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Importance of proper drafting of force majeure clause

October 31, 2021
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This article has been written by Mihir Sinai Kakodkar pursuing the Diploma in Cyber Law, FinTech Regulations and Technology Contracts from LawSikho. This article has been edited by Ruchika Mohapatra (Associate, Lawsikho) and Prashant Baviskar (Associate, Lawsikho). 

Introduction

This positive attitude of Indians in the face of multitude of stiff day-to-day challenges has its fallout in contract drafting with the structuring of the Force Majeure Clause, often being treated in sheer disdain. Many times the Force Majeure Clause is simply copy-pasted from other drafts and templates, with the primary focus being on incorporating the phrase ‘Acts of God ‘. Sometimes, the contract simply says ‘ This Agreement shall be subject to Force Majeure Clause‘ without the term ‘ Force Majeure ‘ being defined anywhere in the Agreement.

What is the ‘Force Majeure Clause’? 

Force Majeure ‘ is a French term meaning ‘ superior force ‘. The usual perception and understanding of ‘Force Majeure ‘ is any Act of God, a natural calamity, floods, tempest, earthquakes, landslides, bushfires, cyclones, hurricanes, tsunami, Orders of Courts of Law, or pursuant to Orders or new enactments/ changes in law or policy made by the Government of the State or the Union Government, civil disorder, riots, labour strikes, restrictions on supply of input materials, epidemics, etc. 

It is generally perceived that the impact of these factors causing disruption is very well recorded in the public domain and, hence, would either not be disputed or is easy to prove in case of a dispute. 

The Force Majeure Clause is applied to enable the affected party(ies) invoking its provisions to get additional time, equal to the period of time impacted by the occurrence of the Force Majeure event till reasonable normalcy is restored, so as to enable the invoking party(ies) to fulfil their respective obligations under the contract, with delay and without penalty.

Further, the general perception is that the invocation of the Force Majeure Clause by one party implies that the other party automatically gets the benefit of the same in the form of corresponding additional time to fulfil their obligations under the contract. 

There are four necessary components of a force majeure clause:

  1. It must define the breach for which a promisor seeks to be excused.
  2. It must define the “force majeure event” itself.
  3. It must require (and define) the causal connection between these two.
  4. It must explain what will happen if performance is excused.

Each component raises considerations that contracting parties need to consider with some care.

Importance of proper drafting of the Force Majeure Clause

Force Majeure events include the occurrence of widespread devastation and disruption of normal life with breakdown in infrastructure, power lines, communication lines, etc. The Covid-19 pandemic has been an event of Force Majeure but without any occurrences like breakdown in infrastructure, power lines, and /or communication lines, etc. and, hence, has brought a new perspective to the concept of Force Majeure events. The pandemic has thus drawn unprecedented attention to the Force Majeure Clause and highlighted the importance of its proper drafting. 

Firstly, it is necessary to specifically exclude the Payment obligations from the purview of Force Majeure Clause, by stating that, notwithstanding the invocation of the Force Majeure Clause by either or both of the parties, the commitment of either party to effect payments due and/or payable in respect of contractual obligations already fulfilled by the other party shall continue to sustain and survive in the event of such invocation. 

While the lockdown and Janata Curfews declared by the Government of India/ State Governments did bring about a shutdown to most businesses, and brought severe restrictions on the movement of people, the advances in technology, particularly with spread of internet banking, mobile banking, and digital banking, implied that there were no substantial restraints to enabling payments.  

Hence, in contracts where the Payment clause specifically stood excluded from the provisions of the Force Majeure Clause, the paying party was obligated to release payment at the risk of being in breach of the contract.  

Secondly, the pandemic has highlighted the necessity of proper drafting of the Force Majeure Clause, which has been brought out by Orders of the Hon’ble High Courts.

Case Laws

In Standard Retail Pvt. Ltd. vs GS Global Corp and others, in Commercial Arbitration Petition (L) No. 404 of 2020, the Bombay High Court was seized of a Petition filed under Section 9 of the Arbitration and Conciliation Act, 1996, seeking directions restraining the Respondent-Bank from negotiating/ encashing the Letters of Credit issued at the instance of the Petitioner. The case of the Petitioner was that in view of the pandemic and the lockdown declared by the Government, its contracts with the Respondent No. 1 had been terminated as unenforceable on account of frustration, impossibility and impracticability. The Petitioners relied upon Section 56 of the Indian Contract Act, 1872. 

In terms of the contract, the Respondent No. 1, based in South Korea, was contracted to supply certain steel products, to be dispatched from South Korea to the Petitioner at Mumbai. The contract was subject to General Terms and Conditions, which inter alia read as follows : 

Article 11. Force Majeure

In the event of an Act of God (including but not limited to floods, earthquake, typhoons, epidemics and other natural calamities), war or armed conflict or serious threat of the same, government order or regulation, labor dispute or any other similar cause beyond the control of “Seller” or any of its suppliers or subcontractors which seriously affects the ability of “Seller” or any of its suppliers or subcontractors to manufacture and deliver the “Goods”, “Seller” may, at its sole discretion and upon written notice to “Buyer” either terminate the Contract or any portion affected thereof by such event(s), or delay performance of the Contract, in whole or in part, for a reasonable period of time. Any such delay of performance by “Seller” shall not preclude “Seller’s” later right to terminate the Contract or any portion affected thereof by such event(s). In no event shall “Seller” be liable to “Buyer” or to any third party for any costs or damages arising indirectly or consequentially from such non-fulfilment of or delay in the performance of all or part of the Contract” 

It was argued by the Respondent Bank that the Letters of Credit, being an independent transaction with the Bank, had no concern with any disputes between the Petitioner-buyers and the Respondent–seller. Further, there is no beneficial proviso for the Petitioner in the Force Majeure Clause.  The Respondent Seller had fulfilled its contractual obligations, and the cargo had already been dispatched from South Korea, and if the Petitioner would not be able to perform its obligations, it is not a factor which can be considered and held against the Respondent Seller. Also, distribution of steel was declared as an essential service, with no restrictions on its movement, all ports and port related activities including the movement of vehicles and manpower, operations of Container Freight Station and warehouses and offices of Custom Houses Agents were also declared as essential services. Also the lockdown would be for a limited period and, hence, it cannot come to the rescue of the Petitioner so as to enable the Petitioner to rescind from making payments to the Respondent –Seller in terms of its contractual obligations.

The Bombay High Court, vide its Order dated 8th April 2020, upheld the contentions of the Respondents, and rejected the Petition.

In Halliburton v Vedanta, O.M.P. (I) (COMM) 88/2020 before the High Court of Delhi, the petition under Section 9 sought interim protection, by way of a restraint, against Respondent No. 1, injuncting the said respondent from invoking or encashing bank guarantees, issued by the Respondent No 2 bank in favour of Respondent No. 1, under instructions of the Petitioner. 

The Petitioner was executing a contract for the Respondent No.1, for which Performance Bank Guarantees had been furnished. The Petitioner claimed to be in a position to complete the work within the extended due date, 31.03.2020, but due to the sudden spread of Covid-19, the Petitioner had addressed communications, dated 18.03.2020 and 25.03.2020, to the Respondent No. 1, invoking the Force Majeure Clause and seeking benefits thereof. However, the respondent refused to accommodate the Petitioner, and vide communication dated 31.03.2020, had reserved its right to take appropriate recourse under the contract, including, but not limited to termination of the contract and getting the balance work executed through alternative resources at the risk and cost of the Petitioner. 

Aggrieved, the Petitioner approached the High Court apprehending termination of the contract by Respondent No. 1, which would, consequent thereupon, also proceed to invoke and encash the bank guarantees provided by the Petitioner, thereby causing irreparable prejudice to the Petitioner. 

The Petitioner argued that though work was substantially completed prior to the said date, owing to the complete lockdown, on industrial activities as well as on movement of persons consequent to the pandemic, the Petitioner was unavoidably restrained in further execution of work. It was emphasised that the execution of work required travel of persons from overseas, and from various parts of the country. Respondent No.1 strongly opposed the Petitioner’s contentions including on grounds that there was no bar on continuation of industrial activities including production of oil. However, the Petitioner successfully argued that they were not engaged in production of oil per se but only in drilling work unrelated to the current production of oil.  

The Hon’ble Court took a view that the countrywide lockdown, which came into place on 24.03.2020 was prima facie in the nature of a force majeure event, was unprecedented, and was incapable of having been predicted either by the Respondent or by the Petitioner. The Petitioner having represented that they were in the process of completion of the project, and that, but for the lockdown, the project might have been completed by 31.03.2020, therefore, prima facie, special equities did exist, to justify grant of the Petitioner’s prayer, to injunct the Respondents from invoking the Bank Guarantees furnished by the Petitioner, till the expiry of a period of one week from date till which the lockdown had been imposed. Therefore, the interests of justice justified grant of an ad interim injunction, restraining invocation or encashment of the said Bank Guarantees, till the expiry of exactly one week from the date till which the lockdown stood extended. 

Based on the peculiar facts of the case, the Hon’ble High Court of Delhi, by its Order dated 15.04.2020, granted the ad interim stay. 

Conclusion 

The aforesaid orders of the Hon’ble High Courts clearly illustrate how the proper drafting of the Force Majeure Clause is important for obtaining reliefs thereunder, and also how the timely noticing of Force Majeure events to the opposite party, and a proper representation based on the specific facts of the case can help get reliefs on exceptional grounds of existence of special equities.


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