossible for the Petitioner to fulfill its obligations under the contract. The Supreme Court was of the view that merely because the price of a basic raw material had gone up, the contract could not be deemed to be frustrated. It observed as follows:
37. It has also been held that applying the doctrine of frustration must always be within narrow limits. In an instructive English judgment namely, Tsakiroglou & Co. Ltd. v. Noblee Thorl GmbH, 1961 (2) All ER 179, despite the closure of the Suez Canal, and despite the fact that the customary route for shipping the goods was only through the Suez Canal, it was held that the contract of sale of groundnuts in that case was not frustrated, even though it would have to be performed by an alternative mode of performance which was much more expensive, namely, that the ship would now have to go around the Cape of Good Hope, which is three times the distance from Hamburg to Port Sudan. The freight for such journey was also double. Despite this, the House of Lords held that even though the contract had become more onerous to perform, it was not fundamentally altered. Where performance is otherwise possible, it is clear that a mere rise in freight price would not allow one of the parties to say that the contract was discharged by impossibility of performance.
38. This view of the law has been echoed in ‘Chitty on Contracts’, 31st edition. In paragraph 14-151 a rise in cost or expense has been stated not to frustrate a contract. Similarly, in ‘Treitel on Frustration and Force Majeure’, 3rd edition, the learned author has opined, at paragraph 12-034, that the cases provide many illustrations of the principle that a force majeure clause will not normally be construed to apply where the contract provides for an alternative mode of performance. It is clear that a more onerous method of performance by itself would not amount to a frustrating event. The same learned author also states that a mere rise in price rendering the contract more expensive to perform does not constitute frustration.
What events are not force majeure?
Generally, the parties to a contract may give an inclusive list of force majeure events such as act of God (earthquake, tsunami, floods, tide, storm, hurricane, tornado, cyclone), war, insurrection, riot, civil commotion, strike, explosion, fire, break down of machinery, epidemic, government regulations,radioactive contamination etc. However, there is no uniform set of events that constitute force majeure.
Instead, force majeure remains a flexible concept that permits the parties to add presumed/expected events that correspond to their unique course of dealings.
However, events that have been self-induced by the parties to cause breach of contract will not fall within the definition of force majeure.
Similarly, events that show commercial adversities or impossibilities that adversely affect parties or cause a commercial loss will not be accepted as a force majeure condition or a condition for discharge from contract.
Is notice mandatory for invocation of force majeure?
The parties that are taking the plea of force majeure must do so by giving a notice of the force majeure event at the earliest, to the other party, during the pendency of the event. Failing which it will not be deemed to be invocation of the force majeure clause.
What is the result of invocation of force majeure?
The force majeure event may either suspend or terminate the contract. It may also allow the aggrieved party to excuse the performing party’s performance, till the time such as the event continues. However, such an excuse would not be deemed to be a waiver of its rights under the contract. It would also allow the parties to re-negotiate the contract, if they so wish to.
How should a force majeure clause be drafted?
1- The parties while drafting a force majeure clause should bear in mind that the suspension of work or termination of the contract should be within a particular time frame.
2- The clause that is drafted should have an all inclusive list of events or circumstances that could impede a party from performing one or more of its contractual obligations.
3- The clause should clearly set out that the event must be unforeseen, unpredictable and beyond the reasonable control of either party and that such an event would make performance of obligation impossible.
4- The clause should also set out that the party invoking the clause is relieved from its duty to perform its obligations and from liability for damages for the breach of contract.
5- Another important point that should be added in such a clause is that any party who knew that performance was impossible yet who has availed of any monetary benefit from the signing of the contract, should refund the said monetary benefit.
6- The clause should also include a provision regarding invocation by written notice at the earliest possible time, upon the occurrence of the event.
7- And lastly, the parties may have a clause that allows for extension of time for performance in case of a force majeure event or renegotiating the contract.
Sushila Ram Varma
Chief Legal Consultant
The Indian Lawyer & Allied Services