Force majeure clause essentially is the recourse taken by the contracting parties to gain immunity from performance of contractual liability. This article aims at elucidating the meaning and significance of the force majeure clause in a contract and analyse the course taken by Indian jurisprudence for providing clarity and applicability of force majeure on various events. The article also evaluates the distinction between force majeure and the Latin expression vis major as well as doctrine of frustration. With the world going through unprecedented times due to the COVID-19 pandemic, examination of the applicability of this clause in these trying times becomes essential. Force majeure clause typically covers war, natural calamities, changes in the policies of the government, strike and riots. With the onset of COVID-19, the pandemic is also covered under the force majeure clause.
The article spells out the settled as well as contentious principles regarding force majeure to provide a clear insight into what it actually intends at.
Force majeure is a happening of inevitable accident which the parties, in spite of taking due care and caution could not have reasonably foreseen. The term is French for ‘superior force’. Force majeure is a principle against contractual rigidity enshrined in the French Code Civil (Article 1147 and 1148). [[i]] It is defined by Black’s Law Dictionary as “An event or effect that can be neither anticipated nor controlled.” It is basically the occurrence of an event which is beyond the reasonable control of the parties.
A force majeure clause (FMC) in a contract is an expressed provision to identify those circumstances or situations in which performance under the contract by either one or both the parties become impossible to be carried out. In other words, a force majeure clause in the contract frees both parties from contractual liability or obligation when prevented by stipulated or specified events from fulfilling their obligations under the contract.[[ii]] Primarily two instances can happen out of this. First, there can be a termination of contract due to frustration of the purpose owing to non-applicability of the terms of contract or there can be a temporary suspension of performance by the parties which entails extension of timelines or other appropriate relaxations.
Force Majeure as per Indian Jurisprudence
The Hon’ble Supreme Court of India has held that ‘force majeure’ is not a mere French adaptation of the Latin expression ‘vis major’ and it has a wider application since the former incorporates natural as well as manmade unforeseen events. The impossibility based whereon the force majeure clause was being invoked must pertain to the contractual obligation that has purportedly become impossible to perform.[[iii]] In Dhanrajamal Gobindram v. Shamji Kalidas And Co., the Supreme Court dealing with FM clearly defined and distinguished it from vis major,
“19. McCardie J. in Lebeaupin v. Crispin ( 2 K.B. 714), has given an account of what is meant by “force majeure” with reference to its history. The expression “force majeure” is not a mere French version of the Latin expression “vis major”. It is undoubtedly a term of wider import. Difficulties have arisen in the past as to what could legitimately be included in “force majeure”. Judges have agreed that strikes, breakdown of machinery, which, though normally not included in “vis major” are included in “force majeure”. An analysis of rulings on the subject into which it is not necessary in this case to go, shows that where reference is made to “force majeure”, the intention is to save the performing party from the consequences of anything over which he has no control. This is the widest meaning that can be given to “force majeure”, and even if this be the meaning, it is obvious that the condition about “force majeure” in the agreement was not vague. The use of the word “usual” makes all the difference, and the meaning of the condition may be made certain by evidence about a force majeure clause, which was in contemplation of parties.” [[iv]]
The idea of force majeure is evident through Sections 32 and 56 of the Indian Contract Act, 1872. The former provides for term which is enforceable upon the happening of an uncertain future event and if a force majeure event occurs dehors the contract, it is dealt with by a rule of positive law under the latter. The relevant parts of these sections are mentioned herein:
“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.[[v]]
56. Agreement to do impossible act – An agreement to do an act impossible in itself is void.
Contract to do act afterwards becoming impossible or unlawful. A contract to do an act which, after the contract made, becomes impossible or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.
Compensation for loss through non-performance of act known to be impossible or unlawful. Where one person has promised to do something which he knew or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promise for any loss which such promisee sustains through the non-performance of the promise.”[[vi]]
As per section 32, a party to a contract that contains a force majeure clause must prove the following:
- that the event which caused non-performance must be fit for inclusion of the force majeure clause in the contract;
- the non-performance was caused due to the said event;
- the non-performance was beyond the party’s reasonable control and
- that there existed no substitute mode of performance.
The sine qua non for invoking Section 56 are:
- there needs to be a valid contract,
- the performance of the contract has not been fulfilled or must have been partially completed,
- the said performance becomes impossible by way of facts or law,
- the subsequent event is beyond the control of the party who intends to claim frustration and no reasonable steps could mitigate subsequent events.[[vii]]
Force majeure vs. Doctrine of Frustration
The doctrine of frustration of a contract is an established aspect in law of contracts by reason of an impinging impossible or illegal character of the act agreed to be performed. Distinct from force majeure which is a contractual provision, frustration of contract or impossibility of performance is provided under Sec. 56 of the statute. The Supreme Court reiterated the same in Satyabrata Ghose v. Mugneeram Bangur & Co., “…the doctrine of frustration is really an aspect or part of the law of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done and hence comes within the purview of section 56 of the Indian Contract Act. It would be incorrect to say that section 56 of the Contract Act applies only to cases of physical impossibility and that where this section is not applicable, recourse can be had to the principles of English law on the subject of frustration. It must be held also that to the extent that the Indian Contract Act deals with a particular subject, it is exhaustive upon the same and it is not permissible to import the principles of English law dehors these statutory provisions.” [viii]Thus, when the contract does not expressly or impliedly contain immunity from performance in the nature of force majeure, a party seeking to defend himself dehors the contract can rely on Section 56 of the Indian Contract Act.
The Supreme Court of India in Industrial Finance Corporation of India Ltd. v. The Cannanore Spinning & Weaving Mills Ltd., held that “It may be noticed here that the Statute itself has recognised the doctrine of frustration and encompassed within its ambit an exhaustive arena of force majeure under which non-performance stands excused by reason of an impediment beyond its control which could neither be foreseen at the time of entering into the contract nor can the effect of the supervening event could be avoided or overcome.
In the critical case of Energy Watchdog v. CERC, the Hon’ble Supreme Court held that, “Force majeure” is governed by the Indian Contract Act, 1872. The Supreme Court held: “In so far as a force majeure event occurs de hors the contract, it is dealt with by a rule of positive law under Section 56 of the Contract. The performance of an act may not be literally impossible but it may be impracticable and useless from the point of view”.[[ix]]
Analysis of the purview of Force Majeure in the wake of COVID-19
Unexpected Price Fluctuation
In Alopi Parshad & Sons Ltd. v. Union of India, the Supreme Court observed that,”…the Act does not enable a party to a contract to ignore the express covenants thereof and to claim payment of consideration, for performance of the contract at rates different from the stipulated rates, on a vague plea of equity. Parties to an executable contract are often faced, in the course of carrying it out, with a turn of events which they did not at all anticipate, for example, a wholly abnormal rise or fall in prices which is an unexpected obstacle to execution. This does not in itself get rid of the bargain they have made.”[[x]] Therefore, price fluctuation has been considered an unexpected event but this does not imply that the parties can relieve themselves of the contract made.
In the case of Alopi Parshad[[xi]], the Court has clearly stated that a contract cannot be discharged merely because it has become onerous to one of the parties.
Hon’ble Supreme Court in the case of Naihati Jute Mills v. Hyaliram Jagannath[[xii]] stated that, “It is not hardship or inconvenience or material loss which brings about the principle of frustration into play. There must be a, change in the significance of obligation that the thing undertaken would, if performed, be a different thing from that which was, contracted for. These theories have been evolved in the main to adopt a realistic approach to the problem of performance of contract when it is found that owing to causes unforeseen and beyond the control of the parties intervening between the date of the contract and the date of its performance it would be both unreasonable and unjust to exact its performance in the changed circumstances.” There it held that the court do not have general power to absolve the parties from performance merely because the circumstances in which contract was made have changed to be onerous.
The Government of India has taken some measures to protect the interests of parties in commercial contracts. The Ministry of Finance, Government of India vide an office memorandum dated 19.02.2020 elucidated with respect to ‘Manual for Procurement of Goods, 2017’, and acknowledged that in the event of any disruption in the supply chains due to spread of corona virus, such situation will be covered in the force majeure clause in the contract. It is further clarified that such a situation should be deemed as a natural calamity and FMC may be invoked, wherever considered apposite, following the due procedure.
Injunction of besought bank guarantees on the ground of COVID-19
In M/s Haliburton Offshore Services Inc. v, Vedanta Limited[[xiii]],the Delhi High Court examined whether the invocation of the Bank Guarantees is liable to be injuncted on the ground of occurrence of a force majeure event i.e., COVID-19, if the breach occurred preceding the said pandemic. In this case, the grounds relied upon to invoke the force majeure clause were that due to outbreak of COVID-19, experts from France who may be required cannot travel to India. Since the Force Majeure clause in the contract covers epidemics and pandemics, the Contractor asserted that its non-performance is justified and the invocation of Bank Guarantees is liable to be stayed.
The Court held that force majeure clause has to be interpreted narrowly and there has to be a ‘real reason’ and a ‘real justification’ to invoke the said clause. The Court finally granted interim injunction in favour of the petitioner. The Court’s admonitory tone while granting the interim injunction till the expiry of one week from lockdown is indicative of the fact that the Court was cognizant of the unreserved rights of the Respondent to invoke the bank guarantee in terms of the contract as well as the unpretentious hardship caused to the Petitioner during this unprecedented event.
Deferment in issuance of tender
In the case of PKSS Infrastructure Private Ltd. v. South Delhi Municipal Corporation[[xiv]]. The High Court of Delhi in this case observed that the situation in the country is unforeseen and unfortunate, but citing COVID-19 every time as a ground for non-performance of the contract before the court is discouraged. With regard to the case in question, it was noted that it is imperative that the tender process has to be completed with urgency as the term of the existing contractor had already come to an end on account of the action of termination by the Respondents. As such the Petition was dismissed.[[xv]]
Suspension of rent
In Ramanand & Ors v. Dr. Girish Soni., the tenant prayed for suspension of rents owing to the current situation of COVID-19 which has disrupted all the businesses. With regard to the facts of the aforesaid case, it was held by the Delhi High Court that in the absence of a contract or a contractual stipulation, as in the present case, the tenant may generally seek suspension of rent by invoking the equitable jurisdiction of the Court due to temporary non-use of the premises. The question as to whether the suspension of rent ought to be granted or not would depend upon the facts and circumstances of each case, including the nature of the property, financial and social status of the parties, amount of rent, other factors, any other contractual conditions, and protection under any executive order(s) etc.[[xvi]]
COVID-19 a force majeure event under Construction Contracts
Recently on FMC, the Finance Ministry vide notification dated 13.05.2020 clarified that parties to a contract can invoke FMC for all construction works/ contracts, goods and services contracts and PPP contracts with Government Agencies and in such event, the date for completion of contractual obligations which had to be completed on or beyond 20.02.2020 shall stand extended for a period not less than three months and not more than six months without imposition of any cost or penalty on the contractor/concessionaire.[xvii] In most of the construction contracts, there is usually a requisition for issuance of a prior notice for invoking the force majeure clause.
In essence, the force majeure clause provides relief from performance of a contract and lays down events that qualify to be considered force majeure. It undergoes the various tests to examine its applicability. In the occasion of non-inclusion force majeure clause in the contract preceding the advent of an unforeseen event, the contracting parties can resort to doctrine of frustration which is more challenging to prove in the court of law and essentially kills a contract. Therefore, it is essential to have the necessary foresight while framing a contract and laying down the events.
Frequently Asked Questions (FAQ)
1. In what circumstances Doctrine of Frustration or relief u/s 56 cannot be claimed?
The claims of frustration are rejected by the Courts in cases where an event has caused a mere difficulty or inconvenience in performance of the contract or if there are other possible practical means of performance of contract or the impossibility of performance is transient.
2. What is the status of payment obligations on account of force majeure?
Generally, the view this issue in a strict sense and do not exempt the party from payment obligations on account of force majeure or frustration of contract albeit some commercial contracts have force majeure clauses that are wide enough to cover even pandemics like COVID-19. In such cases, they made be liberated from payment obligations. However, Commercial impossibility or non-profitability does not qualify for frustration of contract.
3. What are the areas wherein concept of force majeure may not be enforceable on a particular matter?
Force majeure is not intended to excuse negligence or other malfeasance of a party, as where non-performance is engendered by the routine and natural consequences of external forces, or where the supervening circumstances are specifically contemplated. It would also be important to consider that force majeure cannot be invoked just because the contract has become financially or commercially more testing to perform.[xviii]
- Does there exist a distinction between force majeure and vis major?
- Are the courts empowered to absolve the parties of performance of contract if it turns onerous?
- Is COVID-19 considered to be a force majeure?
- Are unexpected price fluctuations deemed to be force majeure?
- What is the distinction between force majeure and doctrine of frustration?
[i] Nimisha Srivastava, Enforceability of Force Majeure Clause in India and UK, iPleaders ( July 6, 2020, 01:18 PM), https://blog.ipleaders.in/enforceability-force-majeure-clause-india-uk/.
[ii] Anandaday Misshra, India: Force Majeure, mondaq (July 2, 2020, 05:34 PM), https://www.mondaq.com/india/contracts-and-commercial-law/901990/force-majeure.
[iii] Markfed Vanaspati & Allied Industries v. Union of India (2007) 7 SCC 679.
[iv] Dhanrajamal Gobindram v. Shamji Kalidas And Co., AIR 1961 SC 1285.
[v] Indian Contract Act 1872 § 32.
[vi] Id § 56.
[vii] Prithviraj Senthil Nathan, India: Legal Principles In Invoking Force Majeure Clauses – Case Law Analysis, mondaq (June 7, 2020, 07:12 AM), https://www.mondaq.com/india/litigation-contracts-and-force-majeure/926356/legal-principles-in-invoking-force-majeure-clauses-case-law-analysis?signup=true.
[viii] Satyabrata Ghose v. Mugneeram Bangur & Co., And Anr. AIR 1954 SC 44.
[ix] Energy Watchdog v. Central Electricity Regulatory Commission & Ors. Civil Appeal Nos.5399-5400 of 2016.
[x] M/s. Alopi Parshad & Sons, Ltd v. The Union of India AIR 1960 SC 588.
[xii] The Naihati Jute Mills Ltd v. Hyaliram Jagannath AIR 1968 SC 522.
[xiii] M/s Haliburton Offshore Services Inc. v. Vedanta Limited & Anr., O.M.P (I) (COMM.) No. 88/2020 & I.As. 3696-3697/2020.
[xiv] PKSS Infrastructure Private Ltd. v. South Delhi Municipal Corporation and Ors, W.P. (C) 2995/2020 (Delhi).
[xv] Yashika Sarvaria & Mitansha Chopra, FORCE MAJEURE: Q&A Concerning Force Majeure In View Of COVID 19 Pandemic, mondaq (July 7, 2020, 05:03 PM), https://www.mondaq.com/india/litigation-contracts-and-force-majeure/961526/force-majeure-qa-concerning-force-majeure-in-view-of-covid-19-pandemic.
[xvi] Ramanand & Ors vs Dr Girish Soni & Anr CM APPL. 10847/2020.
[xvii] Madhu Sweta & Shivangi Khanna, Impact Of COVID-19 On Indian Commercial Contracts, Singhania & Partners (July 7, 2020, 05:33 PM), https://singhania.in/safeguards-in-force-majeure-in-india/.
[xviii] Poorvi Sanjanwala & Kashmira Bakliwal, What is force majeure? The legal term everyone should know during Covid-19 crisis, Economic Times ( July 7, 2020, 09:46 PM), https://economictimes.indiatimes.com/small-biz/legal/what-is-force-majeure-the-legal-term-everyone-should-know-during-covid-19-crisis/articleshow/75152196.cms