A ‘force majeure’ clause is a key component of many modern contracts and is recognized by Indian courts. Force majeure clauses allocate the risk of loss when performance of a contract becomes impossible or impracticable as a result of an unexpected event beyond the control of the parties.
Force majeure has become significant due to the global SARS-Cov-2 pandemic. Lockdowns and curfews imposed by global governments at various points of time have impacted the performance of contractual obligations. It has created a need to either modify or terminate the existing contracts. It has adversely affected the economy therefore many contractually bound parties are declaring force majeure. A crucial question that arises in this situation is: Can parties who are affected by force majeure events claim really decline performance? Can a force majeure clause be invoked in these circumstances?
However, Force majeure clauses are not only concerned with the “acts of God” but also include non-natural unforeseen situations which are not in parties’ control such as strikes, lockdowns, wars, etc. Force majeure clauses aren’t universal. They can be invoked either (a) in the express terms of contract; or (b) in accordance with law or policy in force. In either case, what is important is the impossibility of performance. Thus, after considering the situation of each case, only those events which are explicitly included in the contract, can excuse a party from performance. Hence, there is no universal formula. (2020) LSI 257 HC India
In the case of Energy Watchdog v. Central Electricity Regulatory Commission,(2017 14 SCC 80) the Supreme Court of India held that force majeure clauses are to be interpreted on a subjective basis considering the situation of each case.
How is force majeure defined?
Some essential ingredients of force majeure clauses are as follows:
- An event unexpected and unforeseen by the parties should have occurred. This event has made the performance of the obligations, usually by one party under the contract impossible or impracticable. Examples of unforeseen events are earthquakes, explosions, fire, flood, war, etc.
- The parties must have taken all possible measures to perform their contractual obligations or at least to mitigate the damage of non-performance.
- The obligation to prove an event is force majeure lies with the party who claims inability of performance.
Is COVID-19 a Force majeure event?
Force majeure rarely covers an epidemic or a pandemic. But, it was clarified by the Finance Ministry that the impossibility of performance of contracts and disruption in supply chain is qualified as a force majeure event. And subsequently, business, and, companies can invoke the clause. It further declared Covid-19 as a ‘natural calamity’.
The language of the force majeure clause in a contract may also define how direct the causal link between the force majeure event and the non-performance sought to be excused thereby must be.
For an event to fall under the ambit of force majeure it is important for it to pass the following tests:
- Externality i.e., the impossibility of performance is caused by an external influence and not by a party.
- Predictability i.e., the cause for invoking the clause must be unforeseeable and inevitable. Such as war, flood, or any non-natural event.
- Irresistibility i.e., it becomes impossible for the party claiming force majeure to perform its obligations successfully under the contract.
- No Alternate mode of performance available i.e. there should be no other way to complete the contract.
For e.g., let us consider a contract for the delivery of certain commodity ‘X’, used in the manufacture of dog food. The shipper, ‘A’, had promised to deliver X to the consignee, ‘B’, by 25.03.2020 through train. On the eve of 24.03.2020, the Indian Central Government imposed a nationwide lockdown and suspended train services in the country. Furthermore, State Governments began closing state borders and preventing inter-district, inter-state and intra-state travel. While announcing the lockdown, the Centre did not include animal food as an essential item, which made it very difficult to procure the items. Due to this, A was neither able to parcel X on to a train or even by road.
In this example, A could have invoked force majeure as it would have been impossible for him to deliver the commodities to B. The impossibility of performance (irresistibility) by delivering X on 25.03.2020, whether by train or road (alternate modes of performance) was caused by government-imposed lockdowns (externality) which were unforeseen and inevitable (predictability).
Later on, the Centre clarified that pet food was an essential item. Therefore, in the second situation the force majeure clause becomes inapplicable.
However, in another instance where A promised B to supply him the steel by 23.03.2020. But wasn’t able to do so, due to the lockdown imposed by the Central Government on 22.03.2020. A tried to invoke the force majeure clause, by explaining the impossibility of performance due to an unforeseen situation. But it was held by the court that steel is included as an essential service and since there was no restriction on its movement, the performance of the contract was not affected. Thus, the force majeure could not be invoked in this case.
From the above examples one can see that, the force majeure clause may require parties to take reasonable efforts to perform the contract by alternate means. Even in the absence of an express provision, the party seeking to rely on a force majeure event to excuse its non-performance, will have to show that it was unable to perform its obligations despite having taken steps to mitigate the effect of the force majeure event.
Is Pandemic an ‘Act of God’?
Indian courts have not specifically defined or ruled whether pandemic is an ‘Act of God’. Courts in the USA and the UK have held that the expression ‘act of God’ includes a pandemic. Many Indian judgments also support this position. However, for a pandemic to constitute an ‘act of god’ the criterion and tests mentioned earlier should be met.
For instance, the performance of a contract may not be affected due to Covid-19 pandemic where employees of an organization have to isolate themselves at home. Depending on the nature of the service, it could be argued that since employees can continue working from home, there is no impact on delivery of services. Similarly, any non-performance due to an economic downturn or other such conditions resulting from the Covid-19 pandemic is not likely to be sufficient to seek excuse from performance of a contract on ground of force majeure.
Read Part-2 of this post here