Now a days most searched words on google is Force Majeure which was less attended clause of any Contract. Basically Force Majeure is one of the clause of the contract / an agreement, normally this clause is overlooked because of its name and exceptional things mentioned in the contract. But now suddenly during lockdown due to COVID-19 pandemic, this clause got an importance and everyone including entrepreneurs, industrialist, landlords, tenants etc. started discussing on this and trying to understand the concept of Force Majeure, when, where and how it will be applicable.
To impart knowledge on this term Force Majeure we had arranged a session on 23rd April 2020, in case you missed the session or you could not join the webinar on zoom platform, still you can watch in on YouTube at the link https://youtu.be/JGWjahTsNIM .
Force Majeure is not defined in Statute; it is a French term which means Superior Force. Since this term is not defined any Statute we will look at the some dictionary meaning of it
- Black’s Law Dictionary: superior or irresistible force.
- Cambridge Dictionary: an unexpected event such as a war, crime, or an earthquake which prevents someone from doing something that is written in a legal agreement.
- Merriam Webster Dictionary: “superior or irresistible force” and “an event or effect that cannot be reasonably anticipated or controlled.
So, it can be summarized from the dictionary meaning that Force Majeure means unpredictable superior or irresistible force which is beyond the control of the parties to the contract.
Force majeure clauses are generally included in contracts to account for circumstances where a party cannot perform the contract due to circumstances beyond its control. Such events could be acts of God, war, riots, strikes, labor disputes, casualty, terrorism, civil commotion, earthquakes, floods, Government actions etc.
A force majeure clause typically operates to absolve the parties from performance of its obligations under the contract as a result of the extenuating circumstances, but its precise effect will depend on the language of the clause. In some of the contract you will find the term Vis Major which is also a similar term used in contracts which means Greater Force or Act of God. Vis Major is the Latin term which is being used like Force Majeure, whereas Force Majeure is wider term than Vis Major.
Force Majeure is creature of contract and it is based on animus contrahendi i.e. intention of parties. Force Majeure Clause describes the events and probability of occurrence of some event which makes the party impossible to perform its obligation, the Clause may provide suspension of obligation by the parties to the Contract or termination of contract on occurrence of said event. Language of this clause can be illustrative or exhaustive which will decide the occurrence of event will impact the contract or not. Force Majeure Clause also provides the remedies available to the parties on occurrence of an event, who will invoke such clause and requirement of notice and time period for suspense of an obligation. Force Majeure Clause can be invoked on satisfaction of followings:
- Existence of valid contract;
- Force Majeure Clause is incorporated in the agreement;
- Occurrence of event mentioned in Force Majeure Clause and circumstances are beyond the reasonable control;
- Event should not be foreseeable at the time of execution of contract;
- Occurrence of event which makes performance of obligation beyond the control of the parties;
- Parties has taken all efforts to perform it’s obligation and mitigate the damages.
Now the question arises, whether COVID-19 lockdown can be considered a Force Majeure event, the answer is YES, as you are aware that The World Health Organization (WHO) on March 11, 2020, has declared COVID-19 outbreak a global pandemic. Thereafter, Government of India vide MHA Order No. 40-3/2020-DM-I(A) dated 24 March 2020 declared lockdown of 21 days throughout India which got extended till 3rd May 2020 as well. This situation very well covers under the Force Majeure Clause which makes the parties difficult to perform its obligation. Ministry of Finance, Government of India vide circular F. No. 18/4/2020-PPD dated 19 February 2020 also clarified on existence of Force Majeure situation and the said clause can be invoked.
COVID-19 lockdown is a temporary event where obligations of the parties can be frozen temporary in case this clause in contract allows to the parties to suspend it’s obligation then parties to the contract can invoke the same and intimate to another party. In case the clause provides that on occurrence of such Force Majeure event contract will be terminated then said contract will come to an end. However, in case one party has performed its obligation before occurrence of such event (lockdown) another party has to perform its obligation, he can’t take the benefit of Force Majeure clause and say contract is terminated. For example: A Ltd has supplied goods to B before declaration of lockdown which is also accepted by B, now B can’t invoke Force Majeure Clause and deny to pay for the goods supplied by A Ltd.
In case Force Majeure Clause is not there in contract the parties can apply the Doctrine of Frustration. Doctrine of Frustration is present under Section 56 of the Indian Contract Act, 1872, which provides that contract becomes void when it is impossible to perform the obligation under the contract. Doctrine of Frustration applies where a contract could not be executed because an event was beyond the control of both the parties. The performance of such a contract, renders it difficult or impossible or even illegal. Following can be the reasons which make the performance of obligation impossible:
- Change in Circumstances.
- Destruction of subject-matter.
- The Death, Incapacity of the Party.
- Government policy; change in Legislation.
- The Intervention of War.
Due to above event if performance of obligation becomes impossible permanently, Doctrine of Frustration can be made applicable and contract gets terminated. However, termination of contract does not give undue benefit to the parties. Section 65 of the Indian Contract Act, provides that compensation can be claimed who derived advantage out of contract which becomes void.
The main difference between Force Majeure and Doctrine of Frustration is that Force Majeure clause contains the remedies or actions to be taken by the parties about performance of contract; whereas application of Doctrine of Frustration terminates the contract due to impossibility of performance of an obligation.
Force Majeure Clause may have provision for suspension of performance for temporary period or allow art performance of contract or termination / discharge of Contract. In case Force Majeure Clause is not there in Contract, parties to contract can also invoke provisions of section 63 of Indian Contract Act and remit performance of contract in part or whole.
In past the Court has taken view that, under Section 56 of the Indian Contract Act the word “impossible” has not been used in the sense of physical or literal impossibility. To determine whether a force majeure event has occurred, it is not necessary that the performance of an act should literally become impossible/ impracticality from the point of view of the parties, object of the agreement will also be considered [Satyabrata Ghose Vs. Mugneeram Bangur].
Further, Hon’ble Supreme Court in case of M/s Alopi Parshad & Sons Ltd. v. Union of India held that “the Courts have no general power to absolve a party from the performance of his part of the contract merely because its performance has become onerous on account of an unforeseen turn of events”. Further, in case of ENERGY WATCHDOG VS CERC, court held that a force majeure clause will not normally be construed to apply where the contract provides for an alternative mode of performance.
In the recent case of M/s Global Corp. Vs. M/s Hyundai Corporation, petitioners contended that contracts with Hyundai Corp and Global stood terminated as unenforceable on account of “frustration, Impossibility and impracticability” due to declaration of COVID-19 Lockdown. The petitioner invoked clause “Force Majeure” and seeks interim relief by restraining the Korean Based Steel Exporters bank in encashing the letter of credit, Bombay High Court vide order dated 9 April 2020 held that the Letters of Credit are an independent Transaction with the Bank and the Bank is not concerned with underlying disputes between the buyers and sellers. In any event, the lockdown would be for a limited period and the lockdown cannot come to the rescue of the Petitioners so as to absolve from its contractual obligations.
Shanghai Higher People’s Court on February 8, 2020 in its Guiding Opinion stated that “If the parties are unable to perform due to the impact of the epidemic or their performance has a significant impact on the rights and interests of the other parties, they shall follow the principles of fairness, good faith, etc. and aggregately consider factors such as the agreement between the parties, the development stage of the epidemic, the causal relationship between the epidemic and the inability to perform or difficulty in performing the contract and the level of impact of the epidemic”.
Another issue during the lockdown pop up is payment of rent for immovable property, many of lease and leave and licence agreement does not have Force Majeure Clause. Landlords started asking for rent from tenants and many tenants like daily workers, students, shop keeper due to lockdown not able to pay rent in time. To tackle this issue and keep the public at large calm, Government of India issued Order No. 40-3/2020-DM-I(A) dated 24 March 2020, advised no rent can be demanded for one month from the works and migrants, if landlord is forcing labourers & Student to vacate premises, they will be liable for action under Disaster Management Act, 2005. Similarly, Maharashtra Government vide its Order dated 17 April 2020, asking landlords not to evict the tenants and defer recovery of rent. Though the legality of such order has been challenged before Hon’ble Supreme Court but till the verdict of such Order will be valid and enforceable. Said orders of Government has got applauds and criticism on social media. Though the decision is good for destitute but on the other hand it is injustice on the part of landlords who is having rent as only source of income, here I am talking about landlords having very small amount of rent income. The possible solution for this in this situation is to have humanitarian approach and taking care of weaker section.
The Courts in case of applicability of Force Majeure and Doctrine of Frustration for lease / rent agreements has taken view that general provisions of contract act can’t be applicable for this type of contract which governs by the Transfer of Property Act, 1882
Amidst this one must take necessary actions to protect its interest in the contract which includes:
- Review the Contracts and Force Majeure Clause
- Check the requirement of sending of Notice
- Reply properly if you have received a Notice invoking Force Majeure Clause
- Check whether there is temporary impossibility of Contract or permanent one
- What are the remedies provided in Force Majeure Clause, suspension/termination/ alteration
- Analyse due to lockdown prices are impacted, check negotiation provisions in contract
- Identify impossibility of contract to invoke section 56 of Contract Act.
- Try to opt for alternate dispute resolution
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