The world has come to standstill due to the spread of coronavirus on Earth. The WHO declared the COVID-19 or the coronavirus as a pandemic, on March 11, 2020. Nearly 210 countries are affected by it. Not only lives are lost, but the industries and companies have taken a huge blow.[i] The business and commerce sector has been halted because of the nation-wide lockdown announced in many countries, and restriction of movement. This has disrupted the world economy. There have been certain events in past which had caused damage to Indian economy comprising and not only limited to the 2001 earthquake which occurred in Gujrat, killed almost 20,000 people, and the 2004 Tsunami which occurred in the Indian ocean, affected lives of nearly 2,30,000. The COVID-19 outbreak on the other hand, has brought the entire world to a halt.
Most essential elements of any business is the ability to pay, and something which binds two parties to perform, i.e. contracts. Contract legislation sets out the mutual duties of the parties towards the performance of a contract. Section 34 of the Indian contracts act, 1872, states that the parties to a contract must either perform, or offer to perform, their respective promises, unless such performance is dispensed from, or excused under, the terms of this Act or any other statute. In this concatenation of commercial contracts, a party without its own fault, might not be able to perform its part of the contract.
In the aforementioned context, it is essential to analyze the commercial implications of COVID-19, and whether the situation which has come before us due to the lockdowns imposed, can be considered as force majeure?
WHAT IS FORCE MAJEURE?
Force majeure is a French term which in Latin means “superior force”. The Black’s Law dictionary defines this term as “an event or effect that can be neither anticipated nor controlled‘. The term includes both, acts of nature (e.g. floods and hurricanes) and acts of people (e.g. riots, strikes and war).”
Force majeure clause must be inserted in the contract for bringing it into action. The Black’s Law dictionary defines force majeure clause as ‘A contractual provision allocating the risk, if performance becomes impossible or impracticable, especially as a result of an event or effect that the parties could not have anticipated or controlled.’
A company inserts a force majeure clause in the contracts to exculpate itself from any liability in a situation wherein it cannot fulfill the terms stated in the contract, for reason which is beyond the company’s control. Force majeure shelters the contract, whose performance becomes impossible due to an intrusion of a superior force. The concept of force majeure has gathered a lot of attention during the COVID-19 pandemic. The provision of force majeure clause provides an immediate but temporary relief from meeting its responsibility which the party owes when a force majeure arises. The concept of force majeure is nearly similar to that of doctrine of frustration.
CONCEPT OF FORCE MAJEURE
Force majeure has not been defined nor has it been specifically dealt with in the Indian statutes. But some references can be found in section 32 of the Indian contract act. Section 32 reads “Enforcement of contracts contingent on an event happening Contingent contracts to do or not to do anything if an uncertain future event happens, cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contracts become void.”[ii]
Ingredients of force majeure clause are as follows
- An unexpected/unforeseen intervening event occurred;
- Presumption of the parties that such an incident will not take place;
- Such an incident made it difficult or impracticable to meet the obligations under the contract;
- The Parties have taken all such steps to satisfy duties under the Agreement or, at the very least, to minimize the damages; and
- The affected party claiming relief under force majeure, will have the burden of proof to show that the force majeure event has affected such party’s performance of the contract.
A force majeure clause usually defines a particular situation or occurrence that may qualify as a force majeure incident, the requirements that must have been met for such force majeure clause to apply to the contract and consequences of occurrence of such force majeure events. For a force majeure clause to become applicable, the happening of such event should be beyond the control of the parties and the parties will be expected to show that they have made attempts to minimize the effect of such force majeure event. If an incident or situation occurs within the span of a force majeure case and fulfills the requirements for the applicability of the provision, the effect will be that the parties will be released from the respective obligations to be fulfilled by them under the contract for the duration of such force majeure events. Further subsequent obligations, depending on the language of the contract, may be needed by the parties to provide a notice duly informing the other party of the occurrence of such an incident and of the application of the force majeure contract. Such contracts may include a clause that, if any force majeure event continues for a longer period, the parties will be able to terminate the contract.
Force majeure typically includes a comprehensive list of events such as war, terrorism, act of god, earthquake, acts of Government, fires, explosions, epidemic or plagues, or a list in which parties establish what generally incorporate force majeure events. The line “and such other acts or events that are beyond the control of parties” can be added to cover all bases. Consequences would include the suspension of obligation to perform or even termination of contract upon the occurrence of the force majeure event. One can seek the remedy only if the contract contains such clause. The honorable Supreme court of India in the case of Energy watchdog and ors. Vs Central electricity regulatory commission and ors,[iii] observed that the force majeure is an express or implied clause in a contract and is governed by chapter III of the Indian contract act. The honorable court also observed that the force majeure clause must be narrowly construed. On construction of force majeure clause, hindrance could mean an event wholly or partly preventing performance.
Force majeure clause is important in the business universe which includes sports. Due to the lockdowns imposed by the respective governments of the countries, sports were halted and a major source of income of clubs and teams viz. ticket sales were cut off. The contract of the players included force majeure clause which allowed the clubs/teams to either suspend the wages of the players or reduce it. Although this didn’t recover the loss which the clubs/teams faced, but it certainly helped in reducing the loss.
Such clauses can be found in various other contracts like power purchasing agreements, supply contracts, manufacturing contracts, project finance agreements, etc. This provision is important in business as it alleviates parties from performing their respective liability or obligations towards one-other.
In the case Satyabrata Ghose v. Mugneeram Bangur & Co.[iv] it was held that, therefore, even if a contract contains a force majeure clause which does not contemplate a particular event, if such an event strikes at the root of the contract and renders it impossible to perform, then the court may find that the contract has been frustrated.[v]
If the execution of an act becomes unlikely or illegal after a contract has been signed, and this impossibility is due to an occurrence which the party performing has not been able to avert, the contract itself will become null and void or it can be assumed that the contract will become ‘frustrated.’ The doctrine of frustration is an English contract law doctrine which acts as a mechanism for setting aside contracts where an unexpected occurrence either makes contractual obligations unnecessary or dramatically alter the primary intent of the contracting party. Doctrine of frustration is not defined in the Indian legislation. It is present in sec 56 of the Indian contract act,1872 which reads as follows
- Agreement to do impossible act. – An agreement to do an act impossible in itself is void.
Agreement to do impossible act. Contract to do an act afterwards becoming impossible or unlawful.—A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful. Compensation for loss through non-performance of act known to be impossible or unlawful.—Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise. The doctrine of frustration makes the agreement null and void after the sole intention behind the contract becomes either unlawful or impossible. [vi]
DISTINCTION BETWEEN FORCE MAJEURE AND DOCTRINE OF FRUSTRATION
A force measure clause may include acts of government, war, earthquake, epidemic or any circumstances which the parties may find appropriate before executing the contract. Here the contract is not terminated but the performance of the contract is suspended when there is a presence of a supervening event constituting force majeure. After the force majeure ceases to exist, the parties are to honor the contract and complete the performance subsequently. The Party shall be entitled to terminate the contract in the event of a failure on its part to perform the contract after such force majeure event. The terms and conditions of this clause are decided prior to the execution of the contract and it is a contractual remedy.
The doctrine of frustration on the other hand has the power to render the contract void. It is the happening of the act de hors of contract and such act makes the performance either illegal or impossible. It is a statutory remedy expressed in sec 56 of the Indian contract act which must be interpreted practically by studying the facts around it.
Whether the situation of COVID pandemic and the lockdowns followed would be covered in sec 56 or sec 32 of the Indian Contracts act depends upon the inclusion of a single clause. The righteous use of this remedies shall help in giving the economy some dampening from the losses, but they should be used sparingly and judicially. Thus, the rigidity around sec 32 and sec 56 of the Indian contract act should remain constant because it makes it efficient and fair. It safeguards the businesses and prevents exploitation to a significant degree.
[iii] (2017) 14 SCC 80
[iv] 1954 SCR 310
Thumbnail Credits- https://vlaa.org/what-is-a-force-majeure-clause/