Force Majeure Clause:Understanding the Importance of this Clause

27 May 2020 Read 583 Views

Coronavirus was declared as a pandemic in March 2020 by the World Health Organization and since then the global economy has been hit the hardest with governments across the globe implementing stringent policies including lockdown to control the coronavirus outbreak. Due to this the force majeure clause is gaining a lot of attention and in this article, we will be discussing the important aspects of this clause.

What is Force Majeure?
The term force majeure is in fact, a French term which has its origins in the Latin expression of “vis major.” The general principle of contract states that parties must fulfil the obligation that they have towards one another, however, this principle acts an exception to the general principle. It envisages certain situations which are beyond the control of the parties. It may be a natural calamity such as a flood, fire, or situations such as war, pandemic etc. 

It is often confused with its Latin counterpart, vis major which means Act of God. However, the two are different. While the former relates to both natural and manmade disasters and acts, the latter only includes the events which are unforeseen and caused by the forces of nature (Black, 2019). Thus, the former is much wider in its scope than the latter. It encompasses artificial unpredictable and overwhelming events as well, which makes vis major a subset of the former.

Though the term force majeure has not been used specifically in the statute, elements of the same can be seen under Section 32 and Section 56 of the Indian Contract Act.

FORCE MAJEURE CLAUSE IN CONTRACTS

In any general contract of performance, there is a clause of force majeure. This is often the bone of contention between the parties and after much negotiation, it enlists events which would qualify as force majeure. The event must be beyond the control of the parties and parties must show that they have taken all the reasonable steps that a man of ordinary prudence would take.

Only when the above conditions are fulfilled will the parties be relieved of their obligations. Thus it is entirely dependent upon the clauses of contract, making it impossible to lay down a straitjacket formula for the events, thereby disallowing even the judiciary to lay down a uniform policy on this clause. 

In fact, the Government of India, vide its circular has stated that due to the disruption in the supply chain during the pandemic, companies can take recourse of force majeure clause(Yadava, 2020). It also mentions the prerequisites that must be fulfilled for the events to qualify as force Majeure and also mentions the consequences of invoking such a clause.  Coming to the cases where the event is not specifically mentioned in the contract such as the present-day Covid-19 crisis, parties can also take the help of this principle. 

Therefore a force majeure provision must include the following aspects 

  1. It must enumerate all the events which constitute a force majeure event. This list can be exhaustive in nature or can include all words.

  2. Intimation to the other party must be given. This is done to ensure that both parties are on the same footing. And there must be a causal link between the non-performance of the party and the force majeure event.

  3. The party forgoing his liability must show that he has taken all the reasonable steps one needs to take in ensuring that liability is complete and he has failed due to the unforeseen event.

  4. Consequences must be enlisted in the contract, if the party invokes this clause. It can be either partial completion or rescinding the contract in its entirety or suspending it indefinitely.

FORCE MAJEURE AND INDIAN CONTRACT ACT

Force Majeure as previously stated has not been defined in the Indian Contract Act. However, it doesn’t mean that it doesn't have this principle. Section 32 and Section 56 talk about non-performance of the contract due to an event which is beyond the control of parties. Section 32 talks about contingent contracts and states that if a contract is dependent on happening on a future uncertain event, and the said event becomes impossible, the contract becomes void (Act, 1872).  Further Section 56, talks about the doctrine of frustration, whereby the contract becomes void, on the inability of the party to perform it due to its impossibility due to an event, which could not be prevented by the promisor. (Act, 1872) 

Section 32 states “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.”

Thus, the party must prove that the non-performance of contract was due to the force majeure and the same must be within the parameters of the force majeure clause which is enumerated in the contract.  

Section 56 of the Indian Contract Act states;

Agreement to do impossible act - An agreement to do an act impossible in itself is void. Contract to do act afterwards becoming impossible or unlawful. A contract to do an act which, after the contract made, becomes impossible or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.

Compensation for loss through non-performance of act known to be impossible or unlawful. Where one person has promised to do something which he knew or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promise for any loss which such promisee sustains through the non-performance of the promise."

For Section 56 to apply, there first needs to be a valid contract between the parties, i.e. there must be a valid subject matter. The contract must not be for such an act which is itself impossible. For example, A promises to revive B, who is dead by magic. Such a contract is void.

For force majeure to apply, the performance must be rendered impossible by such an event which the promisor could not have foreseen and prevented. Thus the event becomes beyond the ordinary control of the promisor. He must also show that he took reasonable care and precautions which would mitigate the events. 

The Supreme Court has observed that Section 32 and Section 56 of the Indian Contract Act, 1972 apply to the clause of force majeure. Section 32 of the Act would apply when the event is related to the force majeure clause (Satyabrata Ghosh v. Mugneeram Bangur, 1954) whereas, Section 56 would come into picture if the event is out of the scope of the force majeure clause, i.e. it dehors the contract (Energy Watchdog v. CERC, 2017). 

Further, the court laid down the exclusions of the doctrine of force majeure. It observed that it will not include;

Any event or circumstance which is within the reasonable control of the parties and the following conditions, except to the extent that they are consequences of an event of Force Majeure:

  1. Unavailability, late delivery, or changes in the cost of the plant, machinery, equipment, materials, spare parts, fuel or consumables for the Project;

  2. Delay in the performance of any contractor, sub-contractors or their agents excluding the conditions as mentioned in Article 12.2;

  3. Non-performance resulting from normal wear and tear typically experienced in power generation materials and equipment;

  4. Strikes or labour disturbance at the facilities of the Affected Party;

  5. Insufficiency of finances or funds or the agreement becoming onerous to perform; and

  6. Non-performance caused by, or connected with, the Affected Parties:

  7. Negligent or intentional acts, errors or omissions;

  8. Failure to comply with an Indian Law; or

  9. Breach of, or default under this Agreement or any Project Documents." 

This clause makes it clear that changes in the cost of fuel, or the agreement becoming onerous to perform, are not treated as force majeure events under the PPA itself."(Energy Watchdog v. CERC, 2017)



CONCLUSION

Force Majeure is a unique principle in recognised in the law of contracts. It is often stated as a principle of contractual jurisprudence. Originating in the common law, today it is a part and parcel of every contract law. It acts an exception to the traditional principle of fulfilment of contractual obligations. However this cannot be applied in every case. The Supreme Court has provided certain guidelines which must be followed for successfully invoking force Majeure

About the Author: Ruchika Jha | 3 Posts

Ruchika is from Jaipur, Rajasthan. I have completed my schooling from Delhi Public School R.K.Puram and currently in my penultimate year of law school at Hidayatullah National Law University. I am interested in Banking and Technology Law. I also have a keen interest in Human Rights and would like to contribute to improving the deteriorating situation of society.  I enjoy cooking, traveling, writing, and research. I strive to better myself every day and work in a dynamic, challenging, work-oriented environment to accomplish my desire to seek more knowledge

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