Force Majeure Clause:Understanding the Importance of this Clause

During the COVID-19 pandemic, two things were mostly talked about: Remdesivir, a medicine, and Force Majeure, a contract's clause. While Remdesivir captured headlines for its potential in combating the virus, the Force Majeure Clause quietly played an important role in protecting business deals, offering a remedy for contractual chaos caused by lockdowns, supply chain problems, and financial trouble.

To put it simply, the Force Majeure Clause is like a legal safety net, allowing parties to a contract to halt or even stop their obligations when extraordinary events beyond their control make performance impossible or impractical. These events could be like natural disasters, wars, government decisions, or pandemics.

This blog will help you to understand what the exactly the force majeure clause is, its implications, and how it can be a game-changer in protecting parties from unforeseen disasters.

What is Force Majeure?

• Force majeure is a French term meaning "superior force" that originates from the Latin expression "vis major."
• The general principle of contract states that parties must fulfil the obligation that they have towards one another. However, this principle acts as an exception to the general principle.
• It envisages certain situations that are beyond the parties' control. These may be natural calamities such as floods or fires or situations such as war, pandemics, etc. 

Is 'Act of God' the Same as 'Force Majeure'?

While force majeure relates to both natural and manmade disasters and acts, the Act of God only includes unforeseen events caused by the forces of nature.

Thus, force majeure is much wider in its scope than the Act of God. It encompasses artificial, unpredictable, and overwhelming events as well, which makes the Act of God a subset of force majeure.

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 contract clauses, making it impossible to lay down a straitjacket formula for the events. This disallows 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 to the force majeure clause. 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 cases where the event is not specifically mentioned in the contract, such as the 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 necessary to ensure that liability is complete and that they have failed due to the unforeseen event.
4. If a party invokes this clause, the consequences must be enlisted in the contract. They can be either partial completion, rescinding the contract in its entirety, or suspending it indefinitely.

Force Majeure & Contract Act 1872

Force Majeure 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 the non-performance of the contract due to an event which is beyond the control of the 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. 

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 contract's non-performance was due to force majeure, and it must be within the parameters of the force majeure clause enumerated in the contract.  

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.

Section 56 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. 

Supreme Court's Guidelines

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 play 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 would 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;

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; 

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 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 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 as 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.