It’s been tough few weeks for, well, the world as we navigate a new normal amid the coronavirus (COVID-19) pandemic.
The unprecedented situation has left no one unaffected and an indefinite timeline looms large as to when the situation would normalize. Amidst the (COVID-19) pandemic and its socio-economic impact, one of the most affected are the parties who are unable to perform their contractual obligations.
In order to mitigate the impact related to delayed or non-performance of the contractual obligations, the parties to a contract are looking to seek shelter under the ‘Force Majeure’ clause contained in their contracts. Hence, these under-rated Force Majeure clauses have now gained sudden and utmost importance in these catastrophic times. There are catena of judgements and information available online explaining the meaning and significance of Force Majeure. However, in these difficult times it is important to simplify the concept for the sake of understanding.
Force Majeure (pronounced as fross mah-zhurn – in French language and vis major -in Latin language) also known as cas fortuit (French) or casus fortuitus (Latin) – in relation to a contract means a “superior force” i.e. a situation which obstructs the continuation or lawful existence of a contract amidst the parties. The inclusion of a Force Majeure clause in a contract allows a party to suspend or terminate its duties and obligations in case of occurrence of an event which may be classified as Force Majeure event.
Force Majeure clauses generally include extraordinary events or circumstances beyond the control of the parties, such as a war, strike, riot, crime, epidemic, quarantines, terrorist attack, governmental actions such as eminent domain or changes in law or events described as act of God (i.e. hurricane, flood, earthquake, volcanic eruption, any other natural disaster, etc.), which prevents one or both parties from fulfilling their obligations under the contract.
Force Majeure clauses in a contract vary substantially and depend on what events are covered at the time of entering a contract. Inclusion of a finite list of force majeure events result in narrowing down the clause’s applicability whereas catch-all open ended clause attempts to broaden the applicability to any unexpected eventuality outside a parties’ control by including an open-ended catch-all provision at the end of the force majeure clause which may be read as “all other acts beyond the parties’ reasonable control”. Hence, whether the COVID-19 pandemic would qualify a force majeure event will depend on wordings of each specific contract.
For seeking the benefit of Force Majeure clause in the event of delay or non- performance of the contractual obligations, inter alia, the following factors are quintessential:
- there is existence of contract between the parties and the said contract contains a Force Majeure clause;
- there should have been occurrence of force majeure event;
- the force majeure event qualifies the definition of Force Majeure clause by way of express or implied provision in the contract;
- the performance of obligations should have become affected/ impossible due to force majeure event;
- whether the Force Majeure clause allows waiver of the contractual obligations or merely protects a party from any liability arising out of delay/ deferment of the contractual obligation;
- whether there is an obligation under the contract on behalf of an affected party to mitigate the damages caused by the force majeure event;
- whether there is a requirement of informing the non-affected party about occurrence of the force majeure event resulting in delay/ non-performance of the contractual obligations.
It is settled law that the failure or delay in performance should not be because the performance has become onerous, commercially difficult/ unviable[1]. It is important to understand that a party can seek deferment and/or waiver of only those obligations, performance of which is not possible on account of the force majeure event i.e. deferment or waiver only to the extent of the hardship caused by the unforeseeable event.
Furthermore, liability arising out of such deferment can be avoided if the affected party demonstrates that performance was impossible and beyond its control i.e. non-performance is purely on account of occurrence of force majeure event. In this regard, it is important that the affected party collects all necessary information which can be used as evidence to corroborate the occurrence of force majeure event.
The aforesaid covers the situation that where there is existence of a suitable Force Majeure clause in the contract. Where the contract does not contain a Force Majeure clause, the doctrine of frustration of contract under Section 56 of the Indian Contract Act, 1872 would be applicable[2]. It is a well settled law vide various judgements of the Supreme Court of India that where an event leading to frustration occurs de hors the contract, it is dealt with by a rule of positive law under Section 56 of the said Act[3].
In another landmark judgement, the Supreme Court held that in cases of frustration of contract, it the performance which come to an end however, the contract would still be in existence for purposes such as the resolution of disputes arising under or in connection with it and the question whether the contract was discharged under the doctrine of frustration would still have to be decided under its dispute resolution provisions[4].
The author is a Corporate and M&A lawyer at Sarin Partners Advocates & Legal Consultants. The views in the article should not be construed as legal advice. Please contact the author for any clarification.
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[1] Sushila Devi vs. Hari Singh 1971 SCC 1756
[2] Satyabrata Ghose vs. Mugneeram Bangur & Co. 1954 SCR 310
[3] Energy Watchdog vs. Central Electricity Regulatory Commission (2017) 14 SCC 80
[4] Naihati Jute Mills Limited vs. Khyaliram Jagannath (1968) 1 SCR 821