Force Majeure Clause & the Indian Contract Act, 1872

The doctrine of Force Majeure is a common law doctrine prevailing in the UK, France and other countries. It is a part of the common law in those countries as a facet of the doctrine of frustration of contract. This doctrine postulates that a contract will be frustrated if its fundamental purpose is destroyed.

Historically, the three essentials for Force Majeure to apply are that the event must be (i) beyond the control of parties to the contract, (ii) one which could not be reasonably foreseen by the affected party at the time of making of the contract and (iii) such that the effects of the same are unavoidable even if the affected party tries to take appropriate measures to avoid the same.

Most commercial contracts contain a ‘Force Majeure‘ clause. The purpose of such a clause is to protect the parties from a breach of contract claim if they are unable to perform their obligations because of an event that is outside their control. Such a clause may also provide that if the Force Majeure event continues for a specified period, the contract would stand terminated or a party would get a right to terminate it.

The Indian Contract Act, 1872 (“the Contract Act”) does not set out the term “Force Majeure” in any of its provisions. RERA and CGST act becomes impossible or unlawful to perform due to a subsequent event that the promisor could not prevent, the contract becomes void when the performance becomes impossible or unlawful. Section 32 of the Contract Act states that 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 and that if the event becomes impossible then such contracts become void.

The Supreme Court of India in the case of Satyabrata Ghosh V/s Mugneeram Bangur & Co. & Anr1 dealt with the issue of frustration of contract and considered the English doctrine of frustration. It was held (i) that the doctrine of frustration comes within the purview of Section 56 of the Contract Act, (ii) that it would be incorrect to say that Section 56 of the Contract Act applies only to cases of physical impossibility, (iii) that to the extent that the Contract Act deals with a particular subject, it is exhaustive upon the same and it is not permissible to import the principles of English law dehors these statutory provisions.

When a party claims that he cannot perform his part of the contract due to Force Majeure and seeks to defend his non-performance and prevent action for breach of contract, it is essential that the non-performance is for a certain period and not indefinite. If the disability persists the contract would get frustrated. A very vexed question in all these cases is – what exactly is the period of time after which the contract can be said to have become frustrated? This of course depends on the facts of each case and the contractual provisions prevailing.

Despite the specific provisions of Section 56 of the Contract Act, many parties wish to have a certainty as to what events can be called Force Majeure events which will excuse the parties from performance. However, the Force Majeure clause is often not sufficient to cover an actual Force Majeure event. This is of course due to the nature of the event itself – the event is obviously unexpected.

The Supreme Court elaborated its findings on the doctrines of frustration and Force Majeure in the case of Energy Watchdog V/s CERC32 (1961) 3 SCR 1020 : AIR 1961 SC 1285, 3 (2017) 14 SCC 80 and held that the unexpected rise in the price of coal did not absolve the company from performing its part of the contract. The Supreme Court also held that when a contract contains a Force Majeure clause which squarely applies to the facts of the case then there is no question of trying to apply the law of frustration as per Section 56 of the Contract Act which section becomes inapplicable. Just because the contract becomes onerous it cannot be called force majeure. It was clarified that when a Force Majeure event was relatable to a contractual clause, Section 32 of the Contract Act became applicable, and when a Force Majeure event was not relatable to the contract then Section 56 of the Contract Act is applicable.

When a contract does not contain any Force Majeure clause, the parties are left to their rights under the prevailing law which, in our case, would be the provisions of the Contract Act (Section 56) and the law declared by our courts as mentioned above.

The recent laws and restrictions, including the Lockdown orders, are causing many businesses to stop functioning. Deciding these legal issues in today’s scenario requires going into the details of specific facts and the provisions of each contract in depth. It is of course necessary to see if the terms of a contract provide that epidemics, pandemics, quarantines, or government shutdowns are an excuse from performance. If not, the next step is to determine whether the performance under the contract is in fact made impossible by the pandemic or its associated government restrictions. If so, then the provisions of the Contract Act may excuse the party’s failure to perform its contractual obligations.

In order to mitigate the economic crisis as a result of COVID – 19, the Government has stepped in and issued various Notifications and Circulars to deal with the Force Majeure situation. These will apply where the contract does not contain a Force Majeure clause or where such a clause is not adequate to deal with the situation.

The pandemic will have effects on various contracts relating to immovable properties, leases and leave and licence etc. We will see legislations being introduced, parties seeking legal redress in courts or in Arbitration, parties settling their disputes out of court, parties renegotiating contracts or entering into mediation. It does seem that a vast majority of the issues would be settled by negotiations or renegotiation of contracts. Given the wide effect of the pandemic, this is probably one of the more practical and efficient methods of dealing with the situation for most people involved. It is however inevitable that all parties will not be able to settle or renegotiate their contracts and it is inevitable that some of these will end up in litigation

Reader Interactions