Force Majeure is a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as war, strike, riot, epidemic or event described by legal term act of God, prevents one or both parties from fulfilling their obligations under the contract. In practice, major force majeure clauses do not excuse a party’s non-performance entirely, but only suspend it for the duration of the force majeure.

Legal Meaning :

While force majeure has neither been defined nor specifically dealt with, in Indian statutes, some reference can be found in Section 32 of the Indian Contract Act, 1872 (the “Contract Act”) envisages that if a contract is contingent on the happening of an event which event becomes impossible, then the contract becomes void.

From a contractual perspective, a force majeure clause provides temporary reprieve to a party from performing its obligations under a contract upon occurrence of a force majeure event.

What Force Majeure typically include ?

A Force Majeure clause in a contract would typically include an exhaustive list of events such as act of God, war , terrorism, earthquakes, hurricanes, acts of government, explosions, fire, plagues or a non- exhaustive list wherein the parties simply narrates what generally constitute force majeure events and thereafter add “and such other acts or events that are beyond the control of parties”.

Force Majeure or Not a Force Majeure TEST ?

The “test” for force majeure usually requires the satisfaction of three distinct criteria:

• the event must be beyond the reasonable control of the affected party;
• the affected party’s ability to perform its obligations under the contract must have been prevented, impeded or hindered by the event; and
• the affected party must have taken all reasonable steps to seek to avoid or mitigate the event or its consequences.

These criteria will be considered in turn.

What is Force Majeure Clauses in contract ?

Force majeure clauses are contractual clauses which alter parties’ obligations and/or liabilities under a contract when an extraordinary event or circumstance beyond their control prevents one or all of them from fulfilling those obligations.

The importance of the force majeure clause in a contract, particularly one of any length in time, cannot be overstated as it relieves a party from an obligation under the contract (or suspends that obligation). What is permitted to be a force majeure event or circumstance can be the source of much controversy in the negotiation of a contract and a party should generally resist any attempt by the other party to include something that should, fundamentally, be at the risk of that other party.

IF Parties does not have Force Majeure Clause in Contract ?

If a contract does not include a force majeure clause, the parties would have to ascertain in light factors such as the nature of the contract, the nature of event and so forth, as to whether Section 56 of the Contract Act (which deals with agreements between the parties to do an impossible act) and which has been briefly discussed below, can be applied to such contract so as to discharge the parties from their contractual obligations

Why it is Important ?

Time-critical and other sensitive contracts may be drafted to limit the shield of this clause where a party does not take reasonable steps (or specific precautions) to prevent or limit the effects of the outside interference, either when they become likely or when they actually occur. A force majeure may work to excuse all or part of the obligations of one or both parties. For example, a strike might prevent timely delivery of goods, but not timely payment for the portion delivered.

A force majeure may also be the overpowering force itself, which prevents the fulfillment of a contract. In that instance, it is actually the impossibility or impracticality defenses.

In COVID SECENRIO ?

COVID impacted the party’s ability to meet its contractual obligation due to many factors. In such events, the courts and arbitrators will have to evaluate and decide each dispute on individual merits, which would be based on the terms of the contract, the intent of the parties, steps taken to mitigate. Further, in cases where a contract does not have an explicit clause on force majeure, there could be a scenario where parties may try to seek shelter under section 56 of the Contract Act and seek frustration of a contract

• The courts will then have to ascertain whether the contract has become impossible to perform and whether the doctrine of frustration of contract could be made applicable to have such a contract

How court interpret the impact of COVID 19 will be interesting to watch out after COVID settles

Famous Case over Force Majeure ?

In Energy Watchdog V Central Electricity Regulatory Commission the supreme court faced the issue of whether an increase in coal prices ( due to change in Indonesian Law) could be cited as a force majeure event by certain power generating companies that were sourcing coal from Indonesia. The Supreme Court held that if the fundamental events of the contract remain unchanged and no frustrating events occur, except for a rise in coal prices, it could not be held that a mere increase in prices constituted a force majeure.

All views expressed on this site are my own and do not represent the opinions of any entity whatsoever with which I have been, am now, and will be affiliated.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

For work /Concern/ Queries/Drafting Mail us at Info@corpindcart.com