Force Majeure

Amidst the COVID19 situation and a lock-down in entire India, businesses are in a fix of how to comply with their contractual obligations. The word ‘Force Majeure’, which was hardly heard and formed part of miscellaneous clauses of agreements, is now in everyone’s mind.

So, today in this Article, We have listed down meaning and essentials of Force Majeure along with covering some important aspect to understand such an event.

1.  What is a meaning of Force Majeure?

Force Majeure is a French word and has found its origin in French law which literally means ‘superior force’.

In India, the doctrine of Force Majeure has found its roots in Section 32 read with Section 56 of the Indian Contract Act, 1872 where the doctrine of frustration is laid down and explained. In simple words Force Majeure means and includes any act of god or acts which are beyond the control of the parties to perform their obligations. It includes events which constitute act of gods such as flood, earthquake, hurricane, etc. and other events such as strike, change in law, epidemics, pandemics, etc. 

2.   What shall constitute a Force Majeure Event?

It is to be noted that any event to qualify for a Force Majeure must include the following:

a.     The performance of such obligation is impossible or becomes unlawful. It is prudent to note that not all difficulties faced to perform the obligations may be included in Force Majeure. Force Majeure event occurs when the performance is completely prevented and not just hindered or made difficult. All such events are interpreted and decided upon the light of events prevalent at that time and each case will be a tailor made case. It is important to understand that depending upon facts of each case in a similar situation; the conclusion may differ for each case. Further, Force Majeure is not to escape performance but to suspend it in unforeseen events. In the landmark judgment of Energy Watchdog v. Central Electricity Regulatory Commission and Anr, the Apex Court held that escalation of prices leading to difficulty in performance of obligation shall not be termed as a Force Majeure Event.

b.     Reasonable endeavours must be taken by the obligated party to perform which has resulted in impossibility of performance. It is important to note that in case the performance of the obligation can be carried out through alternative approach then in such a case it might not result into a Force Majeure Event, provided the contract does not restrict the performance in a prescribed manner only. It is important to understand that what shall constitute reasonable endeavour in a particular case might not constitute similarly in a different case and hence has to be decided on case to case basis, considering the facts of the case and circumstances prevalent at that time. For example, efforts to mitigate financial losses by the obligator may be considered as reasonable endeavours depending upon facts and circumstances of the matter.

c.     Such event needs to be an unforeseeable event. It means that neither of the party to their best knowledge foresee occurrence of such event which would render the performance of obligation impossible. 

3.    How is Force Majeure Event described in agreement?

a.     Events that would term as Force Majeure are usually defined in the contracts which enumerate the instances which shall form a force majeure event. It is necessary that such clause must be expressly mentioned in the agreement and accordingly in absence of express mention of the said clause, parties cannot apply the said clause by implied means. Further, the events that are defined and enumerated in the agreement constituting a force majeure event shall only be included while determining and deciding any event to be termed under forced majeure clause. For example, if the parties have expressly excluded epidemics as one of the instance to invoke force majeure clause, then in such a case on occurrence of an epidemic situation, the said clause cannot be invoked. However, it is prudent to note that these clauses sometime mention a comprehensive list and mention of events such as ‘beyond the reasonable control’, which constitute a force majeure event. In such a scenario, such an event which is falling under the ‘beyond the reasonable control’ must pass through all test which is mentioned and enumerated in point 2 above to qualify for a valid force majeure event.

b.     Further, the contracts usually even enumerate the circumstances in which a force majeure clause can be invoked. For example, in a rental contract, the force majeure clause may be restricted in an event when the premises is damaged and destroyed due to which its occupation is impossible to perform.

c.     Usually, a process is also laid done in the contract itself when such a force majeure event is occurred or is foreseen to occur. In such situation, the obligator (one who has the obligation to perform) has to usually notify the other party enumerating the details of the force majeure event leading to its impossibility to perform. Further, this notice is served in writing with a timeline which may be defined in the contract or mutually determined between the parties wherein post completion of the said timeline if such force majeure event continues, the agreement becomes voidable and either party may be authorised to terminate the said contract without any obligation to the other party. Further, there is no particular format in which the said notice has to be served and the parties can mutually decide upon the same. In my opinion, the importance has to be laid down on documenting the facts and events which have lead the obligator to invoke a force majeure event. In the absence of any process laid down in the contract itself, the parties can mutually decided the process of such event. Further, it would be advisable to document the process of such force majeure event as agreed between the parties in writing, to avoid any future conflicts. 

4.   What happens when a Force Majeure Clause is invoked by either party of the contract wherein the agreement provides for such clause?

When a party to a contract invokes a Force Majeure Clause stating that performance of its obligations are impossible to perform in the current force majeure like event, the other party has a right to either accept or reject such a notice. The burden of proof is upon the party invoking the said clause to prove the existence of force majeure event leading to impossibility of performance which was unforeseeable and reasonable endeavours were taken for its performance. 

a.     In case the other party accepts and agrees the event to be a force majeure event because of which the performance of obligations of the obligator is impossible to perform, then in such a case parties shall follow the process as laid in the contract or as mutually determined between them as mentioned in point 3 above. Further, some contracts provide that for the force majeure event period as defined in the contract or determined between the parties mutually or such period till which the force majeure event continues, the obligation of the obligator is suspended for said period and in the event the said force majeure situation continues thereby not enabling the obligator to perform its obligations, then in such a case the suspension period is extended or the agreement becomes voidable at the option of either party, as per the terms of the agreement. Some contracts provide for immediate termination on occurrence of force majeure event. 

b.     However, if the other party rejects the contention of the said party and disagrees to constitute such an event a force majeure event leading to impossibility of such party’s performance, then in such a case the said matter may be considered as a dispute and has to be resolved between the parties by following dispute resolution process as mentioned in the said contract.  

5.    What happens when an agreement does not cover a force majeure clause?

In the event where the agreements do not expressly define the force majeure event or wherein the force majeure clause does not cover all instances for which the obligator is seeking relief, then in such a case the obligator may take following recourse depending upon the facts and circumstances of the matter:

a.     Doctrine of Frustration: The obligator may seek relief under Section 56 of the Indian Contract Act, 1872 defining the doctrine of frustration. Under the said doctrine of frustration, the agreement itself becomes void in case the obligation is impossible to perform or becomes unlawful to perform after the agreement is made wherein such event could not be prevented by the obligator. It is important to note that impossibility of performance must not be foreseen. In the case of Energy Watchdog v. Central Electricity Regulatory Commission and Anr, the Apex Court held that a mere onerous turn of events would not attract Section 56 as unforeseen risks are part of the commercial risks undertaken through creation of a contract. The contract must be rendered so fundamentally different that the basis on which it was entered into is disturbed and it is no longer the contract the parties believed themselves to be undertaking to perform. 

It is crucial to understand that the force majeure is a right of suspension wherein the agreement becomes voidable till the performance becomes possible whereas doctrine of frustration makes the agreement itself void when the performance becomes impossible.   

b.     Material Adverse Effect and similar terms: The obligator may explore other clauses of the agreement seeking necessary reliefs. Many agreements have defined ‘Material Adverse Effect’ or similarly defined terms. Generally, these terms are used in investor documents, or mergers & acquisition structure which define changes in business, assets or liabilities which lead to material adverse effect and these events usually do not cover act of god or similar instances. However, one may invoke these clauses for renegotiating the terms of contract instead of opting for termination entirely.

c.     Termination: The obligator may invoke termination of the contract entirely. However, this recourse may be taken considering the terms of notice period, lock-in period, if any, and/ or other effects of termination. For example, in case of termination of a rental agreement which does not have a force majeure clause and has a lock-in period, then in such a case, termination as a recourse may be considered bearing in mind the facts of the matter including penalties if any, which may be levied in case of exiting the agreement during the lock-in period, indemnity clause, representations and warranties clause, etc. if any. 

d.     Negotiating with the other party: The obligator may chose to directly talk to the other party of the current force majeure like situation explaining the facts of the matter and describing the difficulties or impossibility to perform the obligations and enter into a settlement with the other party to amicably resolve such matter. 

6.              Force Majeure in COVID-19 situation

a.     Instances where COVID-19 is considered as Force Majeure:

In a Office Memorandum dated February 19, 2020 issued by Department of Expenditure, Ministry of Finance, Government of India, it is examined and determined that disruption in the supply chain due to COVID-19 situation in China and other countries shall be considered as case of natural calamity and hence a Force Majeure Clause may be invoked, wherever considered appropriate and subject to adherence of due process. It is persistent to note that, though this Office Memorandum pertains to government contracts, necessary force majeure clauses have been invoked in COVID-19 situation treating it as a natural calamity. Also, Ministry of New & Renewable Energy vide Office Memorandum dated March 20, 2020 has examined and decided that all renewable energy implementing agencies of the said Ministry are directed to treat disruption in the supply chain due to COVID-19 situation in China and other countries shall be considered as case of natural calamity, which is in line with the Office Memorandum dated February 19, 2020 issued by Government of India.

Life Insurance Council of India announced that the clause of ‘Force Majeure’ will not apply in case of COVID-19 death claims and all private and public life insurance companies will process any death claim pertaining to Covid-19. 

It is also persistent to note that the doctrine of frustration/ force majeure, as applicable, may be argued and challenged considering the facts of the matter and circumstances prevailing. For example, during the COVID-19 situation and complete lock-down in India, the supply chains have been completely disrupted which may lead to impossibility to perform contractual obligations and hence the Government too have come up with orders making COVID-19 a part of force majeure event. However, similar contention may not be valid for other industry, may be that of providing essentials which were partially allowed to do business in such COVID-19 situation in India. 

In my opinion, if the contract has a Force Majeure clause and the said clause expressly includes pandemic, as an instance to invoke a force majeure as stated hereinabove in points 3 and 4, then in such a case parties may seek relief under the said force majeure clause and follow the process laid down under the said clause, provided the obligation for which the force majeure event is invoked is not excluded from the said clause. In a contract which does not define a Force Majeure clause, the parties may seek necessary redressal as mentioned in point 5, considering the facts and circumstances of the matter.

b.     Business Interruption Policy or similar policies: Many businesses are trying to take recourse in their Business Interruption Policy for the mounting losses during COVID-19 situation. There have been contentions made by insurance companies that the Business Interruption Policy do not cover COVID-19 situation, as it is necessary for the property insured to suffer physical damage due to a covered peril such as fire, flood or earthquake, etc. Interestingly, in USA, some restaurant owners namely Thomas Keller, Jean-Georges Vongerichten, Daniel Boulud, and Wolfgang Puck are fighting battle against the insurance company by contending that their restaurant has suffered physical damage due COVID-19 situation wherein the virus is staying on surfaces of the restaurant causing physical damage to it. Only time can tell whether their arguments will be held valid by courts in USA.

It is quite evident that the force majeure event along with the doctrine of frustration is very subjective in nature and if challenged, may cause a lot of interesting arguments and interpretation issues wherein court intervention may be required to come up with necessary recourse. Businesses are foreseeing a lot of litigation or dispute resolution instances to be invoked too in light of these scenarios. However, in all these cases, one thing is settled that each case might have to be dealt with separately considering the facts of the said matter, terms of the agreements, industry details, etc. and ‘One Rule Fits All’ ideology may not be accepted. Going forward, businesses are definitely going to reread and re-assure themselves of having a detailed and well-drafted force majeure clause covering all such necessary instances and enumerating necessary processes in the event if such force majeure is to be invoked before executing any agreements/ documents!

Published by

Adv. Janhvi Pradhan Pradhan

[email protected]

Adv. Pooja Rambhia

Startupbox Consultancy Services LLP

[email protected]

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position. Information herein is for general information purposes only. It is not intended as legal advice. The author of this article shall not be liable in any manner whatsoever for any action taken relying on information contained here. Readers must seek independent legal advice and not act upon information contained herein.