By Aryan Bhat
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Force
Majeure clause has now become quite important to know for businesses amidst the
ongoing COVID-19 pandemic as the clause is now being frequently invoked to
escape one’s contractual responsibilities in face of the uncertain
circumstances that are currently prevailing in the current business and
economic environment.
Force Majeure is a French term for “Superior Force”. Force Majeure clauses in a contract could either be drafted generally (referring to any unanticipated event beyond the reasonable control of the parties) or could refer to a specific set of events (like floods, curfews, industrial accidents, earthquakes etc.) or could be a combination of both.
It
is also crucial to note that Force Majeure only temporarily relieves the party
from fulfilling its obligations under the contract until the circumstances
persist but doesn’t permanently bring the contract to an end. The concept under
the Indian Contract Act can be explained by the doctrine of frustration or
impossibility of performance. This article explains the concept of force
majeure in India, its effect on the parties and under what circumstances could
it be invoked by a party.
Doctrine
of Frustration
Section
56 of the Indian Contract Act 1872 deals with the doctrine of frustration. The
section states that any contract which involves doing of an impossible act
shall be void. Also, any contract formed which later becomes impossible to
perform due to any factor beyond human intervention shall also become void from
the time at which performance of the act becomes impossible. It is this section
which recognises Force Majeure as a concept which can be invoked by one of the
parties to declare the contract null and void.
A
Force Majeure clause in a contract is made with the purpose to cover such
unanticipated events that may arise and make it virtually impossible or
impractical to fulfil the contract entered into by the parties. These events
may include floods, fire accidents, labour strikes, earthquakes etc. However,
it is an important principle to note that the mere happening of an event which
was unanticipated and altered the circumstances prevailing at the time of
formation of contract is not a sufficient case for a party to escape its
contractual responsibilities. The following conditions must be fulfilled to
successfully invoke Force Majeure by a party:
The
Changed Circumstances Shall Gravely Affect the Fundamental Purpose of Entering
into Contract
A
contract can be declared null and void under section 56 only when it causes
such a significant change in circumstances that the fundamental purpose for
which the parties entered into the contractual relationship can no longer be
fulfilled. Some change in circumstances is common and expected and that cannot
be a basis to declare any contract void.
In
Satyabrata Ghose v. Mungeeram Bangur and Co (1954 AIR 44), the Supreme
Court laid down this principle quite comprehensively. The case involved a company
which owned vast tracts of land in Calcutta. It initiated a scheme wherein it
sold plots to the purchasers for residential and commercial purposes. A person
took interest in the scheme and made advance payment for a plot. In the
meantime however, the Government took possession of the land belonging to the
company due to which it couldn’t allocate the plot to the person. The company
was sued. It is also critical to highlight that the possession of land by
Government was temporary in nature and that the two parties had not agreed upon
the time limit in which the contract shall be completed. Also, the possession
of land by the Government was quite common at that time due to the Second World
War and such a scenario was therefore, not unanticipated.
The
Court held that the contract can only be frustrated when the change of
circumstances affect the fundamental basis upon which the contract was formed
between the parties such that it has become either impossible or practically
useless to perform the contract. Hence, in the absence of any time limit, the
Court stated that this necessary prerequisite was not fulfilled in the case.
A
corollary of this prerequisite is also that change in circumstances that only
makes it very difficult or onerous or less profitable to honour the contract
cannot be a valid reason to frustrate the contract under Force Majeure. In the
famous case of Alopi Parshad & Sons Ltd v. Union of India (1960 AIR 588),
the Supreme Court recognised this principle. The case involved a company which had
to supply ghee to the Army at a certain price. During the Second World
War however, the demand for ghee surged and the Army reduced the payment
offered to the company by mutual consent. Later however, the company asked for
increased prices in light of the abnormal circumstances. When the Army refused,
the company filed for frustration of contract.
However,
the Supreme Court stated that the contract was still valid as the altered
circumstances only made it more onerous and less profitable for the company to
fulfil its obligations under the contract but not impossible.
Therefore,
it shall be borne in mind that Force Majeure can be invoked by the party only
when circumstances have changed to such an extent that fulfilment of contract
obligations has been rendered virtually impossible from a practical point of
view and not merely difficult or commercially less viable to perform.
The
Changed Circumstances Shall Be Unanticipated and Not Preventable by Reasonable
Diligence
Section
56 of the Contract Act contains a caveat: that it cannot be invoked in those
circumstances where the party making the promise had known or with “reasonable
diligence” might have known it to be impossible or unlawful but the other party
did not know it to be impossible or unlawful.
Hence,
the happening of any event should also necessarily be beyond the reasonable
control of the party which wishes to invoke the Force Majeure Clause. A party
cannot relieve itself of its contractual obligations due to an unforeseen
intervening event which fundamentally alters the circumstances and strikes at
the fundamental purpose of the contract if the same could have been reasonably
controlled by the party or it could have taken reasonable steps to mitigate
such a risk.
In
the recent English case of 2 Entertain Video Ltd v. Sony DADC Europe ([2020]
EWHC 972 (TCC)), Sony DADC was responsible for storing and distributing CDs
and DVDs for 2 Entertain. During the London riots in 2011, a mob entered the
premises of the warehouse and set the stock of CDs and DVDs on fire. Sony
invoked Force Majeure as the protests were totally unexpected and spontaneous
and made it practically impossible to fulfil the contract on account of
destruction of goods. However, the Court rejected the plea of Force Majeure on
grounds that Sony hadn’t taken all reasonable steps to mitigate any risks of
such an invasion in its premises or to secure the warehouse from the same. Sony
therefore, had to compensate for the losses.So, while Sony couldn’t have
anticipated the violent riots it had indeed failed to take reasonable steps to
prevent any loss to goods for which it became liable.
Force
Majeure vis-à-vis Act of God
Force
Majeure as well as Act of God can be invoked by parties to a contract to
temporarily suspend obligations they had to perform under the contract to the
other party owing to the occurrence of an unexpected event that couldn’t have
been reasonably contemplated or avoided by them. In the practical sense too,
the terms are used inclusive of one another as a Force Majeure Clause often
includes an Act of God however, the two are conceptually different.
Force
Majeure is a very broad term which includes any event caused by unanticipated
circumstances beyond the reasonable control of the parties that renders the
fundamental purpose of entering into contract useless. Act of God is however a
far narrower concept as it includes unforeseen events arising exclusively out
of natural causes which involves no human intervention – earthquakes, cyclones,
tsunamis and floods to name a few.
The
distinction was laid down by the Supreme Court in Dhanrajmal Gobindram v.
Shamji Kalidas and Co (AIR 1961 SC 1265), where it also held force majeure
to be a wider phrase which includes extraordinary circumstances arising out of
acts of nature (i.e. Acts of God) as well as acts of people (say industrial
accidents, strikes, riots etc.) as well as change in law and policy of the
Government. Act of God however, only applies to natural events.
Force
Majeure in Times of COVID-19
The COVID-19 indeed led to an unexpected and
uncertain business situation which caused immense practical difficulties for
firms. Many of the events such as the national lockdown, sealing of state
borders, curfews etc can be brought within the purview of Force Majeure. The
Union Ministry of Finance issued an office
memorandum dated 19 February 2020 stating that the coronavirus situation shall be
considered as a natural calamity and Force Majeure shall be considered whenever
appropriate. The Delhi High Court too, ruled in Haliburton v. Vedanta Ltd (OMP
(I) (COMM) & IA 3697/2020) that the lockdown imposed by the Central
Government was in the nature of Force Majeure on account of its unprecedented
nature.
However, to determine if a Force Majeure
Clause shall be made available to the party invoking it depends upon the facts
and circumstances of each case and COVID-19 can simply not be used as a
catch-all phrase to escape liability arising out of the contract. In Standard
Retail Pvt. Ltd v. M/S Global Corp and ors (Order dated April 8, 2020 passed by
the Bombay High Court in Commercial Arbitration Petition (Lodging) No. 404 of
2020), the Bombay HC dismissed the plea for Force Majeure invoked by an
importer importing steel from South Korea. The importer had refused to make
payment to the exporter on the grounds that it had become impossible to sell the
steel in India due to the national lockdown, a contention that the High Court
did not accept.
Also, by applying the second principle of
reasonable diligence , it could also be said that now that the economic
situation posed by the contagion has persisted for quite a while and that the
pandemic is likely to stay in the foreseeable future, parties would have these
extraordinary circumstances in mind while entering into contracts and hence, it
cannot be used as a ground to invoke the clause.
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Aryan Bhat is a 2nd year law student at National Law University Delhi. A Potterhead, his other favourite authors in fiction include Khalid Hosseini, Jhumpa Lahiri and Ruta Septys. Besides fiction, he enjoys to read about political and social issues too. He plays chess as a leisure activity. While he is willing to explore any area of law, he finds himself particularly drawn towards Intellectual Property, Corporate Law and Criminal Law.
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