WHAT IS THE FORCE MAJEURE CLAUSE?
The term ‘Force Majeure’ has been defined in Black’s Law Dictionary, as an event or effect that can be neither anticipated nor controlled. It is a contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event that the parties could not have anticipated or controlled.’
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 reprieve to a party from performing its obligations under a contract upon the occurrence of a force majeure event.
In the case of Energy Watchdog Vs. Central Electricity Regulatory Commission & Ors. the Supreme Court of India, restated the law of force majeure and laid down the following guidelines to be mindful of while invoking a force majeure clause:
- The basis of such clause is that the events are beyond the reasonable control of the parties and in such conditions, parties cannot be held liable for non-performance of obligations in the contract.
- The occurrence of the event has actually rendered the performance impossible or illegal.
- For any event to qualify as a force majeure, it is necessary that the same is unavoidable by the parties even taking all the measures necessary or capable in their capacity.
- While analysing the force majeure clause or considering the force majeure event, it is also necessary to take into consideration that best endeavours have been taken to mitigate force majeure events.
THE ESSENTIAL CONSTITUENTS OF FORCE MAJEURE CLAUSES
1. An unexpected/unforeseen intervening event occurred;
2. Such an event has made the performance of the obligations under the contract impossible or impracticable;
3. The parties have taken all measures to perform the obligations under the agreement or at least made sure that the damages are less;
4. 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.
HOW DOES FORCE MAJEURE WORK?
The force majeure clause is a provision in a contract that allows both parties for non-performance of their contractual duties due to unavoidable circumstances and situations beyond human control thereby relieving the parties from their respective liabilities arising in the course of non-performance. Though the above clause allows for rescue in chaotic cases like the present COVID 19 situation, its applicability depends on the specific use of words.
For example, in some contracts, the force majeure clause is quite extensive and it elaborately covers the circumstances describing the exact state of affairs or events where the said clause can be invoked.
In situations where the force majeure events are not clearly elucidated or the force majeure clause is present only in the form of a boilerplate clause, the enforcement of the same becomes a matter of varied interpretation. In these circumstances, the applicability of the clause is best determined by judicial interpretation.
Force majeure clauses can usually be found in various contracts such as power purchase agreements, supply contracts, manufacturing contracts, distribution agreements, project finance agreements, agreements between real estate developers and home buyers, etc.
This provision is important for businesses as it relieves the parties from performing their respective obligations and which are to be undertaken under the contract and consequential liabilities, during the period that force majeure events continue provided that the conditions for the clause to become applicable (which have been discussed above) are met.
SPECIFIC DISASTERS THAT CAN BE COVERED BY FORCE MAJEURE
Parties’ s liabilities or performance obligations when an event or circumstance that was unavoidable or not anticipated at the time of contract formation occurs. In many cases, the events which will be covered under the force majeure clause is mentioned specifically in the contract like, war, floods, earthquake, fire, pandemic in short all acts of gods will be covered under the force majeure clause.
However in case, if a particular event is not mentioned the declaration that such event will come under force majeure depends on the interpretation of court however commercial hardships, self-induced events, an act of third-person etc. will not be included.
While there are slight variations from state to state and court to court, a court interpreting a force majeure clause will generally attempt to answer the following questions based upon the facts of a specific triggering event:
(1) Does the triggering event fall within the language of the force majeure clause?;
(2) the party seeking relief from its obligation demonstrated that its ability to perform was materially impacted by the occurrence of the event?;
(3) Was the triggering event beyond the control of either party?; and
(4) Was the triggering event unforeseeable at the time the parties entered into the contract?
Again, while it may vary slightly between jurisdictions, courts also trend toward reading force majeure clauses narrowly.
Narasu Pictures Circuit Vs. P.S.V. Iyer and Ors.
In Narasu Pictures Circuit Vs. P.S.V. Iyer and Ors. the court had observed that “Where it appears from the nature of the contract and the surrounding circumstances that the parties have contracted on the basis that some specified thing without which the contract cannot be fulfilled will continue to exist or that a future event which forms the foundation of the contract will take place, the contract, though in terms absolute, is to be construed as being subject to an implied condition that if before the breach, performance becomes impossible without default of either party and owing to circumstances which were not contemplated when the contract was made, the parties are to be excused from further performance.”
The Hon’ble court had clearly identified the point that upon the advent of an event, which makes the performance of the contract impossible, the parties are to be excused from further performance.
What are some of the key aspects related to the Concept that legal teams should keep in mind while drafting contracts?
Aspects to be covered while drafting Force Majeure
- enumerating events which would constitute a force majeure event, based on the commercial understanding between the parties and the nature of the contract, the said list can be exhaustive or non-exhaustive in nature;
- actions required to be undertaken by the parties to invoke the provisions of force majeure by providing for issuance of notice to the other side intimating them about force majeure by providing for issuance of notice to the other side intimating them about force majeure
- consequence of occurrence of a force majeure event, including requiring parties to the extent possible, to mitigate the consequences of the force majeure event, excusing the affected party from performing the contract in whole or in part or excusing a party from delay in performance or entitling them to suspend or claim an extension of time for performance; or giving that party a right to terminate the contract.
Therefore, from the above discussion we can say that the Force Majeure clause is the essential clause in an agreement to save parties from their contractual obligations and save damages losses suffered by any situation which is unforeseeable Under the present situation of coronavirus outbreaks in several countries, vendors, airline companies’ shipment companies and in certain circumstances even consumers are like most likely to invoke the force majeure clause.