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19 April 2021
The concept of force majeure has been a hotly debated topic in recent times due to the COVID-19 pandemic. The pandemic has resulted in the breach of many contracts due to delays in payments or completing conditions precedent or any other terms agreed by the parties to contracts. Due to COVID-19, parties to contracts have been unable to fulfil their obligations within the contract despite wanting to, and thus they have tried to use force majeure in order to safeguard their own interests.
On 19 February 2020 the central government issued an office memorandum which stated that the hindrances that have occurred within supply chains due to COVID-19 should fall within the purview of natural calamity and thus force majeure clauses may be invoked in situations where deemed appropriate.(1)
The office memorandum stated that force majeure may be invoked in situations where deemed appropriate; thus, it does not apply in all scenarios and will apply on a conditional basis. Consequently, the crux of the issue is: when can force majeure be invoked due to breaches that have occurred in contracts between parties due to COVID-19?
Force majeure may be defined as "a superior force" or "an event or effect that cannot be reasonably anticipated or controlled".(2) Thus, force majeure may be defined as an occurrence of an event or circumstance that is extraordinary in nature that could not be anticipated or predicted.
Force majeure is a French term which means 'greater force'. It comprises both natural calamities and human-made activities and thus includes:
Force majeure aims to exempt a party from fulfilling an obligation under a contract due to the occurrence of a force majeure phenomenon. Since the performing party is unable to fulfil its obligation due to a lack of control over the situation, it must be protected from the consequences for the same.
Most agreements contain a separate clause for force majeure as it helps to protect the rights of the parties which are otherwise obligated to perform certain obligations but will become unable to do so if a force majeure event were to occur. Force majeure clauses generally cover:
The essentials stated above help to solidify a force majeure clause in order to provide an advantage to the party obligated to perform an obligation in case a certain force majeure event were to occur. Despite the advantage of an explicit force majeure clause, in certain rare cases parties choose to have no express and unambiguous force majeure clause. In such a scenario, the parties to the contract will be left to the mercy of Section 56 of the Contract Act 1872, which covers the doctrine of frustration.
The terms 'force majeure' and 'doctrine of frustration' have been used interchangeably; however, they have a completely different meaning and stance under Indian law.
When it comes to force majeure, there is a clause prevalent within contracts which helps to safeguard the interest of the parties which are unable to perform an obligation within the contract due to some unforeseen superior force. Thus, a force majeure clause provides an exemption to a party to the contract from fulfilling its obligation due to an incident of force majeure occurrence.
The concept of doctrine of frustration emanates from Section 56 of the Contract Act, which states that "an agreement to do an act which is impossible in itself is void". In effect, the 'doctrine of frustration' means acts which cannot be fulfilled or performed by a party as the act in itself has become impossible, making the contract between the parties void.
Thus, under the doctrine of frustration, a contract becomes void due to the impossibility of the performance of the obligation, whereas, under force majeure, the party obligated to fulfil its obligation under the contract is relieved from fulfilling such an obligation due to the occurrence of a force majeure event.
Due to the COVID-19 pandemic, many of the obligations under contracts have been unfulfilled and thus many breaches have occurred due to which the obligated parties are trying to safeguard their own interests by determining means to protect themselves. With regard to the relief that can be used during the COVID-19 pandemic, broadly two sections of the Contract Act come into play:
When parties have the protection of a force majeure clause within their contract, Section 32 of the Contract Act applies. Section 32 broadly covers contingent contracts and thus states that when a contract is dependent on the future happenings of an event and such an event becomes impossible, that contract becomes void.
In order to determine whether Section 32 of the Contract Act can be used to invoke force majeure in relation to COVID-19, the following factors must be considered:
When there is no explicit and exclusive force majeure clause in an agreement, Section 56 of the Contract Act applies. In order to fall under Section 56:
It is difficult to ascertain clearly situations in which Section 56 will apply, but certain scenarios where it becomes applicable include:
In many cases, the courts have held that force majeure cannot be invoked merely in order to avoid a contractual obligation. Rather, the benefits under it will be used only at the time of the occurrence of a force majeure phenomenon which actually hampered the fulfilment of the obligations under the contract. Thus, the courts have made it clear that force majeure will not apply in situations wherein parties are merely trying to avoid the fulfilment of their obligation. In order to use force majeure during the COVID-19 pandemic, a nexus must be established wherein the party was unable to perform its contractual obligation due to the pandemic.
Thus, the applicability and invocation of force majeure for breaches that have occurred during COVID-19 lockdowns will be assessed on a case-by-case basis and no hard-and-fast rule can be established.
Force majeure has always been a crucial and important aspect of law due to the protection that it provides when used by the parties to a contract; however, due to the disruption created by the COVID-19 pandemic, force majeure has gained a considerable amount of attention. Force majeure has become the crucial ground on the basis of which parties obligated to perform under a contract are trying to protect themselves as the fulfilment of such obligations have been impossible due to the various lockdowns and restrictions.
However, a clear understanding of force majeure being invoked during the COVID-19 pandemic will only appear once judgments are delivered in this regard. Until then, the court's application of force majeure will vary on a case-by-case basis.
For further information on this topic please contact Vasudha Luniya or Ankita Mehra at Clasis Law by telephone (+91 11 4213 0000) or email (firstname.lastname@example.org or email@example.com). The Clasis Law website can be accessed at www.clasislaw.com.
(1) Available here.
(2) Available here.
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