This article has been written by Hritwik Chaudhary and edited by Shashwat Kaushik.
In addition to being a global public health disaster, the COVID-19 pandemic has had a substantial influence on most global industries. The effects of the mitigation measures that have been put in place in many nations include an increase in unemployment and disruptions in the transportation services and manufacturing industries. Indian businesses suffered the consequences of supply fluctuations and meeting project deadlines because of the lockdown restrictions imposed, which are necessary measures a government has to take in such situations. Since pandemic outbreaks are unlikely to be predicted, it is essential to adopt preventive measures to preserve lives as well as safeguard enterprises that are unable to fulfil their contractual responsibilities amid this crisis.
Consequently, some contracts contain “force majeure” clauses that shield the signatories from being held liable for compensation or other financial repercussions if they are unable to fulfil their obligations due to reasons beyond their control.
What is force majeure
Force majeure is a term that everybody who wants to enter into a contract should know after going through an unprecedented pandemic crisis.
According to the Cambridge Dictionary, a “force majeure” is an unanticipated occurrence, such as war, criminal activity, or earthquake, that stops someone from acting in accordance with a legal agreement.
Whenever a party declares force majeure, it essentially means that the party was unable to fulfil a contractual obligation due to factors beyond its control. Force majeure comes out as an essential element of a contract after the occurrence of COVID-19, Force majeure clauses are now being drafted more often by parties in their agreements to set aside themselves from their contractual obligations during any future pandemic-like situations.
Understanding the force majeure clause
The “force majeure” clause exempts the parties from carrying out their contractual obligations. However, without a force majeure clause, the parties run the risk of being in breach of the agreement and being forced to compensate the other party for damages even though the situation was beyond their control.
In the event of the occurrence of an unforeseen event, an impossibility occurs on the part of the parties’ contractual responsibilities. Although the parties can include a list of events that are not in their control, if they are not pre-decided by the parties, it can be understood by the below statements held in Satyabrat Ghosh vs. Mugnareem Bangur & Co. And…(1953).
Impossibility does not mean a literal interpretation, but it implies two elements
- The supervening event should destroy the foundation/ subject matter of the contract and
- Therefore, continuing a former contract is impractical and unreasonable because the object or purpose of the contract is already frustrated and cannot be achieved further.
It is impossible to downplay the significance of the force majeure clause in business contracts. In pandemic situations where all projects are at a halt after incurring significant costs already, it is necessary to concentrate on the legal perspective and to take into account potential legal ways by invoking force majeure conditions regarding the factors that will give a hand in the competition of the project, such as seeking an extension for the necessary amount of time for the full completion, commensurate the losses incurred, seeking compensation for the operational cost, capital expenditure incurred, and other unrecovered losses to restore the situation to its pre-pandemic condition. Therefore, nowadays it has become a customary practise for advocates to incorporate force majeure clauses in contracts.
If a force majeure provision is used and the occurrence of a pandemic lasts longer than the contract’s specified timeframe, the parties are not only entitled to postpone their contractual duties but also to terminate the agreement. After the COVID-19 pandemic, parties are now starting to update their force majeure clauses so that they can account for possible future pandemics.
Necessary components for enforcement of the force majeure clause
- The parties to the agreement thought that such an occurrence would not occur; yet, an unplanned or unexpected intervening event occurred. For instance, Plague, Spanish Flu, COVID-19 etc.
- The burden of establishing that the force majeure event has interfered with the affected party’s ability to perform the contract rests with the party looking to get away under force majeure.
- The parties have taken all appropriate measures to carry out their contractual duties or at the very least to minimise the harm.
- Such an occurrence has rendered the fulfilment of the contract’s duties impossible or impractical. Such as obligations that can’t be performed from home and having to get away from home to complete them.
Some examples of causes that can make work impossible or impracticable
- Destruction of subject matter.
- Incapacity for personal service.
- Non- occurrence of a particular state of things.
- Intervention by legislative or executive authority.
- Intervention in war.
Not to confuse it with the Doctrine of Frustration
In Indian law, the doctrines of frustration and force majeure are two distinct concepts that deal with unforeseen events that may impact the performance of a contract. While they both address similar situations, there are some differences between the two doctrines.
The doctrine of frustration is governed by Section 56 of the Indian Contract Act, 1872. This doctrine states that a contract may be judged frustrated when an unanticipated event takes place after its creation and either makes it impossible to execute or significantly alters the nature of the duties under the contract. For instance, the defaulting party may be exempt from fulfilling the frustrated contract if COVID-19 profoundly alters the primary reason for the parties to enter into it, making it impossible for it to be performed as originally intended. Whereas force majeure is not outlined in the Indian Contract Act and is normally incorporated as a clause in a contract that has been approved by all parties.
In accordance with the doctrine of frustration, the contract is declared unlawful and each party is exempted from their individual contractual responsibilities; however, force majeure provisions have the potential to delay or extend the fulfilment of contractual commitments. The affected party is permitted to temporarily stop or postpone the fulfilment of its duties until the situation has passed or its effects have lessened. The parties do not acquire a right to nullify an agreement just by relying on the force majeure clause of the agreement. Therefore, a party cannot benefit from this condition if it can fulfil its obligations and has access to all of its resources once the lockdown time has ended. Although, during the lockdown period, the delay is such that it disrupts the fundamental foundation of the agreement, then the parties must go one step further and prove that time was of the essence of the agreement and that any delay would render it invalid, which may also result in the contract or agreement being concluded.
Relevant cases for a deeper understanding
The Naihati Jute Mills Ltd. vs. Hyaliram Jagannath (1967)
In this case, it was observed here that, although there was a change of policy and the government in the lockdown period had decided to place an embargo on imports, the question would still be whether the appellants were relieved from liability for their failure to deliver the licence. A contract is not frustrated merely because the circumstances in which it was made are altered.
Therefore, just because there is a simple turn of events on the occurrence of a pandemic, the turn of events will not terminate the party’s obligations; however, it may postpone the obligations of the parties. What will be considered is whether the best endeavour was made to fulfil the contractual obligations by the parties.
M/s. Haliburton Offshore Services… vs. Vedanta Limited & Anr. (2020)
In this case, it was noted here that COVID-19 is without a doubt a force majeure occurrence but was the non-performance caused by this incident? If the contractor’s performance is “prevented, hampered, or delayed by any natural disaster, including a pandemic or disease,” the issue that will be raised is whether COVID-19 delayed the contractor from performing its commitments on time. Any violation or failure to perform cannot be justified or excused simply by citing COVID-19 as a case of force majeure.
This ruling makes it quite apparent that COVID-19, in general, would not be considered a force majeure occurrence and that it will depend on the circumstances, such as whether certain steps were taken to complete the tasks entered in the contract or whether the party was genuinely prevented by the circumstances from fulfilling the obligations.
Energy Watchdog vs. Central Electricity Regulatory Commission and Ors., Etc. (2017)
The Supreme Court in this case declared that the notion of frustration must only ever be used within specific parameters. Although the Suez Canal was closed and the usual route for shipping the goods was only through the Suez Canal, it was held that the contract for the sale of groundnuts, in that case, was not frustrated.
Therefore, Section 56 will not apply if the epidemic does not significantly affect the party and the party can still carry out the contract by another means. It is also clear that where performance is otherwise practicable, a simple increase in the freight price will not render the contract null and void.
COVID-19 can be included in the scope of the “Act of God” clause, which is the most general force majeure provision. But if we keep in mind the above-stated judgements, one cannot be sure of the termination of their obligations after adding a force majeure clause. The impact of the pandemic like situations on the overall contract is to be determined and subjective standards on a case-by-case basis can be used. The way the clause(s) are worded also becomes crucial. Some contracts allow for its suspension until the force majeure situation has passed. Certain contracts stipulate time frames after which any party may end the arrangement by giving the other party written notice. Others want the contract to continue in force while the force majeure issue is being addressed. The party seeking to rely on the force majeure clauses bears the burden of proof to show the impossibility of continuing the assigned project and that the essence of the decided time period has now terminated.
It can be said that in circumstances where there is just minor hardship and not an impossibility of the event, the court may choose not to grant relief under the doctrine of force majeure.
Although a pandemic might not be a strong enough defence against all contract breaches, a force majeure provision that expressly releases the parties from their duties for a certain period of time and even releases the parties of their duties if the event was not fulfilled within the stipulated time and time was an essence to the agreement, in the event of circumstances beyond their reasonable control, should be included in any well-drafted contract. To protect the interests of parties, advocates should have it included in the agreements.