Written by Radhika Maheshwari and Umra Rehmani of Faculty of Law, Aligarh Muslim University.
As we all know that the sudden outbreak of novel coronavirus (COVID-19) has bought all of us to the point of great uncertainty, impracticability and anticipation over this new normal. Also, it has led to chain of lockdowns for a period of several months in many countries including India, which have made the contracts complicated and almost impossible to perform. As a result of that Indian courts experienced an onslaught of contractual disputes inter-alia borders revolving around Force Majeure and the Doctrine of Frustration.
Recently many countries, like, China; India; Singapore; Paris; etc., in the wake of this pandemic, passed legislations; added memorandums; issued certificates regarding the Force majeure clause and what not. Likewise, India’s biggest container terminals, run by Maersk at Mumbai ports as well as Adani Ports in Gujarat, several big business houses and large retail chains like, Domino’s Pizza; PVR Cinemas, Reliance Retail, McDonald’s, Big Bazaar etc. imposed the provision of Force Majeure in their contracts to save themselves from the payment of license fees, rental dues and to stop invocation of penalties.
Contract’s general rule states that if a commitment is made in return for money, then that contract is valid in nature and will be made enforceable, even if it becomes more difficult than expected to live up to its terms due to certain conditions.
It is the exception to exonerate a party from its contractual responsibility for a case. ‘Liability under contract is a strict obligation. It is an accepted maxim that the contracts of Pacta Sunt Servanda are to be kept. Therefore, even though parties do not have any liability and the circumstances have made the contract harder or less acceptable than parties intended the obligor is liable for damages for violation of the agreement.
Notwithstanding the initial motive on the part of the parties, it is possible for one party, that they are not able to comply with the contractual liabilities because of some unforeseeable and unexpected events, like- the present pandemic, war, earthquake, etc., which may disrupt the completion of contracts by the parties. Because of this reason, when a post-contract formation supervening event occurs, the relief is been demanded by parties in national as well as international contractual practices and disputes, which generally comes under the Doctrine of Force Majeure and sometimes the performance is excused.
Evolution of the concept of Force majeure clause:
In the 1800s the Napoleonic Law crystallised the cornerstone of the theory of Force Majeure and Act of God, although its origins can be traced back to Roman law .
The clause of “Force Majeure” is a character of contract. If we translate the word ‘Force Majeure’ precisely, the meaning of the word comes directly from French word “As superior force”. In Common Law as well as Indian Laws, this is a concept of civil law with no clear definition. In the Indian Contract Act, 1872, the definition of the term is not provided.
The concept of Force Majeure had however been defined by the Hon’ble Supreme Court of India in the following words; “where reference is made to “force majeure”, the intention is to protect the performing parties from the negative results of anything or any event, which they can’t control.”
The principle of “Force Majeure” has a wider scope than “Vis Major”, i.e., Act of God, and applies to both natural acts like earthquakes; volcanic eruption; hurricanes; etc., along with human acts, like strikes; wars; protests; etc. Therefore, it can be said that, term refers to “events outside the control of the parties and which prevent one or both the parties from performing their contractual obligations”
The law was previously very stringent in England. In spite of an unforeseen occurrence of the event, which was not induced by either party, and made it difficult to fulfil the contract, it was appropriate to carry out a contract. It was observed, in Taylor vs. Caldwell, if an unfortunate event occurs when a contract has become impossible to enforce the basis of the contract, the result will be that it no longer needs to be executed.
Hence, for the event to be proved as a force majeure, it must pass the tests of externality, unpredictability and irresistibility. The entire jurisprudence on the subject has been stated by Justice RF Nariman of the Supreme Court in Energy Watchdog case .
Force majeure- a statutory defence?
Amidst of the lockdowns due to the novel COVID-19, a lot of business houses have faced hard times and as a remedial tool most of the companies are invoking or intending to invoke the “Force Majeure” clauses in their contracts or in want of it, applying the “Doctrine of Frustration” for their own benefit. However, it is to be understood that clauses of “Force Majeure”, “Act of God” and/or “Doctrine of Frustration” may provide the ‘suspension’ of obligations for the aggrieved party under a contract for certain limited period, though the parties may not be free from performing their respective obligations in all, unless their contract provides for an exemption beyond a certain period of continued force majeure.
There is no rocket science in stating that the recent lockdowns were a “force majeure” event as it was recognized by some governmental departments as well, but the question is do “force majeure” or “Act of God” or “doctrine of frustration” are sufficient legal armours to protect the business houses from the ongoing and upcoming hardships?
It is to be minded that criteria for invoking of a force majeure event is very narrow and some basic principles are to be noted, as below:
The express provisions of the contract (not extra-contractual excuses) generally determine whether a party can be excused of its contractual obligations (extent of allocation of the risk), like in 476 Grand, LLC v. Dodge of Englewood, Inc. where the court refused to consider tenant’s extra-contractual defences of impracticability and frustration purpose.
The basic assumption of the non-occurrence of the supervening circumstance by the parties at the time of contracting gives rise to disputes later on. Like disruption to business caused by Hurricane Harvey and Avian Flu.
Severe cost increases or significant market fluctuations, in and of themselves, generally do not excuse performance. While non-performance directly caused by government closures in many cases will be enough to excuse performance, a court is far less likely to excuse performance that the pandemic and attendant closures made performing contracts burdensome due to economic risks. Like disruptions due to 9/11 terrorist attacks and Suez Canal crisis.
A temporary disability only suspends a contractual obligation but it does not permanently excuse it. Like disruption due to bank holiday in the Great Depression.
Also, a partial disability may not suspend or excuse performance. Like the disruption due to government restrictions on business in World War II in the case of Lloyd v. Murphy.
The party seeking excuse must prove that it acted with diligence and in good faith to overcome the force majeure event. Like the inability to obtain government permit because land inhabited by endangered species.
A must minded thing is that there is little certainty in this area of the law. Mounting a successful defence to be excused of a contractual obligation due to a supervening event is often difficult. Like disruption due to the 1918 Spanish flu pandemic.
a) If contract has a Force Majeure clause–
A force majeure clause would require that the breach of performance should be beyond the invoking party’s control as the event was not reasonably foreseeable. The burden of proof rests on the party invoking the force majeure clause. The said burden can be discharged where the force majeure clause in the contract explicitly provides for events like epidemics, pandemics or government restriction.
In Nafed vs. Alimenta (April, 2020) it was held that when the contract contains a force majeure clause, it is to be reviewed on the basis of Section 32 only and Section 56 has no applicability. Also, in the Satyabrata Ghose case , when a contract contains a force majeure clause which on construction by the Court is held attracted to the facts of the case, Section 56 can have no application.
b) If contract does not have a Force Majeure clause –
This situation may appear, but the same has been well guarded by doctrine of frustration prescribed under Section 56 of the Indian Contract Act, 1872 and adopted by the Hon’ble Supreme Court in India in the celebrated case of Energy watchdog Vs. Central Electricity Regulatory Commission , it was held that the event leading to frustration which is relatable to an express or implied clause in a contract, is governed by Section 32 of the Act and if it occurs de hors the contract, it is dealt with by a rule of positive law under Section 56 of the Act. Under the prevailing circumstances, reliance on Section 54 of the Act depends upon the following conditions:
a) a valid and subsisting contract between the parties;
b) a part of the contract yet to be implemented must exist;
c) And the contract after it is entered into becomes impossible of performance i.e., subsequent impossibility.
It is crucial to note that the Indian Courts provide relief on account of subsequent impossibility when it is found that the whole purpose or the basis of the contract has been frustrated by the occurrence of supervening event which was not expected by the parties during execution of the contract or the performance of the contract becomes unrealistic or pointless in view of the intent and object of the Parties .
It is thus, summed up that in the event of absolute inability, the Principle of Force Majeure and the Doctrine of Frustration of contract have always been used as extraordinary protections from the obligation of performing contracts. It is widely suggested that, in their contracts, the parties would be better positioned, if they draw up a satisfactory force majeure clause that contains events because of which they have been prohibited from performing it.
But a person with prudence can’t include a broad range of events in a force majeure clause provided by him in the contract, which can happen. This situation can arise either because the occurrence of the event was way too unexpected or because even after having the knowledge of the occurrence of the event, or after its occurrence, they believed that they would be able to perform the contract. Such occurrence can have a number of negative consequences from impossibility or impracticability to the situation where success is still feasible but is either overly costly or does not favour the contracting parties.
If that is the situation, the required logical consequence is that, even if contracting parties puts forth a clause of force majeure in their contract and that event occurs, Section 56 would become relevant and therefore only Section 32 should not be enforced, especially if such a clause renders the contract increasingly difficult or worthless, if performed. Nevertheless, in the situation of a narrow force majeure provision, it should not be read as a licence for the group to immediately fall back to section 56. Such dependence could be permissible only if the court considers that, in spite of a clause to the contrary, the contract was in fact frustrated as a result of the occurrence or non-occurrence of the case and the party is thus exempted from performing.
Also, the application of this clause or the doctrine of frustration can harm the other side to the contract immensely. Hence, for the purpose of protecting such party, it should be made mandatory on the part of that party who is applying Force Majeure clause to immediately inform the counterparty of the occurrence of a force majeure event, in such a way as specified by the contract.
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