Legal Articles

FORCE MAJEURE CLAUSE-TOO TEMPTING TO RESIST

Summary Opinion

The recent events related to COVID-19 pandemic have impacted the ability of businesses around the globe to maintain operations and fulfill their existing contractual obligations. Force majeure clauses excuse a party‘s nonperformance under a contract when extraordinary events prevent a party from fulfilling its contractual obligations. The applicability of a force majeure provision is contract-specific, and there is a high bar for invocation of such a clause. Recent events, including the declaration of COVID-19 as a “pandemic” and the implementation of travel, movement, and large-gathering restrictions, have altered the force majeure landscape in a manner that may impact the availability of such provisions to nonperforming parties.

A key point is when a contract contains the Force Majeure clause, versus the contracts that do not have the clause. As a general principle, Courts will assess whether the performance sought to be excused is impossible or impractical. Another common principle is the doctrine of frustration of purpose, this focuses on , whether the event at issue has obviated the purpose of the contract.

As the COVID-19 pandemic continues to develop, businesses should take proactive steps to ensure continuity of operations to meet their existing contractual obligations. Almost all companies are on both sides of this issue, as the performing party in some cases and receiving party in others. The applicable legal standards will vary by state, depend on the contractual language, their specific situation .

Things are in a very fluid state at present .

We are going to see emergence of a new jurisprudence emerging with Force Majeure Clause being invoked and doctrine of Frustration of Contract being pressed into service.

Key Definitions:

1. Black’s law dictionary:
force majeure : [Law French “a superior force”] An event or effect that can be neither anticipated nor controlled. The term includes both acts of nature (e.g. floods and hurricanes) and acts of people (e.g.riots, strikes and war)- also termed force Majesture; vis major; superior force.1

2. Webster’s 3rd New International Dictionary:
force majeure: (1) superior or irresistible force. (2) an event or effect that cannot reasonably be anticipated or controlled.2

3. Typical Contractual Definition:
force majeure or vis major (Latin) meaning “superior force”, also known as cas fortuit (French) or casus fortuitus (Latin) “chance occurrence, unavoidable accident” is a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties occur.

4. The UNIDROIT Principles of International Commercial Contracts, 2016 stated as under:

Vide Article 7.1.7 (Force majeure)

(1) Non-performance by a party is excused if that party proves that the non-performance was due to an impediment beyond its control and that it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.

(2) When the impediment is only temporary, the excuse shall have effect for such period as is reasonable having regard to the effect of the impediment on the performance of the contract.

(3) The party who fails to perform must give notice to the other party of the impediment and its effect on its ability to perform. If the notice is not received by the other party within a reasonable time after the party who fails to perform knew or ought to have known of the impediment, it is liable for damages resulting from such non-receipt.

(4) Nothing in this Article prevents a party from exercising a right to terminate the contract or to withhold performance or request interest on money due.

Importance of the concept of Force Majeure

The importance of the force majeure clause in a contract, particularly one of any length in time, cannot be overstated as it relieves a party from an obligation under the contract (or suspends that obligation). What is permitted to be a force majeure event or circumstance can be the source of much controversy in the negotiation of a contract and a party should generally resist any attempt by the other party to include something that should, fundamentally, be at the risk of that other party.

Time-critical and other sensitive contracts may be drafted to limit the shield of this clause where a party does not take reasonable steps (or specific precautions) to prevent or limit the effects of the outside interference, either when they become likely or when they actually occur. A force majeure may work to excuse all or part of the obligations of one or both parties.

Concept of Force Majeure under the Indian Contract Act

The Indian Contract Act, 1872 does not expressly refer to ‘Force Majeure’. However, there are two Sections which are relevant in such situations – Section 32 and Section 56.

Section 32 deals with “contingent contracts”, in which the performance of the contractual obligations is contingent on the happening or non-happening of an event. If the event becomes “impossible”, the contract becomes “void” under this Section.

As far as general contracts are concerned, Section 56 is relevant. This provision embodies the “doctrine of frustration”. It says:

1. An agreement to do an act impossible in itself is void, 2. A contract to do an act which, after the contract is 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.

Key Indian Court Decisions On Force Majeure:

A. Dhanrajamal Gobindram V. Shamji Kalidas & Co. AIR 1961 SC 1285

  • The Apex Court through Hidayatullah, J stated that “McCardie, J. in Lebeaupin v. Crispin has given an account of what is meant by “Force majeure”, with reference to its history. The expression “force majeure” is not a mere French version of the latin expression “Vis Major”. It is undoubtedly a term of wider import. Difficulties have arisen in the past as to what could legitimately be included in “force majeure”. Judges have agreed that strikes, breakdown of machinery, which, though normally not included in “vis major” are included in “force majeure”. An analysis of rulings on the subject into which it is not necessary in this case to go, shows that where reference is made to “force majeure” the intention is to save the performing party from the consequences of anything over which he has no control. This is the widest meaning that can be given to “force majeure”….”(at para 17)
  • In this the Court differentiated between “force majeure” and “vis major”. Making “Force majeure” wider in purport than “vis major”.

B. Satyabrata Ghose v. Mugneeram Bangur & Co., 1954 SCR 310

  • This is a landmark Indian decision which explains the ambit of Section 56. Here, the defendant was a company, which was engaged in the construction and development of house plots. There was an agreement for sale of a plot between the plaintiff and the defendant. Meanwhile, during the Second World War, the plots were compulsorily acquired by the military.
  • The issue was whether the agreement was frustrated due to requisition by military. On facts, the Court held that the contract cannot be held to be frustrated, as its performance was possible even after the wartime.
  • Few principles stated by the Court in the decision are: 
    • The word “impossible” in Section 56 does not mean physical or literal impossibility.
    • Contract can be held to be frustrated if its performance is “impracticable” and “useless” from the point of view of the object and purpose of the parties, though the performance is not literally impossible.
    • If the untoward event totally upsets the very foundation upon which the parties entered their agreement, the contract can be held to be frustrated.
  • In this case, the Court found that the delay was not of the character which “totally upset the basis of the bargain and commercial object which the parties had in view”.
  • The Court also held that if the contract has an express or implied “force majeure” clause, then the situation will be analysed on the basis of that, and not through the application of principles under Section 56.

“According to the Indian Contract Act, a promise may be express or implied (1). In cases, therefore, where the court gathers as a matter of construction that the contract itself contained impliedly or expressly a term, according to which it would stand discharged on the happening of certain circumstances the dissolution on of the contract would take place under the terms of the contract itself and such cases would be outside the purview of section 56 altogether”.

C. SPIC SMO V. Tamil Nadu Electricity Board: 2013(1) CTC 500

In the said judgment the madras High Court stated that there are three tests to determine whether an event qualifies as “force majeure” event or not, which is stated as under:

” 89d. The understanding of force measure in French law is similar to that of international law and vis major as defined above. For a party to a contract to invoke force measure in French law, the event proposed as force majeure must pass three tests:

  • Externality: The party, who claims to be absolved, must have nothing to do with the events happening.
  • Unpredictability: If the event could be foreseen, the default party is obliged to have prepared for it. Being unprepared for a foreseeable event leaves him culpable. The standard is very strictly applied.
  • Irresistibility: Consequence of the event must have been unpreventable.”

D. Naihati Jute Mills Ltd. v. Hyaliram Jagannath, 1968 (1) SCR 821

In this case, the Court held that even if a contract is held to be void under Section 56, it will not affect the arbitration clause contained in it.

“Even if the appellants had established frustration, it would not be as if, the contract was ab-initio void. In cases of frustration it is the performance of the contract which comes to an end but the contract would still be in existence for purposes such as the resolution of disputes arising under or in ‘connection with it:

On facts, the Court held that the change in government policy on jute import did not frustrate the contract in question.

E. Sushila Devi vs. Hari Singh AIR 1971 SC 1756

The case concerned the lease of a property, which went to Pakistan after partition.

“The impossibility contemplated by Section 56 of the Contract Act is not confined to something which is not humanly possible., If the performance, of a contract becomes impracticable or useless having regard to the object and purpose the parties had in view then it must be held that the performance of the contract has become, impossible”, the Court observed, holding the lease agreement as frustrated.

F. Industrial Finance Corp. Of India V. Cannanore Spinning And Weaving Mills Ltd. (2002) 5 SCC 54

The Apex court held: The Latin Maxim referred to in the English judgment “lex non cogit ad impossibilia” also expressed as “impotentia excusat legem” in common English acceptation means, the law does not compel a man to do that which he cannot possibly perform. There ought always thus to be an invincible disability to perform the obligation and the same is akin to the Roman Maxim “nemo tenetur ad impossibilia”. In Broom‘s Legal Maxims the state of the situation has been described as below:—

“It is, then, a general rule which admits of ample practical illustration, that impotentia excusat legem; where the law creates a duty or charge; and the party is disabled to perform it without any default in him, and has no remedy over, there the law will in general excuse him (t):…”

G. Energy Watchdog v CERC (2017) 14 SCC 80 (Important)

This decision given by a Bench comprising Justices P.C. Ghosh and R.F. Nariman summarises the jurisprudence on the doctrine of frustration.

Some key points from this judgment are :

  1. If contract has an express or implied ‘force majeure’ clause, it will apply over the principles embodied in Sec 56.
  2. Application of the doctrine of frustration must always be within narrow limits.
  3. A rise in cost or expense will not frustrate a contract.
  4. Doctrine of frustration will not apply so long as the fundamental basis of the contract remains the same.
  5. Force majeure clause will not apply if alternative modes of performances are available.

One of the issues in this case was whether the rice of prices of coal imported from Indonesia would frustrate the Power Purchasing Agreements (PPA).

The Court held that price rise was not an event which frustrated the contract.

“Alternative modes of performance were available, albeit at a higher price. This does not lead to the contract, as a whole, being frustrated”, observed the judgment authored by Justice R F Nariman.

In this case, the Court applied the principle in Satyabrata Ghosh that a contract with an implied or express “force majeure‘ clause will be outside the purview of Section 56.

Referring to Satyabrata Ghosh case, the judgment observed :

“It was further held that where the Court finds that the contract itself either impliedly or expressly contains a term, according to which performance would stand discharged under certain circumstances, the dissolution of the contract would take place under the terms of the contract itself and such cases would be dealt with under S.32 of the Act. If, however, frustration is to take place de hors the contract, it will be governed by S.56”.

In this case, the Court also applied the opinion expressed in “Treitel on Frustration and Force Majeure”, that a force majeure clause will not normally be construed to apply where the contract provides for an alternative mode of performance.

The principles of this case were applied by the Delhi High Court in the 2019 case Coastal Andhra Power Ltd v Andhra Pradesh Central Power Distribution Co Ltd to hold that escalation of price of coal and change in law abroad will not amount to “force majeure” under the agreement, so as to absolve the power generating company from its obligations.

Conclusion/Opinion:

In our opinion, this discussion leads to the irresistible conclusion that the force majeure clause is not a magic wand which can be invoked for all contracts in the present situation.

Contrary to common perception, there is no statutory or common law definition of force majeure or a force majeure event in law. The parties to a contract therefore have the freedom to agree what will amount to a force majeure for the purpose of their contract and what the consequences will be if such an event happens. That means there are no generic answers to questions about how force majeure applies – each party must look at the wording of their own contracts to establish how it works in the relevant circumstances.

One needs to review the text of your key agreements to see if they contain a force majeure or other relevant provision. Broadly speaking, the purpose of a force majeure provision is to “relieve a party from its contractual duties when its performance has been prevented by a force beyond its control or when the purpose of the contract has been frustrated.”

Courts often read force majeure clauses strictly, so if the clause specifically indicates that a pandemic would be a triggering event that could excuse performance, a party would have a strong argument that COVID-19 is covered. However, force majeure clauses often do not specifically identify pandemics as covered events. If that is the case, a company should review the language of the clause to determine whether COVID-19 may fall under the definition of another specific triggering event. For example, some clauses include language defining the enactment of laws, regulations, or governmental orders as force majeure events. In the oil and gas context, governmental actions, including orders to halt production, have been deemed to be force majeure events.

If the force majeure clause is more general in nature, a party should review the language to see if it could be considered to cover events like pandemics. In reviewing general force majeure clauses, courts will also analyze whether the event was unforeseeable when the parties entered into the contract. If the event was foreseeable, the court may determine that the parties intended to address and allocate the risk of the occurrence of the event through the contract‘s other terms.

It is time to review the agreements to see the context and the content of the agreements and to analyze whether the Force Majeure clause can be invoked, if at all, when?- The pre-condition to be fulfilled before its invocation.

As with any contractual dispute, the specific contract language, the governing law, and the specific facts will drive the resolution of any dispute about performance and Courts are likely to apply a force majeure clause narrowly.

RAJIV BANSAL,
SENIOR ADVOCATE

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RAJIV BANSAL

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