Contractual Clauses – Force Majeure

Force majeure is defined in the Black’s Law Dictionary as “an event or effect that can be neither anticipated nor controlled.” It is a contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event that the parties could not have anticipated or controlled.[1] These are contractual clauses used to prevent the performance of a contract in some extraordinary circumstances of events which are beyond the control of the parties. This clause is used to prevent the parties from an unforeseen event.

The concept of force majeure is not just restricted to some uniform events. It covers all the unforeseen, natural, unnatural, etc. events. The concept revolves around the impossibility of performing the contract. The impossibility no longer is restricted to the literal meaning of the word i.e., it cannot be done. In today’s scenario if the contract capable of being performed but the main purpose of the contract no longer exists then also the contract is considered impossible. In the case of commercial impossibility, if the performance is possible and purpose is also existing but later the purpose or the profit becomes senseless then also this contract will be considered impossible.

The Purpose behind including a Force Majeure Clause

There are two main purposes of Force Majeure: (i) to allocate risk and (ii) to provide notice to the parties of events that may suspend or excuse performance. This is because in a normal contract there is always a list of events which may lead to non-performance of a contract but they are so numerous that it becomes very difficult to include everything in it. Therefore, the clause of Force Majeure is used. There are a few elements that are required to qualify an event as Force Majeure. They are: (i) the event must be external; (ii) it must render the performance radically different from that originally contemplated; (iii) it must have been unforeseeable or unforeseen.[2]

The major part of the applicability and consequences of this clauses depends on its drafting. The drafted clause decides whether the affected party will be excused fully or partly, whether such party will get time extension to perform the contract, whether they will get the chance to terminate the contract etc. [3]

In some laws, the clause of force majeure is just dependent on the contract but in others despite the draft contract the court decides whether some event can be included under force majeure or no. in the latter type, the contracts are drafted as general common law.

Foreseeability

The only requirement for a contract to apply the concept of Force Majeure is the un-foreseeability of an event at the time of contracting. Now the test of foreseeability is complicated as the event has to be inevitable at the time when parties seek to apply the clause. There is an ambiguity as some events may be foreseeable generally but not specifically.[4] Therefore, the court generally decides the foreseeability based on the type of inquiry done by the court.

It has been held in various judgements that the foreseeability test can only be conducted if it is mentioned in the force majeure clause that the event should be unforeseeable.[5] It is suggested that the force majeure clause should be broadly made and interpreted and not specifically. Instead of including foreseeability application, the drafters should include disruptive events. But as the foreseeability element is important in the force majeure clause hence the court focuses on foreseeability as a result of a disruptive event, which completes the requirement as well as leads to the conclusion of unforeseeability.

Control

Force Majeure also involves the concept of reasonable control of the misuse of the clause. It prevents either party to deliberately cause a force majeure event to avoid the performance of the contract.[6] There is one more reason for reasonable control, i.e., that the party should not use an event as a force majeure without taking reasonable care and caution which could have been taken to prevent the event. This reasonable control is not mandatory and it is totally upon the parties to decide whether they want to include the controlling clause to force majeure or no.[7] the parties are free to decide their standards which are only subject to manifestly unreasonable standards, i.e., those standards should not be unreasonable, legitimate, and should concern the event.[8] There are many circumstances that are beyond the control of the parties. But all circumstances are very difficult to be mentioned in the contract therefore it depends on the interpretation.

Now if we talk about the present situation, i.e., COVID-19 is the best example of interpretation. In such a situation the courts are lenient and do generous interpretation to help the parties really suffering to perform the contract. But this does not change the basic burden of proof on the affected parties to prove that the non-performance or delay was beyond their control and could not be prevented or mitigated.[9] Further, if the courts agree to include COVID-19 under the force majeure clause, it will never mean that the parties are free to delay the performance or licensed for non-performance or terminate the contract, etc. but the reason for non-performance had to be justified or accepted by the court. This is because the major events such as COVID-19 may create circumstances of non-performance for many but not all and therefore it is very important to see whether the parties claiming force majeure has tried his level best to perform the part of the contact or not. Force majeure does not only prevent the party when the contract is impossible to perform due to more difficulty in performance or more expensive or less profitable etc.

“The concept of force majeure has not been defined or specifically dealt with under any Indian statutes. However, the legislators have to some extent dealt with this concept as is clear from Section 32 of the Indian Contract Act, 1872 dealing with contingent contracts. Section 32 of the Indian Contract Act, 1872 reads as follows:”[10]

“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.” [11]

When this concept is not applicable or absent in a contract then the legislature has dealt with another concept which is similar to the doctrine of frustration under Section 56 as:

“56. Agreement to do impossible act. Contract to do an act afterwards becoming impossible or unlawful—A contract to do an act which, after the contract is 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 promisee for any loss which such promisee sustains through the non-performance of the promise.”[12]

In the case of M/s Halliburton Offshore Services Inc. v. Vedanta Limited[13], Corona Virus was considered in the category of Force majeure in the Interim Order dated April 20, 2020, which observed that the lockdown done by the Government in view of the outbreak of the coronavirus was prima facie in the nature of a force majeure. In this case, the force majeure clause was invoked by the petitioner as it was contained in the contract entered into between the parties. The Hon’ble Court, therefore, stayed the invocation of bank guarantees by Vedanta Ltd.[14]

The relevant portions of this interim order read as follows:

“20. The countrywide lockdown, which came into place on 24th March 2020, was, in my opinion, prima facie in the nature of force majeure. Such a lockdown is unprecedented, and was incapable of having been predicted, either by the respondent or the petitioner.

……. Prima facie, in my view, special equities do exist, as would justify grant of the prayer, of the petitioner, to injunct the respondent from invoking the bank guarantees of the petitioner, forming the subject matter of these proceedings, till the expiry of a period of one week from 3rd May 2020, till which date the lockdown has been imposed.”

“29. There shall be an ad interim stay on invocation and encashment of the eight bank guarantees……”[15]

Based on the analysis of the aforesaid judicial precedents, it is clear that the judicial response to the doctrine of force majeure has been rigid. The courts have not allowed economic inability, inconvenience, difficulty in performance, onerousness, etc. as grounds of force majeure for a party to terminate or get an exemption from a contract.

Absence of Force Majeure Clause

If in a contract there is no force majeure clause then the affected parties will have to find some other clause to prevent themselves. This is because this clause not defined in any statute but it totally depends on the contract drafted. The other clause which can be relied on is the doctrine of frustration.

It is very difficult to prove the doctrine of frustration as it requires to prove that the event was totally unforeseen. It is very interesting to note that the doctrine of frustration is not applicable if the express force majeure clause is mentioned in the contract. “The doctrine of frustration results in the contract automatically coming to an end. The parties to the contract will no longer be bound to perform their future obligations. Because of the dramatic consequences’ contractual frustration, the threshold for proving frustration is much higher than that for most force majeure provisions, since it must be shown that the obligations impacted by the event or circumstance are fundamental to the contract.”[16]

Force majeure and Doctrine of Frustration are usually considered the same. The basic difference between the two clauses is that the events in the force majeure clause cannot be pre-decided because they are possible at the time of contract drafting. On the other hand, the events covered under frustration are already decided at the time of contract drafting.

There are some steps which can be followed to make force majeure more reliable:

  • the draft contract’s detail should be highly considered and the as soon as the party determine that the performance is becoming impossible then they should immediately bring the force majeure clause as it is difficult to prove such a clause;
  • before drafting the clause of force majeure, other alternatives should always be explored as a backup;
  • whatever notice regarding the non-performance or delay or termination are to be provided, it should be done as soon as possible;
  • to invoke force majeure the excuse should be genuine and not like the costs are increased therefore performance is impossible;
  • all the documents for non-performance should be kept safely. It further helps as evidence in court;
  • if it becomes difficult to prove force majeure then the concept of frustration should be proved.

Conclusion

There are some points which are to be analysed in order to see whether the force majeure clause is attracted or not. The very first step is to see whether the contract contains a force majeure clause or not. If the contract contains force majeure clause then it attracts Section32 of the Indian Contracts Act, 1872 because there is an express provision relating to the concept of force majeure in any Indian Statute but it is similar to Section 32. The parties who successfully prove the clause of force majeure are relieved from the performance of the contract. If the contract does not contain a force majeure clause then it attracts Section 56 of the Indian Contracts Act, 1872.

In the current COVID-19 situation no prudent person would have foreseen this event. Some of the performances of the contract have become impossible due to the spread of the virus which led to the sudden lockdown and other restrictions imposed by the government. In this scenario, the non-performing parties could not have foreseen the event and therefore were not able to mitigate the circumstances. Now it is on the court to interpret the non-performance in this situation.


[1] Black’s Law Dictionary Eighth Edition, First South Asian Edition 2015

[2] Wm. Cary Wright, Force Majeure Clauses and the Insurability of Force Majeure Risks, 23 Constr. Law. 16 (2003).

[3] Will Covid-19 trigger a force majeure clause? OUT-LAW GUIDE, https://www.pinsentmasons.com/out-law/guides/covid-19-force-majeure-clause

[4] Marvin 0. Young, Construction, and Enforcement of Long-Term Coal Supply Agreements-Coping with Conditions Arising from Foreseeable and Unforeseeable Events-Force Majeure and Gross Inequities Clauses, 27 Rocmc MTN. MIN. L. INST. 127, 133-34 (1982). See also Stephen G. York, Re: The Impracticability Doctrine of the UCC, 29 DUQ. L. Rev. 221,223 n.13 (1991).

[5] See Perlman v. Pioneer Ltd. Partnership 918 F2d 1244, 1248 (5th Cir 1990) (“Because the clause labelled ‘force majeure’ in the Lease does not mandate that the force majeure event be unforeseeable or beyond the control of [the nonperforming party] before performance is excused, the district court erred when it supplied hose tams as a role of law”); Sabine Corp. v ONG Western Inc., 725 E Supp. 1157,1170 (WD Olda. 1989); Kodiak 1981 Drilling Partnership v Delhi Gas Pipeline Corp., 736 S.W2d 715, 720-21 (ex App. 1987) (judicially inserting “the requirement of un-foreseeability” into a contractual force majeure provision “has not been approved by any Texas court—state or federal’)

[6] Declercq supra note 6, at 238.

[7] Id

[8] See U.C.C. § 1-102(3) (explaining that the totality of the circumstances, including the comparative abilities of the parties to make informed judgments as to the extent of the risk, each party’s interest in avoiding the risk, and the extent to which that interest was a factor in the negotiation of the contract, will determine whether a specific standard is “manifestly used”)

[9] Supra note 3

[10] Tarun Dua and Geetanjali Sethi, India: Force Majeure In Times Of COVID-19: Challenges And The Road Ahead, Mondaq, L&L Partners, https://www.mondaq.com/india/litigation-contracts-and-force-majeure/930674/force-majeure-in-times-of-covid-19-challenges-and-the-road-ahead

[11] Sec 32 Indian Contracts Act, 1872

[12] Sec 56 Indian Contracts Act, 1872

[13] O.M.P. (I) (COMM)& I.A. 3697/2020

[14]  Tarun Dua and Geetanjali Sethi, India: Force Majeure In Times Of COVID-19: Challenges And The Road Ahead, Mondaq, L&L Partners, https://www.mondaq.com/india/litigation-contracts-and-force-majeure/930674/force-majeure-in-times-of-covid-19-challenges-and-the-road-ahead

[15] Supra Note 10.

[16] Iain Elder, COVID-19: FORCE MAJEURE EVENT? Shearman & Sterlin, https://www.shearman.com/perspectives/2020/03/covid-19–force-majeure-event

Sameeksha Sharma from NMIMS School of Law

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