This article is written by Saroj Chauhan, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from Lawsikho.com.
The aftermath of recent large-scale disasters in the 2020 back to back like the Australian Bushfire, Floods in Indonesia, The Dreaded Coronavirus, Volcano Eruption in the Philippines, Earthquakes in India, Turkey, The Caribbean, China, Iran, Russia Philippines, Locust Swarms In East Africa & Asia, Cyclone Amphan in India & Bangladesh, Forest Fires in Uttarakhand, India Floods In Assam in India, Snow in Antarctica Turns Green and many such past incidents over a period of times realized the importance of carefully planning for the unexpected events and same goes when drafting the contracts. As upon happening of such disastrous events it becomes impossible for either party to perform its obligations under the contract then in such scenario the Force Majeure clause in the contract comes into picture. Force Majeure is a key tool in managing the risk of such challenging circumstances is the force majeure clause in the contract.
Force Majeure legal definition
Force majeure is a French word which means superior force, the word has also been defined in the Black’s Law Dictionary as an event or effect that can be neither anticipated nor controlled by any individual hence by Force majeure it means events which are beyond human control and hence extra ordinary. It is largely believed that force majeure includes an act of god, natural disaster, war, labor unrest, epidemics and strikes, etc. “Force majeure” is governed by the Indian Contract Act, 1872. the contingent contracts and more particularly Section 32 . In case a force majeure event occurs under the contract, it is dealt with by a rule of positive law under Section 56 of the Contract. Sections 32 and 56 are set out herein:
“Section 32: Enforcement of Contracts contingent on an event happening – Contingent contracts to do or not to do anything if an uncertain future event happens, cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contracts become void.”
“Section 56: An agreement to do an act impossible in itself is void.
In the case of Energy Watchdog Vs. Central Electricity Regulatory Commission & Ors. the Supreme Court of India, restated the law of force majeure and laid down the following guidelines to be mindful of while invoking a force majeure clause
- The basis of such clause is that the events are beyond the reasonable control of the parties and in such conditions parties cannot be held liable for non-performance of obligations in the contract.
- The occurrence of the event has actually rendered the performance impossible or illegal.
- For any event to qualify as a force majeure, it is necessary that the same is unavoidable by the parties even taking all the measures necessary or capable in their capacity.
- While analysing the force majeure clause or considering the force majeure event, it is also necessary to take into consideration that best endeavours have been taken to mitigate force majeure events.
What is the effect of the force majeure clause?
A company must insert a force majeure clause into a contract to relieve itself from liability in the event it cannot fulfill the terms of a contract for reasons which are beyond its control.
Force majeure clause aims at exempting a party from its obligations under a contract which has become impossible for the performance, due to intervention of a superior and unavoidable force. The concept of force majeure has gained significance in the past few years and even more now under the present COVID 19 pandemic the world is going through everyone and every business is effected and is forced to find new ways to run there business that is why now force majeure clause in a contract has gained much more importance then it had ever before.
How does force majeure work?
The force majeure clause is a provision in a contract which allows both parties for non-performance of their contractual duties due to unavoidable circumstances and situation beyond human control thereby relieving the parties from their respective liabilities arising in the course of non-performance.
Though the above clause allows for rescue in chaotic cases like the present COVID 19 situation, its applicability depends on the specific use of words.
For example, In some contracts the force majeure clause is quite extensive and it elaborately covers the circumstances describing the exact state of affairs or events where the said clause can be invoked. In this regard, general terms like epidemic, pandemic, government or military actions, national or regional emergency are commonly used. With the use of the said terms, invoking the force majeure clause becomes subject to the exact situations as mentioned.
In situations where the force majeure events are not clearly elucidated or the force majeure clause is present only in the form of a boilerplate clause, the enforcement of the same becomes a matter of varied interpretation. In these circumstances, the applicability of the clause is best determined by judicial interpretation.
The essential constituents of force majeure clauses
- An unexpected/unforeseen intervening event occurred;
- Such an event has made the performance of the obligations under the contract impossible or impracticable;
- The parties have taken all measures to perform the obligations under the agreement or at least made sure that the damages are less;
- The affected party claiming relief under force majeure, will have the burden of proof to show that the force majeure event has affected such party’s performance of the contract.
Is a force Majeure clause necessary?
The Indian Contract Act, 1872, does not define ‘Force Majeure’. The Indian Contract Act, 1872 also does not provide for any temporary suspension of performance obligations under a contract. The concept of Force Majeure in India has actually evolved through jurisprudence over a period of time, such that it has now become a recognized concept under Indian contract law. In an unforeseen or unavoidable event the parties are not able to deliver the performance neither is able to pay damages of such non performance under such circumstances may parties may invoke force majeure clause to protect their and business interest.
The first and most important step before evaluating the remedy is to assess the impact of the event on the business and performance of contractual obligations and understand the relationship between cause’ and ‘effect’ before looking to invoke the contractual remedy of Force Majeure.
On the basis of analysis of impact, a party should determine whether any particular event has resulted in or will result in any kind failure of performance/ temporary suspension of performance; or the contract has become impossible to perform. The remedies which are available to a party will depend upon the outcome of this determination. Including such clause in a contract gives the parties protection against any breach of the contract caused due to any superior forces against which their skill and care can not possibly provide for.
The specific disasters that can be covered by force majeure
Parties’ s liabilities or performance obligations when an event or circumstance that was unavoidable or not anticipated at the time of contract formation occurs. In many cases the events which will be covered under the force majeure clause is mentioned specifically in contract like, war, floods, earthquake, fire, pandemic in short all acts of gods will be covered under force majeure clause however in case if a particular event is not mentioned the declaration that such event will come under force majeure depends on the interpretation of court however commercial hardships, self induced events, act of third person etc. will not be included While there are slight variations from state to state and court to court, a court interpreting a force majeure clause will generally attempt to answer the following questions based upon the facts of a specific triggering event: (1) Does the triggering event fall within the language of the force majeure clause?; (2) the party seeking relief from its obligation demonstrated that its ability to perform was materially impacted by the occurrence of the event?; (3) Was the triggering event beyond the control of either party?; and (4) Was the triggering event unforeseeable at the time the parties entered into the contract? Again, while it may vary slightly between jurisdictions, courts also trend toward reading force majeure clauses narrowly.
The courts of India have time and again identified force majeure as a relevant ground for non-fulfillment or frustration of contract.
In Narasu Pictures Circuit Vs. P.S.V. Iyer and Ors. the court had observed that “Where it appears from the nature of the contract and the surrounding circumstances that the parties have contracted on the basis that some specified thing without which the contract cannot be fulfilled will continue to exist or that a future event which forms the foundation of the contract will take Place, the contract, though in terms absolute, is to be construed as being subject to an implied condition that if before breach, performance becomes impossible without default of either party and owing to circumstances which were not contemplated when the contract was made, the parties are to be excused from further performance.”
The Hon’ble court had clearly identified the point that upon advent of an event, which makes the performance of the contract impossible, the parties are to be excused from further performance.
Things to include in a force majeure clause
For a party to be able to seek temporary suspension of its contractual performance by invoking ‘Force Majeure’:
- The ‘Force Majeure’ clause in the agreement should explicitly set out the events which will be covered;
- It has to rely on the wordings in the contract with regards to the definition and scope of ‘Force Majeure’ event in the contract. In case such ‘Force Majeure’ clause is of a wide/ inclusive nature (i e covering terms such as natural calamity, natural disaster, pandemic, epidemic) suspension of contractual obligations. In case such ‘Force Majeure’ clause is narrowly worded/ worded in an exclusive manner, it may be difficult to invoke it to seek temporary suspension while construing Force Majeure clauses, the contract must be read as a whole;
- While invoking a contractual ‘Force Majeure’, some of the things to be borne in mind are: (i) the burden of proof lies on the party who wants to invoke the ‘Force Majeure’ clause to establish an existence of such events, circumstances or conditions which result in ‘Force Majeure’; (ii) before triggering ‘Force Majeure’, one must enquire whether there is any alternative way to perform or has a best endeavour been made to mitigate a ‘Force Majeure’ event before invoking it; and (iii) it has to be kept in mind that the time period of subsistence of ‘Force Majeure’ event is crucial to determine the extent to which the contractual obligations can be suspended.
- Ascertain the kinds of contractual performance that are capable of being suspended under the contract. Depending on the precise wording of the ‘Force Majeure’ provision, it is for the affected party to demonstrate that an event of ‘Force Majeure’ (and not some other factor) delayed performance of the contract or caused the failure in performance of the contract notwithstanding the commercially reasonable efforts of the affected party to overcome or mitigate the effect of the event of ‘Force Majeure’; and
- Adhere to the requirements of notification of ‘Force Majeure’ event under the contract. Typically, most of the contracts require a party to notify the occurrence of a ‘Force Majeure’ event, within a stipulated time period, for seeking suspension of its contractual obligations.
Therefore from the above discussion we can say that the Force Majeure clause is the essential clause in an agreement to save parties from their contractual obligations and save damages losses suffered by any situation which is unforeseeable Under present situation of coronavirus outbreak in several countries, vendors, airline companies shipment companies and in certain circumstances even consumers are like most likely to invoke the force majeure clause. However, it has to be clearly understood that force majeure clause can only be enforced when the specific situation under which the said clause is invoke is specified in the agreement so it very important to carefully draft the Force Majeure clause in contract to save your client from huge amount of loss or damages that can be occurred for not drafting or including any particular event in the clause.
- CONTRACT ACT 1872
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