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Force Majeure and how it is treated in Contractual Relationship

Force Majeure – Meaning

  1. The word ‘force majeure’ literally means “Superior Force”. In the context of contracts, this superior force alters parties’ obligations and liabilities under the contract.
  2. It is a creature of contract and does not emanate from general law as it is not a codified law and has no precise technical meaning under Indian law. We find interpretations and explanations of the doctrine of force majeure through judicial precedents. There is a myriad of the jurisprudence of the definition of force majeure and its scope in international law. For enforcement of this clause under a contract, the governing law of the contract has to be seen.
  3. Force majeure clauses in contracts require the aggrieved party, who is prevented from performing under the contract as a result of the force majeure event, to exercise ‘reasonable endeavours to avoid or mitigate’ the force majeure event. Therefore, the principles of mitigation are applicable when enforcing force majeure.

Contracts having Force Majeure Clause

  1. Generally, what has to be seen is if the contract under question has a precise definition of force majeure events in it. Rarely would one find an unqualified definition for force majeure in any contract which makes invocation of the force majeure clause subjective to the trigger of a particular incident? Since force majeure is a creature of the contract, extrapolations are precluded under the law which thereby entitles the court to take into consideration:
  2. the pre-contractual circumstances;
  3. allocation of overall contractual risk between the parties;
  4. The impending situation that has given rise to the need of invocation of the clause; and
  5. The stage of performance of the contract by the parties.

Testing Impact of Force Majeure on Aggrieved Party

  1. The test of a force majeure event is to see if the party is physically prevented from performing the contract and not simply making it legally impossible, which naturally makes it an extraordinary test.
  2. In this edition, we will discuss other factors, in addition to the foregoing test, which are taken into consideration by the courts in order to determine whether an event qualifies as a force majeure event.
  3. Firstly, it will be determined whether the party is hindered in performing its obligations under the contract. The scope of this test is wider and has a lower bar, however, the duration of such hindrance in performance is then considered.
  4. Secondly, the court will determine whether the party is being delayed in its performance. Certain type of contracts, such as construction contracts, provide for circumstances under which a party can claim an extension of time. If such a clause exists, the period determining the extension of time becomes critical. The scope of this test is less onerous.
  5. Thirdly, the court doesn’t require the aggrieved party to prove that the party could have performed, but for the force majeure event, he is precluded from the performance.

Claiming benefits under Force Majeure

  1. When an aggrieved party invokes the force majeure clause under the contract, the burden of proving the existence of a situation which justifies invocation of the force majeure clause is on such party claiming force majeure. He not only has to prove the existence of the force majeure event, but he also has to prove that he has duly complied with all condition’s precedents for proper invocation of the clause. In essence, he has proved that:
  2. The force majeure event was the cause of his physical inability to perform his obligations under the contract, that such event prevented, hindered or delayed his performance;
  3. He non-performance was due to circumstances beyond control and no reasonable steps could have been taken by him to avoid or mitigate the consequences of the event; and
  4. He has complied with the procedural requirements of the force majeure clause, and has served/submitted all notifications or reports, etc. within the contractual timelines as some contracts contain detailed procedures and timelines for such notice.

Consequences of Claiming Force Majeure

After the aggrieved party complies with all necessary requirements and proves the existence of a force majeure event, the court may grant the following reliefs to the party:

  1. Release the party from performing the contract, in whole or in part;
  2. Make allowances for delays in performance;
  3. Permit the party to suspend performance of the contract or claim extension of time for contractual performance;
  4. Provide the party the right to terminate the contract, giving the party the leverage to renegotiate contractual terms.

Generally, enforcement of force majeure clauses does not extinguish the performance by the parties of the contract but only suspends it for the duration of the force majeure event. In essence, a credible claim of force majeure limits the liability as well as the quantum of any potential damage against the party claiming existence of force majeure event. However, antecedent breaches of the contract committed by the party will not be covered under the reliefs granted by the court.

What is not Force Majeure

The court will not grant enforcement of force majeure in the following situations:

  1. When the party has committed negligent or wilful default or has committed malfeasance;
  2. usual and natural consequences of external factors exist;
  3. circumstances of the event are specifically contemplated in the contract; and
  4. the event simply results into the performance becoming more difficult, onerous, more expensive, or less profitable.

Contract with No Force Majeure Provision 

When a contract does not contain force majeure clauses, the aggrieved party may either has to analyse the contract for other clauses which may provide similar relief and the overall construction of the contract to ascertain the intention of the parties, or consider relying on the doctrine of frustration of contract.

In addition, the party may rely on the legal principles of limitation of damages. This principle is inherent in section 74 of the Indian Contract Act. It can be invoked under those contracts which contain clauses of ‘liquidated damages’ or ‘limitation of liability’, wherein a sum would be named in the contract as the amount to be paid as damages in case of breach of the contract or in the form of a penalty, which the party complaining of the breach would be entitled to receive from the party breaching the contract. The penalty amount, or damages cannot exceed the sum so named in the contract, whether or not actual damage or loss is proved to have been caused from the breach. 

Features of Frustration

The doctrine of frustration is codified under Section 56 of the Indian Contract Act, 1872. It is a narrower concept than the doctrine of force majeure. It is generally difficult to establish frustration of a contract than it is to establish the existence of a force majeure event. The following situations would qualify the invocation of frustration of the contract by a party:

  1. The event under question has transformed the performance of obligations into something so radically different from what the parties originally intended to do and it would be unfair to hold the parties to their original bargain; or
  2. The event is unforeseen by the parties and occurs after the parties have entered into the contract and such event which makes the contract impossible to perform is outside the control of parties.
  3. The duration of the event vis-a-vis the duration of the contract is a very crucial aspect for a court to determine when considering whether or not the event is suitable for application of the doctrine of frustration. Therefore, it does not naturally follow that if the event has a limited duration it will not lead to frustration of the contract. It is subjective to the situations set out in the foregoing paragraph.

What is not Frustration

Analogous to force majeure, the performance of the contract has become more onerous, difficult, or expensive may not be enough to claim frustration of contract.

Procedure precis

From the foregoing, it can be construed that the aggrieved person attempting to claim and invoke force majeure or frustration of contract, has to carry out the following:

  1. Consider and analyse the force majeure clause very carefully in terms of the framework, rights, and timings thereof;
  2. explore alternate means of performing the contract to minimize delay and mitigate loss to the other party;
  3. Comply with every procedural requirement under the contract with respect to notification, reporting, et al. Even if the contract does not contain a requirement to notify, a notification to the other party of difficulty in performance should be provided within reasonable time;
  4. It may not be prudent to emphasize on increased costs or difficulties in performing obligations, as these may not be enough to justify force majeure event;
  5. Generate and maintain contemporaneous documentary records to support the claim of impossibility of performance of obligations;
  6. If the is no force majeure clause, consider the options available under the doctrine of frustration of contract;
  7. Create leverage for re-negotiation of performance under the contract;
  8. Parties could resort to the despite resolution mechanism given in the contracts upon failure of agreement on the event being a force majeure event, or failure to comply with provisions of contract.

General impact of COVID-19 on contractual rights and obligations

COVID-19 as a Force Majeure event

Whether or not COVID-19 qualifies to be an event justifying the invocation of force majeure clause under a contract will depend on the contractual definition of force majeure. Definitions which include ‘epidemic’ or ‘pandemic’ would squarely cover COVID-19 pandemic event. If these terms are not included in the contract, the clause needs to be interpreted to understand whether parties intended to make the clause exhaustive or illustrative. For instance, if the clause uses a phrase like, ‘beyond the reasonable control of the parties’ or such similar phrases, it could be interpreted to include a COVID-19 event. However, prima facie a larger meaning is generally accorded to force majeure clauses in a contract.

Generally, in view of the unprecedented nature of the COVID 19 outbreak and actions of various governments around the world, it is likely that this event will constitute a force majeure event under many force majeure clauses. Be as it may, it does not necessarily follow that parties would be protected from performing their contractual obligations.

Even if COVID 19 is considered a force majeure event, the next question to be considered is its real impact on the affected party’s ability to perform its contractual obligations. This is debatable, whether an epidemic or pandemic could be considered an ‘unforeseen’ event, given the fact that there have been similar events in the past, if not in this monumental scale, and there are warnings of similar events in the future. Nevertheless, what followed as a result of the pandemic could be reckoned as an ‘unforeseeable’ event, i.e., it is conceivable that the extent and duration of the enforced lock-down by majority of governments across the world was unforeseeable. As the Delhi High Court in Halliburton Offshore Services vs Vedanta Ltd[1] said:

“The imposition of the lockdown was by way of a sudden and emergent measure, of which no advance knowledge could be credited to the petitioner – or, indeed, to anyone else”

Contracts where time was of the essence of contract or obligations were strictly restricted within timelines, the COVID-19 pandemic event may lead to frustration of such contracts if the impact period extends beyond the performance timeframe and remedies available under the contracts, such as extension of time for performance of the contract, becomes impractical. Consequently, such events could lead to frustration of short-term contracts.

Recent Judicial Approaches

In unprecedented times like this, courts are likely to be generous and liberal in interpretation of contractual wordings where parties have genuine difficulties in performing the contract. That does not discharge the parties from proving impossibility of performance and it was outside their reasonable control.

In India, even though many ministries, such as the Ministry of Finance, Ministry of Road Transport and Highways and Ministry of Urban Development, there has been a mixed response from the courts in India:

  • Supreme Court – Court said that if a contract has a force majeure clause, the option for claiming frustration of contract may not be available to the affected party.[2]
  • High Court of Delhi – Court gave interim orders restraining invocation of bank guarantees in connection with a development contract. However, later the Court vacated the order upholding the sanctity of bank guarantees stating that they are unconditional and irrevocable, and bank will have to make payment upon demand being made. The Court stated that:

“The question as to whether COVID-19 would justify non-performance or breach of a contract has to be examined on the facts and circumstances of each case. Every breach or non-performance cannot be justified or excused merely on the invocation of COVID-19 as a Force Majeure condition. The Court would have to assess the conduct of the parties prior to the outbreak, the deadlines that were imposed in the contract, the steps that were to be taken, the various compliances that were required to be made and only then assess as to whether, genuinely, a party was prevented or is able to justify its non-performance due to the epidemic/pandemic. It is the settled position in law that a Force Majeure clause is to be interpreted narrowly and not broadly. Parties ought to be compelled to adhere to contractual terms and conditions and excusing non-performance would be only in exceptional situations…. It is also not the duty of Courts to provide a shelter for justifying non-performance. There has to be a ‘real reason’ and a ‘real justification’ which the Court would consider in order to invoke a Force Majeure clause.”[3]

  • High Court of Mumbai – Court stated that the force majeure clause contained in the contract, by its language, was only applicable upon the bank and not the debtors and that the debtors cannot use lockdown as an excuse to resile from its contractual obligations of making payments to the bank.[4]

[1] O.M.P. (I) (COMM) & I.A. 3697/2020

[2] Energy Watchdog vs. CERC (Civil Appeal Nos.5399-5400 of 2016)

[3] Halliburton Offshore Services vs Vedanta Ltd (O.M.P. (I) (COMM) & I.A. 3696-3697/2020)

[4] Standard Retail Pvt. Ltd. V/s M/s. G. S. Global Corp & Ors. with Integral Industries Pvt. Ltd. V/s M/s. G. S. Global Corp. & Ors.; Vinayaga Marine Petro Ltd. & Anr. V/s M/s. G. S. Global Corp. & Ors.; Hariyana International Pvt. Ltd. V/s M/s. Hyundai Corporation & Ors. and Prabhat Steel Traders Pvt. Ltd. V/s M/s. Hyundai Corporation & Ors. (Commercial Arbitration Petition Nos. 404, 405, 406, 407 and 408 of 2020)

Picture courtesy – Steve Buissinne from Pixabay

Asia Law Offices advised a major transnational strategic collaboration between its client, UAE-Based Pharmax Pharmaceuticals, and Swiss pharma major Acino Pharmaceuticals.

ALO represented Pharmax in the structuring and closure of entire transaction documents of the significant collaboration.

The collaboration framework extends to licensing, manufacturing, and supply of Acino formulations within the gastroenterology and the cardiovascular space throughout the Middle East and Africa.