In this article we will analyze the concept of ‘force majeure.’ It is normal for the parties to an agreement to be vigilant in safeguarding their rights and obligations. One important move in protecting the same is to include in the contract a well-drafted force majeure clause which will decide the extent of such a clause depending on the factors it covers within its scope.
In Black’s Law Dictionary the term ‘force majeure‘ was defined as ‘an event or effect which cannot be anticipated or controlled. It is a contractual provision allocating the risk of loss if performance becomes impossible or impracticable, particularly as a result of an event that the parties could not have anticipated or controlled.’ While force majeure was neither defined nor specifically dealt with, some reference can be found in Section 32 of the Indian Contract Act, 1872 (the “Contract Act”) it futhure stated that If the contact is based on the contingent on the happening of such events, which in turns become impossible such a contract becomes void.
From a contractual perspective a force majeure clause provides a party with immediate relief from meeting its obligations under a contract when a force majeure incident occurs. Usually, a force majeure clause sets out particular situations or incidents that would qualify as force majeure events, requirements that must have been met for such force majeure clause to apply to the contract, and the implications of any force majeure occurrence. As such, in order to apply a force majeure clause (if any force majeure event occurs), the occurrence of such events should be be beyond the control of the parties and the parties must demonstrate that they have made attempts to mitigate the impact of such force majeure event. If an event or circumstance falls within the scope of a force majeure event and meets the conditions of the clause’s applicability then the consequence would be that the parties would be relieved from fulfilling their respective obligations under the contract during the period that such force majeure events continue. Further consequential obligations that allow the parties to issue a notice formally intimating the other party of the occurrence of such an incident and triggering the force majeure clause, depending on the language of the contract. .Some contracts also include a clause that if any force majeure case occurs for an extended period of time, the parties will become eligile to terminate the contract
A force majeure clause in a contract would typically include an exhaustive list of events such as acts of God, war, terrorism, earthquakes, hurricanes, governmental acts, explosions, fire, plagues or epidemics or a non-exhaustive list in which the parties simply describe what generally constitutes force majeure events and subsequently add ‘and other acts or events beyond the control of the parties’ As discussed above, it would also include conditions which would have been met for the application of such force majeure clause to the contract and the consequences of such force majeure event occurring. ju. Consequences would include suspension of the parties’ obligations upon occurrence of force majure event.
If a contract does not include a force majeure clause, the parties would have to determine, in light of factors such as the nature of the contract, the nature of the event and so on, whether Section 56 of the Contract Act (which deals with agreements between the parties for an impossible act) and which has been discussed briefly below can be applied to that contract in order to discharge that part.
Why is this concept important in businesses?
Force majeure clauses can usually be found in various contracts such as power purchase agreements, supply contracts, manufacturing contracts, distribution contracts, project finance agreements, real estate developer and home buyers agreements, etc. This provision is relevant for businesses because it relieves the parties from performing their respective responsibilities and is to be fulfilled under the contract and related liability during the time during which force majeure incidents occur, given that the requirements for the clause to become effective (discussed above) are met.
Difference between force majeure and frustration of a contract?
Under the doctrine of frustration, a party’s impossibility to fulfill its obligations under a contract is linked to the occurrence of an event / circumstance that followed the execution of a contract and that was not contemplated at the time the contract was executed. However, in the case of force majeure, parties typically identify an exhaustive list of events prior to the execution of a contract, which would attract the force majeure clause applicability. Frustration of a contract to be exercised and applied involves the dissolution of the entire subject-matter or the underlying rationale for the contract. Doctrine of Frustration makes the contract void and consequently all the parties’ contractual obligations cease to exist. Frustration of a contract is a measure dehors of contractual terms and is the product of incidents that occur after execution of the contract. Whereas a force majeure is a contractual provision that contemplates an event that may result in deferment of contractual performance, obligations and therefore rights of the parties thereunder until such event continues and typically does not necessarily excuse the parties from carrying out their duties. Typically, where a force majeure event is not specifically covered by a contract, the frustration of a contract may be claimed by the party concerned, but where the case is the opposite and a particular event is covered by a contract as a force majeure event, the frustration of such a contract can not be claimed automatically.
Key aspects related to the concepts that legal teams should keep in mind while drafting contracts
The following issues should be addressed when drafting a force majeure provision:
(A) the list of events that would constitute a force majeure event, depending on a contractual agreement between the parties and the terms of the contract, may be exhaustive or non-exhaustive;
(B) actions required by the parties to invoke force majeure provisions by providing for the issuance of a notice to the other side to inform them of force majeure
(C) the consequence of force majeure events, including those requiring parties to the extent possible, to mitigate the consequences of force majeure events, to pardon the concerned party from performing the contract in whole or in part or to pardon a party from delay in performance or to entitle them to suspend or claim an extension of time for performance; or to give that party the right to terminate the contract in part;
Besides the aforementioned, the legal teams should also have a discussion with the contracting parties to understand the sector they are engaged in and specific events if they need to be set as part of force majeure provision.
Concept of force majeure keeping in mind the current COVID-19
The following is a hypothetical example of the principle of force majeure in a contract. Company A had signed a supply contract with Company B for a non-essential product and such supply contract makes clear reference to the occurrence of a force majeure case and its implications. The force majeure clause of the supply contract covers all acts / orders of government within its scope and, upon the occurrence of a force majeure event, notification of the occurrence of such event shall be provided by either party to the other within 30 days of the date of such occurrence; Accordingly, Company B’s obligations to supply the goods to Company A and Company A’s obligation to make payments to Company B for such goods shall be deferred for a period of six weeks. As, in the present period , due to the Corona Virus, the lockdown enforced by the government can be viewed as an act / order of the government, Company B would be forced to give a notice to Company A indicating that such an occurrence has occurred and that the lockdown is beyond the control of Company B and thus will trigger provisions of force majeure clause and all the obligation of both Company A and B will be suspended during the period of lockdown.