What is a force majeure clause?

Contract

Force Majeure means ‘causes you cannot prevent and for which you are not responsible’. It is a contractual remedy which exempts either one or both parties from performing their contractual obligation on the fulfillment of conditions provided under the Force Majeure clause of the contract. Generally, Force Majeure events include acts such as riots, war, act of government, and act of god such as earthquake, cyclone etc.

Contract

Contracts with a force majeure clause have been dealt with under Section 32 of the Indian Contract Act, 1872. As stated under the section, such contracts are contingent in nature and cannot be fulfilled in case the event itself becomes impossible.

Doctrine of Frustration of Contract is another rescue which comes to the aid of the parties in case of unanticipated circumstances leading to a failure in performing the contractual obligation.  This doctrine comes as a statutory remedy under Section 56 of the Indian Contract Act, 1872. Under this, an agreement to do an act impossible in itself is void. Therefore, if act become impossible subsequent to the making of the contract, the contract becomes void. Moreover, even a material change could trigger this section and not just absolute impossibility of performance.

In light of the present COVID-19 crisis, the performance of numerous commercial contracts and agreements has been rendered impossible due to the lockdown. The pandemic has further lead to a disruption the economy due to a delay in the supply by the suppliers; companies were unable to uphold their customer agreements, meltdown in the stock market etc.

Therefore, due to a breach of numerous contracts, the question raises as to whether COVID-19 would come under the ambit of force majeure events or not. This is a case to case based discussion. This force majeure clause gets triggered when the performance of a contractual obligation has been rendered impossible by an unexpected or an unforeseen event, which is beyond the control of the parties. The first threshold to be met is laid down under the landmark judgment by the Supreme Court in  Satyabrata Ghose v. Mugneeram. The court held “the performance of a contract can be said to have become impossible if an untoward event or change of circumstances beyond the contemplation and control of the parties upsets the very foundation upon which the parties rested their bargain.” Further, the Burden of proof in such cases lies on the party who claims impossibility of performance owing to a force majeure event. The party has to be prove that the non performance of the obligation is a direct consequence of the unanticipated event. They further have to try mitigating and ensuring alternative methods for the performance of the obligation. In the Energy Watchdog v. Central Electricity Regulatory Commission case the Supreme Court held that only the vents which are mentioned under the Force Majeure clause of the contract can exempt the parties from performance. Therefore, presence of terms such as ‘pandemic’, ‘epidemic’ in the contract would help in invoking this remedy to the parties. On completion of the same, the contractual obligation of the party gets suspended and the party is relieved of any liability for the payment of damages. In February 2020, the Government issued a Memorandum which clarified COVID to be a ‘natural calamity’ and stated that the force majeure clause was to be invoked wherever possible. In absence of a Force Majeure clause, Section 56 is invoked by way of subsequent impossibility of a contract.

A well defined force majeure clause would be beneficial in situations of such peculiarity. An unambiguous definition of the events that fall within the ambit of this clause of a particular contract would ensure mutual clarity between the parties. Vagueness may lead to confusion with regard to the remedy and the liability of damages incurred.

 

(This article is co-authored by Manish Sharma. In case you have any query or want our help on any legal issue feel free to reach us at [email protected] or visit our page and we shall get back to you accordingly.)

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