This article is written by Nandini Tripathi, from Symbiosis Law School, Hyderabad, and Bushra Asif, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from Lawsikho.com.
At one cease of the spectrum is the rule of “absolute contracts” laid down in the seventeenth century in Paradine v. Jane in which a person who “binds himself via contract truly to do a thing cannot break out legal responsibility for damages” on the idea “that as occasions turned out performance is futile or even not possible” at the other give up, is proving discharge of settlement due to impossibility/ frustration on the premise of erosion of the essential bargain among the events.
Between the 2 extremes, it was but natural that an intermediate contractual mechanism for risk allocation could evolve. Such evolution has resulted in multiple sorts of clauses- an “excellent endeavours” clause, an “affordable endeavours” clause, a clause which pins liability or loss of it based on a specific contingency, and so forth. A force majeure clause is nothing, however, a chance allocation mechanism in a settlement.
The role is exceptionally summed up by means of the US Supreme Court in Day v. U.S. therefore:
“One who makes a contract by no means can be certainly positive that he could be capable of performing it while the time comes, and the very essence of it is that he is taking the hazard inside the limits of his information. But, while the scope of the know-how is constant, this is simply another manner of announcing that the contractor takes the hazard of the barriers to that volume.”
Although force majeure is regularly blended up with the concept of frustration, it is simply a contractual treatment (even though the existence of circumstance precedents/ contingencies is recognized through Section 32 of the Indian Contract Act, 1872 (ICA)). Frustration, on the other hand, in the Indian context, is a statutory treatment enshrined in Section 56 of the ICA. While the latter outcomes in discharge of the agreement altogether, the previous is simplest a chance allocation clause, which at high-quality creates a temporary exemption from overall performance (difficulty to the terms of the clause). Since “force majeure” is a contractual mechanism, plenty is at stake in how the force majeure clause is built.
Overcoming the defaults
Lawyers are exploring concepts like anticipatory breach of Contract, contributory negligence, trying to figure out if their Contracts could be renegotiated or terminated without incurring too much liability. There has been a domino effect and many breaches of Contracts have already taken place, while others may be frustrated or simply that delivery of services or goods has become impossible due to unprecedented circumstances. Unless people can find solutions through negotiation and mediation, a deluge of potential lawsuits will have to be filed once this lockdown is officially over. This is where Force Majeure steps in like a knight in shining armour to save the day.
No one cares to read the small print, or even the boilerplate clauses, which are the general clauses towards the end of the Contract, that some may phrase as “etc. etc.” Force Majeure clause in the “etc. etc.” clauses of a Contract suddenly demands attention. Everyone in frenzy is trying to twist its arm and tail to fit in their objective so it could provide them some solace and save them. Force Majeure, taken from French roughly means “a major force” – quite befitting for COVID! Its job is to excuse a party of the Contract from performance of its Contractual obligations under unusual situations.
Currently, the CEOs are finding themselves in hot and uncharted waters, faced with dilemmas and impasses, as they continue to navigate the impacts of the COVID-19 pandemic. It becomes all the more important to draft Contracts carefully having a wider perspective in order to mitigate and out maneuver this uncertainty.
Meaning of Force Majeure
The term has its foundation from French, that means “extra pressure”. Collins Dictionary defines “pressure majeure” as “irresistible force or compulsion consisting of will excuse a party from performing his or her part of a settlement”.
The term has been described in Cambridge Dictionary as follows:
“an sudden event such as a conflict, crime, or an earthquake which prevents a person from doing something that is written in a felony settlement”.
In Merriam Webster Dictionary, the term has been described as “advanced or irresistible force” and “an event or impact that can’t be moderately expected or managed”.
In light of COVID- 19, a pertinent question which can stand up right here is whether or not COVID- 19 shut down may be regarded as a force majeure occasion for all of the agreements, presenting a leeway to the events claiming impossibility of overall performance? Further, whether such non-compliance of the phrases of the settlement will neither be regarded as a “default devoted with the aid of any birthday party” nor a “breach of agreement”? The popular principle is that an event can be appeared as a pressure majeure occasion on fulfilment of the subsequent situations:
- An sudden intervening occasion happened: The event should be one which is beyond the manage of either of the events to the agreement, much like an Act of God;
- The events to the settlement assumed such an event could now not arise: A party’s non-performance will no longer be excused wherein the occasion stopping performance became predicted or become a foreseeable danger at the time of the execution of the agreement; and
- The unexpected event made contractual overall performance not possible or impracticable: For instance, can the provider of debentures say that there is no default if the issuer is unable to redeem the debentures? Whether an occasion has made contractual overall performance impossible or impracticable needs to be decided on a case-to-case foundation. It is to be analysed whether or not the trouble is so extreme with a view to deeply have an effect on the birthday party, and thereby developing an impossibility of overall performance. This must be, but, relative to the counterparty as a way to create an impossibility of overall performance.
- The events have taken all such measures to perform the obligations beneath the agreement or atleast to mitigate the harm: It is needed that a party searching to invoke force majeure clauses need to observe the necessities set forth in the agreement, i.e. to provide be aware to the alternative birthday celebration as quickly because it became aware about the force majeure occasion, and need to concretely display how the said situation has directly impacted the overall performance of responsibilities underneath the settlement.
How can it help the parties
While the fact remains that the occurrence of a Force Majeure event which in turn affects the business transaction is quite highly unlikely, albeit when it does happen it can be completely debilitating – catches one off guard and leaves long term impact. The consequences of non-performance of Contractual obligations can be high, therefore it is imperative for the Parties to understand what events could trigger a Force Majeure provision and what relief will be available. For the risk averse, it may be worth expending limited bargaining power on a more advantageous Force Majeure clause. The wording of the Force Majeure clause plays a vital role as only that shall be considered to be part of it which is clearly stated. Generally, if invoked successfully, they may:
- While the Force Majeure event continues the obligation is suspended, such that when the relevant event ends the obligation is effectively resumed.
- Extension in time is provided to perform the obligation (although, unless an event can be rescheduled, this is unlikely to be of relevance).
- The right to terminate the Contract entirely and without liability is provided, either immediately or after complying with a prescribed procedure, or upon the expiry of a limited time period, if the circumstances are ongoing.
Incorporating a force majeure clause in the contracts
Force Majeure is usually found buried deep in a Contract in the boilerplate clauses – browsed over and accepted with little or no negotiation. However, “boilerplate” clauses do not mean that they are inconsequential, harmless or useless. Severe consequences can entail if there is no appropriate Contractual provision granting time extension and/or monetary compensation for Force Majeure related delays. On the contrary, an overly broad Force Majeure provision can leave a Contracting party saddled with excessive delays and/or overruns. The Court will interpret the wording used in the Clause to ascertain whether the event really comes under the umbrella of the Clause or not. For example, in Tennants (Lancashire) Ltd v G.S. Wilson & Co. Ltd  AC 495 it was written “The event prevents the affected party from performing its obligations under the contract.” The meaning of the word “prevent” was considered by the Courts and it was concluded that if a Force Majeure clause provides that the relevant triggering event must “prevent” performance, the relevant party must demonstrate that performance is legally or physically impossible, not just difficult or unprofitable. So, what is the right balance and how to properly word it?
There is no template to fit all the scenarios possible, however, two things are to be remembered while drafting the clause to ensure your safety:
1. List Force Majeure triggering events
Try to incorporate all/any possibilities by using appropriate language. For example, drafting the catch-all presents its own challenges. If it merely says “. . . or any other events or circumstances beyond the reasonable control of the party affected,” the canon of construction or interpretation ejusdem generis (of or the same kind) likely would limit the meaning of the catch-all to the same type of events as those listed specifically. Thus, the catch-all needs to make clear that it is not limited to the same type of events. A good example is “. . . or any other events or circumstances not within the reasonable control of the party affected, whether similar or dissimilar to any of the foregoing.”
2. Talk to your Client
To ensure that you cover any unforeseen eventualities or possibilities one needs to discuss with its client as they can also provide an insight, being in a better position of knowing the business, as to what might go wrong in the course of performance of that particular Contract which will make it intolerably burdensome to the client. However, you might have to ask your client to think like a lawyer and not just assume things as they seem — clients tend to take things in their own stride.
Contents of a typical Force Majeure clause
Generally, at the same time as a settlement between parties is operational, situations might also stand up which can be beyond the contemplation and reasonable control of the events to the agreement. These conditions generally tend to render impossible the performance of the settlement by means of the events. These conditions are termed as ‘pressure majeure’ occasions. The time period ‘force majeure’ is a French time period derived from the Latin expression, ‘vis important’ or ‘superior pressure.’
Force majeure clauses are of many types- the primary kind affords for a limited list of activities that the events agree might represent a force majeure occasion for the functions of the agreement. These events commonly include conflict, civil strife, epidemics, acts of Government and so on. A 2nd type is wherein the events agree that each one those events that couldn’t have been pondered at the time of execution of the settlement, and that are beyond the affordable manipulation of both parties, constitute a force majeure event for the motive of the agreement. Hybrid variations of the two and more than one variants of those are manifestly feasible since the clause is absolutely left to the parties. The precept to be kept in mind whilst decoding a force majeure clause is that it should be narrowly construed.
Usually, a pressure majeure clause might offer that neither birthday party (or in some instances one unique party) could make a declaration because of a pressure majeure occasion. Some pressure majeure clauses might also offer for a termination choice in case the occasion continues over a distinct term.
Whether the outbreak of COVID-19 and the following lockdowns ordered by the Central and State Governments would represent a force majeure occasion is dependent on the specific wording of the clause. Where “epidemics” or “acts of Government” are part of the pressure majeure clause, it’s far maximum probably that a Court/ Arbitral Tribunal could preserve that the existing occasions might represent a force majeure occasion situation to:
- Proof of causation;
- Harmonious construction with different provisions; or
- Complying with the condition precedents contained within the force majeure clause.
Each of those problems is discussed separately.
Proof of causation
Establishing a causal hyperlink between the force majeure occasion and dilemma to performance of the agreement is a prerequisite to assert the gain of a force majeure clause. As part of organising this take a look at, the celebration searching for to benefit from the pressure majeure clause have to display, first, that it would have been capable of carrying out its duties but for the force majeure occasion; second, that the force majeure occasion itself changed into enough to cause the non-performance as in opposition to being one of the many reasons for non-performance. On this foundation, it was held that where a charterer couldn’t establish its capability to deliver the products, despite the fact that the shipment was made impossible by using distinctive feature of a force majeure event (bursting of a dam in this case), the charterer couldn’t take recourse to the force majeure clause.
Applying this test to the existing situation, the primary question to be replied stays whether or not contractual compliance could have been achieved in spite of the effect of the COVID-19 and the COVID-19 advisories (travel advisories dated 17.01.2020, 05.02.2020, 02.03.2020, and 19.03.2020, amongst others) and eventually the lockdown by way of Governmental Orders (Central lockdown for a length of 21 days vide the Ministry of Home Affairs Order dated 24.03.2020 and multiple man or woman kingdom lockdowns on in advance dates). The 2nd query that desires to be replied is whether a celebration is the use of the pressure majeure as a mere excuse to protect a breach that would have happened even within the absence of COVID-19 advisories and/ or lockdowns.
Applying this rationale, neither a party which could have executed its responsibilities remotely (such as a designer who could have designed an infrastructure task remotely), nor a celebration who was besides in breach notwithstanding the pressure majeure event (including an employer who had no longer yet acquired the website to handover to the contractor for creation and who can’t establish that it’s far in a function to gather the identical throughout the length of the pressure majeure event) can take gain of the force majeure clause.
Another state of affairs might be wherein the preliminary breach by using one party caused the alternative birthday celebration to go through the effect of the force majeure occasion consisting of a construction task which was purported to be concluded via February 2020 but were given behind schedule by means of 2 months because of one party’s breach. In this sort of scenario, the pressure majeure event might have had no effect and therefore the breaching celebration will not be absolved of legal responsibility.
Harmonious creation with other provisions
Since a pressure majeure clause is a contractual introduction, the supply will must be examined harmoniously with other provisions. Hence, despite the fact that the force majeure clause might itself offer that neither birthday celebration can be entitled to make a claim, the equal cause of motion might also suit in the ambit of some other clause which might also entitle a celebration to make a claim. In such a state of affairs, the 2 clauses should be harmoniously construed and via doing so, it may still be possible for a party to make a declaration.
To illustrate, maximum Power Purchase Agreements and some infrastructure contracts incorporate a “Change in Law” clause, which entitles one of the parties to assert certain extra charges in the event of an detrimental effect with the aid of an “exchange in law.” In such a state of affairs, it can be viable to argue (based totally at the wordings of the character clauses) that the lockdown Order, which made pursuant to a rules (Section 10(2)(l) of the Disaster Management Act, 2006) ended in an alternate in regulation and therefore this became a case where parties had agreed that repayment became payable. There may be different clauses as well such as a “Suspension clause” which may be relevant in positive instances. In all such cases, the force majeure clause ought to be read harmoniously with the opposite provisions of the contract to decipher what the intention of the parties became. Hence, even though an occasion may additionally qualify as a pressure majeure event, in case there may be a specific provision allocating threat in relation to the event, the unique provision might be carried out on the basis of the rule of thumb of lex specialis derogat legi generali i.e., the special prevails over the overall.
Complying with the circumstance precedents contained in the force majeure clause
Most contracts have a notification requirement vis-à-vis the occurrence of the stated pressure majeure event, which stipulates that the non-acting celebration notifies the performing celebration approximately the prevalence of the pressure majeure occasion and the subsequent impossibility to perform the works. Indian Courts have held such a notification as an obligatory contractual requirement, failing which the force majeure clause will now not be attracted. This is glaringly on the basis that because the force majeure clause is a creation of the settlement, the pre-conditions in the agreement for bringing into play the stated clause will have to be adhered to.
Obligations of the party while invoking the clause
The party invoking a Force Majeure clause may have these obligations to fulfill:
- Certain procedures to notify the other party must be adhered to. If notification has to be made within a certain number of days or in a specific manner – also be mindful if the days referred to are calendar days or business days.
- A duty to mitigate losses by taking reasonable steps that occur as a result of the lack or partial completion of the contractual obligations.
- If stated, the party may have to explore other means of carrying out the performance to achieve the objective.
- There might be a provision which directs the party to perform other unaffected obligations so that the Contract is carried on excluding the part that is unable to be fulfilled under the unusual conditions.
Is “COVID” Covered under force majeure
Coronavirus has affected all sorts of Businesses: manufacturers, IT sector, contractors, management consultants, business agents, recruitment consultants and service providers. Is COVID-19 a type of event that triggers the relevant clause?
- Explicit words such as a “disease”, an “epidemic” or a “pandemic” may help cover it. Some clauses include sweeping language such as “any event or circumstance beyond the reasonable control of the affected party” while others are limited to major events such as earthquake, war, explosion, fire, governmental actions and flood.
- In the wake of this global pandemic the question arises can it be deemed as an “unforeseeable event” now? However, with the onslaught of the present pandemic it is unlikely that that another virus outbreak was to be categorized as an “unforeseeable event” in a Force Majeure clause, thus it will not be enough to excuse parties from performing their obligations under the Contract because of such an outbreak using this phrase.
- Parties must act prudently and scrutinize all future Force Majeure definitions. It should set out clearly and allocate the risks faced by the parties – including the threat of non-performance due to pandemic-related contingencies.
- Consideration must be given to what kind of obligations parties have to perform when assessing and assigning the risk associated with Force Majeure events, should such an event occur. For instance, a clause could be drafted in such a way to allow a party additional time to perform, to suspend performance or cancel performance altogether.
- Changes in law can also be included by the parties in their definitions of Force Majeure. It is essential to explicitly state what constitutes a change in the law. For example, timely government recommendations and guidelines to be considered as Force Majeure.
When it comes to COVID and Force Majeure clauses, the following points come into play:
- The type of legal obligations the Contract provides for – what are the specific requirements for performance of obligations by the parties under the Contract?
- Will there be a high level of personal interaction between the parties, for example as in a relational Contract?
- Are manufactured goods only required to be delivered?
- What and how much latitude does it provide, such as the length of delay permitted in the Contract?
- Are there any alternative methods available to fulfil the Contract?
- Is the waiver of obligations limited to non-performance due to a Force Majeure event or to those that could not have been prevented through reasonable means (such as workaround plans)?
- What will be sufficient for the clause to excuse Contractual obligations: performance was “prevented” (essentially impossible), “delayed” or “hindered”?
- If the party’s own actions also contribute to non-performance? For example, if it refuses to go to where the pandemic is prevalent, does that limit its ability to rely on the Force Majeure clause?
- Giving notice apprising the other party of its inability to carry on the required obligation is another crucial step. Should it be given when it suffers the actual impact, or a possible impact? What will such notice entail? Will it demand the other party to start taking steps to remedy the impact, or restore the impact or take appropriate steps to save what it can or terminate the Contract?
- To what extent steps have to be taken by the party in order to mitigate the ensuing damages caused by that event? And, in this case which party is obliged to do so? What does the Contract demand – such as a specific disaster recovery or business continuity plan?
- Is the party required to continually report to the other party as to the steps being taken and/or the expected impact of the event?
- If the clause is invoked does either of the parties have the right to terminate or delay performance of the Contract? If so, after how long?
If the Contract was entered after the status of COVID-19 was declared as pandemic by the World Health Organisation, it makes it less likely to be termed as an ‘unforeseeable event’. The Contracting parties are expected to word it right and take measures accordingly.
Some Landmark Rulings in India
Deliberating on what’s to be taken into consideration as a pressure majeure, in the seminal decision of Satyabrata Ghose v. Mugneeram Bangur & Co., 1954 SCR 310, the Hon’ble Apex Court had adverted to Section fifty-six of the Indian Contract Act. The Supreme Court held that the phrase “not possible” has now not been used inside the Section in the feel of bodily or literal impossibility. To determine whether a force majeure event has passed off, it is not important that the performance of an act ought to actually turn out to be not possible, a trifling impracticality of performance, from the factor of view of the events, and considering the item of the settlement, can also be covered. Where an untoward event or unanticipated exchange of condition upsets the very foundation upon which the events entered their agreement, the identical may be taken into consideration as “impossibility” to do as agreed.
Subsequently, in Naihati Jute Mills Ltd. v. Hyaliram Jagannath, 1968 (1) SCR 821, the Supreme Court additionally referred to the English regulation on frustration, and concluded that an agreement is not pissed off merely because the situations in which it turned into made are altered. In widespread, the courts don’t have any energy to absolve a party from the performance of its part of the contract merely because its overall performance has turned out to be onerous resulting from an unexpected flip of activities. Further, in Energy Watchdog v. CERC (2017) 14 SCC 80, it became observed as follows:
While some of the agreements do have a force majeure clause, one query which could get up is whether the excuse of force majeure occasion be taken handiest if there’s a selected clause within the agreement or event otherwise? Typically, in all of the agreements, whether or not the promisor is underneath the obligation to right away inform the promisee in case of occurrence of any event or incidence, any force majeure occasion or act of God such as earthquake, flood, tempest or typhoon, etc or different similar happenings, of which the promisor grow to be aware, which is reasonably expected to adversely have an effect on the promisor, or its capacity to perform responsibilities beneath the agreement.
The terms of the settlement and the purpose has to be understood to determine the effect of force majeure clause. In Phillips P.R. Core, Inc. v. Tradax Petroleum Ltd., 782 F.2d 314, 319 (second Cir. 1985), it turned into determined that the simple reason of force majeure clauses is in fashionable to relieve a party from its contractual responsibilities while its performance has been averted with the aid of a force past its manage or while the reason of the contract has been frustrated.
The next query that may get up is whether or not each pressure majeure leads to frustration of the agreement? For example, if the settlement turned into hiring of an automobile on twenty fourth March, the prevalence of COVID- 19 may additionally just have the impact of changing the timing of performance. In some different instances, the event may additionally only affect one part of the transaction. Therefore, the impact of the pressure majeure occasion can’t be generalised and shall range depending on the nature of transaction. Usually, occurrence of a pressure majeure occasion presents the promisee with a right to terminate the settlement, and take all vital movements as it is able to deem healthy. For example, in case of hire, if the lessor considers that there’s a threat to the system, the lessor may additionally seek for repossession of the leased gadget.
Further, in case the pressure majeure event frustrates the very rationale of the settlement, then the events are below no obligation to perform the settlement. For example, if the settlement (or overall performance thereof) itself turns into illegal due to any government notification or alternate in law, which arises after execution of the agreement, then such agreements no longer have to be accomplished in any respect. In such cases, if the settlement contains a force majeure or similar clause, Section 32 of the Indian Contract Act could be applicable. The stated segment stipulates that contingent contracts to do or not to do something if an unsure destiny event occurs, cannot be enforced via law except and until that occasion has occurred; If the occasion turns into not possible, such contracts turn out to be void. Even if the settlement does not incorporate a selected provision to this effect then in this kind of case doctrine of frustration beneath Section fifty-six of the Indian Contract Act shall follow. The phase gives that an agreement to do an act which, after the settlement is made, turns into not possible, or, by means of motive of some event which the promisor could not prevent, illegal, becomes void while the act turns into not possible or unlawful.
What if there is no force majeure clause
If the Force Majeure is not included in the Contract, then the party may have to face the following:
- Claims arising out of breach of contract;
- Termination of the Contract;
- Since the Contract has become impossible to perform it may frustrate the Contract. The doctrine of frustration automatically applies to terminate such Contracts which have become impossible to be carried out.
There are quite limited options which may not always be feasible. There is no escape to liability other than the law of frustration. Showing that a business agreement has been frustrated is not easy, other than in really clear cases.
When done properly though, Force Majeure clauses provide a much better array of options to the affected party in the Contract.
Caught in a fix
If you have already been threatened with a claim or are contemplating legal action under this scenario:
- Review the terms of the Force Majeure clause for any specific references to epidemic or pandemic or events “beyond the reasonable control of the parties”.
- Consider if the effect of the pandemic on the obligations could be mitigated in any way. Review alternative methods thoroughly.
- Consider whether any required notices need to be served in order to fulfill the terms of the clause.
- Is there any reference to costs that entail and who shall bear them?
- It is advisable to keep a detailed record of the timeline of events and official government announcements.
- The other party must be apprised of the situation at the earliest to assess any possibilities of a compromise or rescheduling of the event which can be mutually agreed upon.
- Check if your insurance provides cover for the particular circumstance.
Concluding Remarks – When the Force Majeure Clause is attracted, does the loss always lie where It falls?
The well known presumption is that in case of a pressure majeure event, the loss lies in which it falls on the grounds that neither birthday party is responsible to the opposite for a loss prompted due to an occasion beyond its manipulation. However, a case for claiming repayment may be made in the following instances:
- By establishing that the purpose of the loss isn’t always virtually the pressure majeure event, however, the other birthday party’s breach,
- Where the force majeure occasion falls inside the ambit of any other risk allocation clause (together with a “exchange in regulation” clause) which presents for payment of reimbursement by one celebration, and
- Where the pressure majeure clause itself is restricted in scope.
The exceptions cited may not be exhaustive and it’s miles likely that with unique truth situations emerging, the jurisprudence on this vicinity would broaden substantially.
Before concluding, it is suitable to emphasize that not one of the examples given in this text relate to contracts where time is of the essence, given that it’s miles more likely that such contracts would stand annoyed owing to impossibility.
COVID- 19 has been declared as a virulent disease by means of the World Health Organisation, and the Ministry of Health and Family Welfare has issued an advisory on social distancing, w.r.t. Mass accumulation and has positioned tour restrictions to prevent spreading of COVID-19. On nineteenth february, 2020, vide an workplace memorandum O.M. No. 18/4/2020-PPD, the Government of India has clarified that the disruption of the delivery chains due to the unfolding of coronavirus in China or USA must be taken into consideration as a case of natural calamity and “pressure majeure clause” may be invoked, wherever taken into consideration appropriate, following the due method.
In view of the present day situation in which COVID- 19 has a global impact, and is ensuing in a continuous sharp decline inside the marketplace, it’s far crucial to understand the relevance of force majeure clauses, and the effect thereof.
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