What is a Force Majeure Clause?
‘Force Majeure’ clause is a provision in a contract that exempts a party from performing his contractual obligations which have become impossible or impracticable due to an event or effect which the parties could not have foreseen or controlled.
As reproduced by the Government of India in its Office Memorandum dated 19.02.2020 wherein they referred to the definition and due procedure of Force Majeure provided in the Para 9.7.7 of the Manual for Procurement of Goods 2017, “A Force Majeure means extraordinary events or circumstance beyond human control, such as, an event described as an act of God (like a natural calamity) or events such as war, strike, riots, crime (but not including negligence or wrong-doing, predictable/seasonal rain and any other events specifically excluded in the clause).”1
What situations/ occurrences/ events classify as Force Majeure?
Situations which are outside the control of the contracting parties classify as Force Majeure events. Few examples of such events are: Act of God, War, Floods, Earthquakes, Any natural calamity, Terrorism, Government Intervention, Sudden change of Government policies, etc.
Vide its Office Memorandum No. F.18/4/2020-PPD dated 19th February 2020, issued by Government of India, Ministry of Finance, Department of Expenditure, Procurement Policy Division to the Secretaries of all Central Government Ministries/ Departments clarified that “A doubt has arisen if the disruption of the supply chains due to spread of coronavirus in China or any other country will be covered in the Force Majeure Clause (FMC). In this regard, it is clarified that it should be considered as a case of natural calamity and FMC may be invoked, wherever considered appropriate, following the due procedure as above. Hence, COVID-19 pandemic will be treated as a force majeure event.
Furthermore, the Office Memorandum clarifies that if there is a delay in performance in part or in whole of its contractual obligation during the force majeure event for a period of more than 90 (ninety) days, the parties gets the option to terminate the contract without financial worry from either side.
Are Force Majeure Clauses present in all contracts (Commercial Contracts, Service Agreements, Trust Deed, etc.?
Force Majeure Clauses are commonly found in contracts which contemplate continuous performance. This clause generally lists what classifies as events outside the control of the performing party and if such an event occurs which restricts the performing party from completing its contractual obligations, the performing party is excused from those obligations.
However, in the absence of any specific clause relating to Force Majeure, the parties have an option to look at Indian Contract Act, 1872 for appropriate legal recourse. The parties while invoking Section 56 of Indian Contract, 1872, in the absence of Force Majeure Clause, will have to show that the event (in this case COVID-19) has changed the fundamental basis of the contract thereby making it impossible to perform.
What are the circumstances under which invoking “Force Majeure” has been rejected by the Courts?
If the contract contains a term/ clause, according to which performance would stand, discharged under certain circumstances, the dissolution of the contract would take place under the terms of the contract itself.
However, if the contract is silent with respect to Force Majeure events, then the courts will approach it in accordance with Section 56 of the Indian Contract Act, 1872. It is necessary to note that the court does not permit invoking Force Majeure clause if the performance of the contract has become expensive. As held by the court in the case of M/s Alopi Parshad & Sons Ltd. v. Union of India, “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.”
The courts have at multiple instances reiterated that Indian law does not permit the parties to be discharged, irrespective of the construction of the force majeure clause in question, since the change in circumstance did not ultimately prevent them from performing their obligations. 6 Instead, the parties should „generally factor in the possibility of sudden fluctuation in international prices‟ by incorporating „risk purchase and like clauses‟ in their commercial contract.7
The parties need to consider this issue very carefully and seek the invocation of force majeure clause only when it became impossible to perform the contract within reasonable period of time due to reasons beyond their control. In the current perspective of COVID 19 , the lock out of 21 days or may be 45/60 days may not be adequate ground to invoke COVID 19 unless for example:
- The performance of the contract could be possible only during this period e.g. any event related contract which was scheduled during this period. Or
- The performance after the lock down will defeat the very object of the Contract or
- Arising out of COVID 19 the import/export of specific goods or services involved is legally restricted/ prohibited and only such international supply can meet the purpose of the contract
However, in most of the cases of supply of goods or services, the Force majeure invocation may not be appropriate. For example:
- In case of lending contracts, the borrower will be liable to pay interest for the period of lockdown and disruption period arising out of lockdown.
- In case of lease or renting contract already in operation, the lease rental will become payable even for the period of lockdown as the premises will remain in the possession of the tenant even if partly used/not used during disruption period.
In such situations, the lender or the lessor as the case may be may consider allowing staggered payment of interest /rental as the case may be with a reasonable charge ( not penal interest) towards time value of money.