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Force Majeure: the defense for non-performance of obligations in contracts

Force Majeure is an emerging new concept in Indian laws, specifically during this pandemic period in the business world. Where COVID-19 has a devastating impact on human lives across the world, it also shows its devastating impact on the businesses where its operations and consequently contractual obligations are revised to assess its impact. The word which now is being most heard in contractual context today is the “Force Majeure” and its applicability in the contracts.

What is Force Majeure?

Force Majeure is basically a contractual clause according to which the parties to the contract have the right to remove the contractual liability for the non-performanence of contract in situations which are natural or unavoidable circumstances because of which the parties are prevented from the performance of their contractual obligation.

The term “Force Majeure” is a French term that refers to “greater force”. It is derived from the concept of Act of God, that is, wherein the event of any uncontrollable natural forces neither of the party will be held liable, however, force majeure clause also includes human actions like war, terrorism, acts of government, plagues or epidemics. Nevertheless, this concept of law differs from the concept of Pacta Sunt Servanda which means the agreements must be kept, which is the basic concept of every contractual whether it be civil or international law.

As defined in the Oxford Dictionary, it is an unexpected circumstance, such as war, that can be used as an excuse when they prevent somebody from doing something that is written in a contract. Therefore, where the party fails in the performance of any of their agreement neither of the party would be liable if it is beyond the reasonable control or the circumstances is such that it affects the performance of any its obligation or it could not be reasonably be foreseen but it is also to be noted that such clause won’t be applicable as an excuse for failure or delay resulting from general economic conditions or any other condition. This clause of Force Majeure, although have got no reference under Indian statutes, some relevancy can be found under Section 32 of Indian Contract Act, 1872, according to which, wherein certain contracts are completed on the fulfillment of obligation commonly known as a contingent contract, and if any uncertain future event occurs leaving the contractual obligation to be unenforced then under these circumstances the contract becomes void.  

The parties seeking defense under such clause needs to show that:

  • That the force majeure event was the result of delayed or inability to perform obligation;
  • All the possible and reasonable steps were taken to avoid or mitigate the consequence of the event;
  • Non-performance of obligation was due to unavoidable circumstances.

Therefore force majeure clause is a kind of contractual clause which can be applied only on the specific circumstance when fulfilled for such application to the contract and the consequence if such event occurs, which is a necessary condition and such occurrence should be beyond the control of parties and all attempts so far being made have failed to fulfill the obligation of the contract is needed to be proven. And if such conditions and the events so far specified in the contract is fulfilled then, under those circumstances, the parties would be relieved from performing their obligations so far being undertaken till such force majeure event continues.

Moreover, if the language of the clause so desires the parties may be required to issue a notice for the occurrence of such event the incapacity or delay in the performance of obligation due to the occurrence of the event, also some of the contracts even permits for the termination of the contract if the event continues for a long period.    

What is the Frustration of Contract?

The frustration of the contract refers to the termination of a contractual obligation by the parties without the fault on either side of the party. Therefore, in the event where the performance of the contract becomes impossible due to any unforeseen or unenforceable occurrence of the event with no party at fault, under such circumstances the contract becomes frustrated and the Doctrine of Frustration comes into play. The frustration of contract thereby results in relives the parties from the performance of obligation and liabilities due to such non-performance. Hence the happening of an event outside the scope of contract making it impossible to perform is known as the frustration of contract.

Since the Force Majeure is not the general law and is just creature of contract which has its application if specified in the contract, and therefore if there is no force majeure clause in the agreement affected parties will have to opt-out other provisions to mitigate and to save themselves from liabilities so far arsing for not performing a contractual obligation. And such other defense in such cases other then force majeure is that of the frustration of contract.

Under Indian statue sec. 56 of the Indian Contract Act, 1872 provides the provision for the performance of an act which after the formation of the contract becomes impossible or unlawful which the parties couldn’t prevent, such agreement to perform an act becomes void. Under the Satyabrata Ghose vs. Mugneeram Bangur co. and ors.[1], the Supreme Court upheld the principle that the term “impossible” has to be interpreted in the practical sense i.e. the frustration of contract would still be the valid defense even where there is no absolute impossibility, but the terms had fundamentally changed which was not considered during the time of making of such agreement. Also under sec. 65 of the Act also has got some relevance in frustration of contract as to where the contract becomes frustrated and void, the party who has secured any benefit out of such agreement shall be forced under this sec to restore such benefit or to make compensation to the other party.

Difference between Frustration of Contract and Force Majeure:

As under the force majeure, its applicability is dependent on the inclusion of a clause in the contract agreement, and parties in this case generally before the execution of contract agree on an exhaustive list of events for its applicability, whereas under the doctrine of frustration of contract the contract agreement can be set aside or discharged upon the happening of an uncertain event which renders the impossible to fulfill its obligation and is applicable when invoked by either party subsequent to the execution of the contract.

The frustration of contract is invoked in the case where the subject matter of the contract is destroyed, which subsequently renders the contract to be void and thereby resulting in obligations by parties to be ceased, whereas, under force majeure contract the provision contemplating an event can result in a delay in performance of the contract and subsequently in fulfilling the obligation towards parties but invoking such provision doesn’t mark the end of the contract, and continues till the event continuos.

However, it is also important to note that where the provision of force majeure is invoked then the frustration of contract can’t be applied, and if the condition is inversed i.e. the contract doesn’t include force majeure clause in agreement then the defense can be taken under the frustration of contract.

Is prevailing COVID-19situation would be considered as force majeure event?

COVID-19 pandemic has not only affected the national trade but also cross-border trade, real estate market, and other businesses. Due to the spread of this COVID condition the parties’ obligation towards meeting their contractual obligation has been hindered. Due to the government-imposed restrictions in movement, production, labor shortage, costly raw materials have all resulted in contribution towards making the obligation either impossible or delay in performance.

Thereby in the wake of the above circumstances, many giant companies are either planning or have already invoked the force majeure clause in their contract. And since force majeure is a clause which requires prior invocation in agreement, and therefore to determine whether the COVID-19 has its application parties need to interpret the definition of force majeure events included in the terminology of agreement. Generally, such terminology includes pandemic, act of God, governmental actions, natural calamity, if the contract agreement contains any such condition then under such circumstances it force majeure may be triggered by the other party.

On 11th March 2020, WHO declared the novel coronavirus to be pandemic thereby leading the way towards its applicability in the interpretation of term under the force majeure clause. Also on February 20, 2020, the by the way of an office memorandum (O.M. No. 18/4/2020-PPD) Ministry of Finance has declared the disruption of the supply chains due to the vast spread of coronavirus shall be considered as an appropriate case for natural calamity. However, it is necessary to keep in mind that such invocation of force majeure event with respect to the COVID condition will be assessed on the case to case basis depending on the terms agreed between the parties. Thereby leading us the way to wait for the determination made by the courts to deal and interpret such provision in the light of prevailing pendemic condition. 

Edited by Vedanta Yadav

Reference

[1] AIR 1954 SC 44

By Sakshi Raje

I am Sakshi Raje from M.S. University Vadodara, pursuing BALLB (hons.). Tort law and it's interpretations in legal world are way too interesting according to me. I am attracted towards it because of its interpretation done differently according to the needs of society. Apart from this I am fond of travelling and tracking different places.