This article has been written by Sunita, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.
It has been published by Rachit Garg.
Table of Contents
Introduction
When a contract is entered into between any two parties but the contract cannot be completed due to an Act of God, non-performance of the contract will not attract legal consequences. There are certain external forces that are beyond the control of the party, and hence the contract cannot be fulfilled. This clause is called the force majeure Clause.
What is force majeure clause
Force Majeure is derived from French Law, which means “Superior Force”. It is a clause in an agreement or contract whereby the non-performing party is exempted from any legal consequences if the non-performance of the contract is beyond the human’s control to fulfil the contract. Normally, any contract has a liability clause, which states that in the event of non-performance of the contract, the party has to bear the injunction charges, penalties, fines, etc. for non-performance of the contract. But if there is an Act of God, e.g., a storm, hurricane, epidemic, pandemic, floods, earthquakes, war, political unrest, civil disorder, labour strikes, etc., the party who has failed to fulfil the contract is exempt from paying such damages. The Force Majeure Clause covers natural disasters as well as catastrophes created by humans.
When a person enters into a contract with another person for some lawful consideration, it becomes binding on both parties to fulfil the contract. But if one party is unable to complete his/her part of performing the contract due to an unforeseen event, then the Force Majeure Clause comes to the rescue of the non-performing party. This unforeseen event can be a storm, hurricane, epidemic, pandemic, flood, earthquake, war, or political unrest. There is an Act of God over which the party to the contract is unable to perform his part of his / her part of fulfilling the contract. In such an event, the party who is unable to perform the contract is not liable to pay any damages, penalties, or injunction charges to the other party. Basically, it is a protection for the non-performing party from the legal consequences that may arise due to non-fulfillment of the contract.
How force majeure cause in India applied
The Indian Contract Act, 1872, does not define the Force Majeure Clause. But it’s essence can be seen in Section 32 and 56 of the Indian Contract Act, 1872, which state that:
Section 32 states that
Enforcement of Contracts contingent on an event happening:
The performance of the contract depends on the event, which is uncertain.
Contingent contracts to do or not do anything if an uncertain future event happens, cannot be enforced by law:
If any uncertain event occurs, the fulfillment of the contract depends on either doing it or not doing anything.
Unless and until that event has happened:
The contingent event has to happen, and only then can it be invoked.
d. If the event becomes impossible, such contracts become void:
If an unforeseen event makes it impossible to complete the contract, such contracts will become void.
Section 56 states that an agreement to do an act impossible in itself is void
For example, if a person makes an agreement with another person for the smuggling of goods, which is forbidden by law, the agreement will automatically be null and void.
However, if the parties have failed to insert a force majeure clause, the party in default can still claim relief under Section 56 of the Indian Contract Act, 1872, and have to prove in a court of law that the unforeseen event made it impossible for the party to fulfil the contract.
What are the conditions of force majeure clause
There are two main conditions that need to be fulfilled in this clause :
1. The event must be an unforeseen one.
2. This unforeseen event makes it impossible to perform the contract.
The most common example of this unforseen event is Covid-19. During Covid-19 pandemic, it was virtually impossible to deliver the goods to domestic as well as international markets. As there was lockdown in many states within India and in many countries, this clause became a major relief to the party that failed to perform their contracts.
Essentials of a force majeure clause
All contracts must have a Force Majeure Clause, which can relieve the non-performing party, in the event of an unforeseen event. Indirectly, it is an exemption to the contract, whereby a non-performing party benefits from all the legal consequences due to the non-performance of the contract.
In order to claim relief from this clause, the following essentials are required:
- The events must be eternal, unavoidable, and unforeseen for both parties concerned.
- Due to this, the performance of the contract becomes highly impossible.
- All possible steps are taken by the parties to perform the contract.
4. The non performing party is unavoidable, in a court of law, in the event that it makes it impossible for fulfilment of the contract.
Conflicts with force majeure clause
The Force Majeure Clause conflicts with Pacta sunt servanda. It’s a Latin word, which means agreements must be kept. So ideally, one cannot escape the liability of non-performance of the contract. The best option considered is that instead of going to court, it’s settled mutually by giving time for the performance of the contract to the defaulting party.
Time is the most important factor in determining the applicability of the Force Majeure Clause. Due to lockdowns in many countries during Covid-19, international trade was affected. It became practically impossible for the parties to deliver the goods on the domestic and international markets. Since it’s an act of God, suppliers must have benefited from this clause by not fulfilling the contract. But the same clause cannot be applied now, as there’s no lockdown in any country. Hence, time is crucial in deciding whether the Force Majeure Clause is applicable or not.
Although it is necessary to insert a force majeure clause explicitly, if the parties have failed to do so, the party can claim relief under Section 56 of the Indian Contract Act, 1872, where the party will have to prove that due to the unforeseen event, it has become impossible for the party to perform, leading to frustration of the contract.
Important case laws
Satyabrata Ghose v. Mugneeram Bangur & Co.,1954 SCR 310
In this case, the Supreme Court held that the word “impossible” has not been used in the sense of physically or literally impossible.
The Divisional Controller, KSRTC v. Mahadeva Shetty :
It holds that the expression ‘Act of God’ signifies the operation of natural forces free from human intervention, with the caveat that every unexpected natural event does not operate as an excuse from liability if there is a reasonable possibility of anticipating their happening. It held that the expression ‘Act of God’ signifies the operation of natural forces free from human intervention, with the caveat that every unexpected natural event does not operate as an excuse from liability if there is a reasonable possibility of anticipating their happening.
Conclusion
The Force Majeure Clause in a contract should be properly worded. Precise words such as floods, storms, epidemics, pandemics, hurricanes, war, political unrest, etc. should be mentioned and worded properly. Words such as natural disasters can be looked at from a broader perspective. If any of the acts are missed, the court may give the benefit of the doubt to the other party. A carefully drafted contract with a good Force Majeure Clause enhances the beauty of the contract and goes a long way.
Suggestions
- If a contract is entered between two parties, laws of the country must be kept in mind before drafting any contract, and the possible areas of conflict in a contract must be decided while finalising the contract, e.g., place of delivery, date of full payment, collection of delivery by a third party, etc.
- List out all such events that fall under unforseen events or that are coming under the category of “Act of God” to claim relief from the force majeure clause. The suits are easily mitigated if a properly drafted contract is entered into between the parties.
- The terms of the contract can be re-negotiated with the party, e.g., payment, extension of the time for delivery, etc., for the completion of the contract. This will help protect the contractual interests of both parties.
References
- The Contract Act, 1872
- https://corporatefinanceinstitute.com/resources/accounting/force-majeure/
- https://www.law.cornell.edu/wex/force_majeure
- https://acrobat.adobe.com/link/review?uri=urn:aaid:scds:US:6731b93e-4930-39e0-889b-b34f7ea1571
- https://acrobat.adobe.com/link/review?uri=urn:aaid:scds:US:6731b93e-4930-39e0-889b-b34f7ea1571
- https://www.venable.com/insights/publications/2011/02/understanding-force-majeure-clauses
- https://blog.ipleaders.in/what-is-the-force-majeure-clause-in-a-contract-and-what-care-should-you-take-while-drafting-it/
- https://www.thehindubusinessline.com/opinion/columns/slate/all-you-wanted-to-know-about-force-majeure/article31834792.ece
- https://www.investopedia.com/terms/f/forcemajeure.asp
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