Force Majeure Clause- A Resort for Businesses

Force Majeure Clause- A Resort for Businesses

Executive Summary

• Never was it imagined, Covid-19 could cause inevitable disruption in human routines, business and commerce resulting non-performance & delays in performance of contractual obligations. To bear with its adverse impact, parties have resorted to the provisions under Indian Contract Act, 1872 which are relevant to “Force Majeure” and “Doctrine of Frustration”.
• “Force Majeure” is an event or effect that can be neither anticipated nor controlled and includes both natural and artificial unforeseen events.
• “Vis Majeure” means “overwhelming, unpreventable event caused exclusively by forces of nature, such as an earthquake, flood, or tornado.” It covers only natural unforeseen events.
• Force Majeure” has a wider scope than “Vis Majeure”.
• If the contractual definition of the force majeure event expressly includes epidemic/pandemic and the event occurs, then the affected parties may get the relief.
• Where such words are not specifically mentioned, in such scenario “catch-all phrases” may be used for exemption. For example- “including, but not limited to” or “any cause/ event outside the reasonable control of the parties”.
• The Honorable Supreme Court of India has in one of its judgements held that when a force majeure event is relatable to a clause (express or implied) in a contract, it is governed by Section 32-Force Majeure of the Act and if a force majeure event occurs outside the scope of the contract, Section 56-Doctrine of Frustration of the Act applies.

Introduction

Covid-19 pandemic has not only affected the human lives but has also caused economic crisis all across the world. Never was it imagined, it could cause inevitable disruption in human routines, business and commerce resulting non-performance & delays in performance of contractual obligations. To bear with adverse impact on businesses and commerce, parties have resorted to the provisions under Indian Contract Act, 1872 which are relevant to “Force Majeure” and “Doctrine of Frustration”.

Force Majeure and Vis Majeure

“Force Majeure” as defined in Black Law Dictionary means “an event or effect that can be neither anticipated nor controlled’. The term includes both acts of nature (e.g. floods and hurricanes) and acts of people (e.g. riots, strikes and wars).”

“Vis Majeure” as defined in Black Law Dictionary means “overwhelming, unpreventable event caused exclusively by forces of nature, such as an earthquake, flood, or tornado.”

“Force Majeure” has a wider scope than “Vis Majeure” as “Force Majeure” includes both natural and artificial unforeseen events while the latter only covers natural unforeseen events.

A company may insert a force majeure clause into a contract to absolve itself from liability in the event it cannot fulfill the terms of a contract for reasons beyond its control.

Force Majeure Clauses in Contracts

The concept of Force Majeure is to save the parties from consequences over which, it has no control. Hence, it has become the last resort for parties to exempt themselves from the liability of a breach of contract.

Contracts generally have force majeure clause consisting of force majeure events such as, acts of god, wars, terrorism, riots, labour strikes, embargos, acts of government, epidemics, pandemics, plagues, quarantines, and boycotts.

If the contractual definition of the force majeure event expressly includes epidemic/pandemic and the event occurs, then the affected parties may get the relief. Where such words are not specifically mentioned, in such scenario “catch-all phrases” may be used for exemption. Catch-all phrases are sentences in addition to the specified events in force majeure clauses. For example- “including, but not limited to” or “any cause/ event outside the reasonable control of the parties”.

Also, if “Vis Majeure” or “Act of God” has been specified as force majeure event, the current scenario of COVID-19 can be contended to be an “Act of God”.

Section 32 and Section 56 under Indian Contract Act, 1872

The Indian Contract Act, 1872 contains two provisions which relates to Force Majeure and Act of God. Section 32 of the Act deals with contingent contracts & provides that if a contract is based on the happening of a future event and such event becomes impossible, the contract becomes void.

Section 56 of the Act deals with frustration of a contract & provides that a contract becomes void if it becomes impossible, by reason of an event which a promisor could not prevent, after the contract is made.

The Honorable Supreme Court of India has in one of its judgements held that when a force majeure event is relatable to a clause (express or implied) in a contract, it is governed by Section 32-Force Majeure of the Act and if a force majeure event occurs outside the scope of the contract, Section 56-Doctrine of Frustration of the Act applies.

Eventually, the burden of proof shall be on the party taking defense of force majeure to mitigate the liability of non-performance of its contractual obligation.

Even if a pandemic like Covid-19 falls within the ambit of a force majeure clause that, by itself, would not relieve a party from performance of contractual obligations. The pandemic must have a direct impact on the non-performance. A clause that requires a party to be “prevented” by the force majeure event from performing its obligations will require a more direct and proximate causal link than the one which only requires the party to be “hindered “or “interrupted” in the performance of its obligations.

Regards,

Legal Team

Proind Business Solutions Private Limited
306, Tower B, I-thum, Plot No A-40, Sector 62, Noida, UP, India- 201301
No.: +91 120 4224203
Email: info@proindmail.in, website: www.proind.in