Force Majeure - All that you must know before invoking

As every country and their citizens are grappled with the outbreak of dangerous virus ie COVID-19 and most of them are still under lockdown condition.  Even countries such as India with a total population of around 130 billion people are under complete lockdown condition for least 21 days as of now.  Being an unprecedented event in human history, its impact will also largely be unimaginable.     

Since the majority of industries except for essential commodities remain closed, each lockdown day could pressurize them as they might not be able to meet the contractual commitment they would be having and hence, they must be thinking about several legal issues to minimize the loss to the maximum extent. One such legal issue is the invocation of a Force Majeure clause.

Force majeure clause

Force majeure clause is a contractual clause that alters parties' obligations and/or liabilities under a contract when an extraordinary event or circumstance beyond their control prevents one or all of them from fulfilling those obligations.

Depending on the wording of the contract, such clauses may have a variety of consequences, including excusing the affected party from performing the contract in whole or in part; excusing that party from delay in performance, entitling them to suspend or claim an extension of time for performance; or giving that party a right to terminate.

The Ministry of Finance (Department of Expenditure) vide its office memorandum (No. F.18/4/2020-PPD dated 19 February 2020) clarified that disruption of supply chains due to spread of coronavirus in China or any other country will be covered under the Force Majeure Clause (as defined in the Manual for Procurement of Goods, 2017).

Para 9.7.7 of the Manual for Procurement of Goods 2017 issued by the Department of Expenditure states the following with regard to the ‘Force Majeure Clause’:

(i) Force majeure is an extraordinary event/circumstance that is beyond human control and has been described as an act of God, natural disasters, war, strikes, riots, crimes (but does not include negligence or wrong doing, predictable/seasonal rain or any other event specifically excluded in the clause).

(ii) Such a clause in the contract frees both parties from contractual liability when prevented by such event but is not an excuse for the parties’ non-performance entirely and only suspends it for the duration of the force majeure.

(iii) If a force majeure clause is triggered, a notice of force majeure should be given to the other party as soon as such event occurs and cannot be claimed ex-post facto.

(iv) Where a force majeure event affects only the purchase organization, the purchase organization is to communicate with the supplier along similar lines as above for further necessary action.

(v) If the performance of the contract is prevented or delayed as a whole or in part for a period exceeding 90 days, either party may terminate the contract without any financial repercussion on either side.

One should note that the memorandum simply says that the D-19 situation could be construed as a natural calamity however procedural safeguard must be followed by the party seeking to invoke the clause. It does not automatically assure the success of the party invoking such a claim, even in the case of COVID-19.

Most commercial agreements contain a clause on force majeure, which provides protection to the parties to it, against claims and liabilities arising out of non-performance or breach of the contract due to certain specified force majeure events.

The consequence of a force majeure event will depend upon the terms contained in the agreement and therefore, it becomes pertinent to consider the language of the force majeure clause to determine if a specified event will be considered a force majeure event under the agreement between two or more parties.

Factors to be considered before invoking the clause

A party seeking to rely on a force majeure clause must also show that:

• the force majeure event was the cause of the inability to perform or delayed performance;
• their non-performance was due to circumstances beyond their control; and
• there were no reasonable steps that they could have taken to avoid or mitigate the event or its consequences.

As a result, where a party anticipates falling into difficulty with meeting its obligations, for example due to staff shortages through self-isolation in accordance with government guidelines or issues with the supply of materials, it is crucial to explore whether alternatives, such as alternative sources of labour or materials, are reasonably available – including at higher cost, unless this involves breaching existing contracts.

Procedure for invoking the clause

A business seeking to rely on a force majeure clause must also comply with any procedural requirements under the contract, such as a requirement to give notice of its intention to rely on the clause to the other party within particular timescales, including any formalities required for the service of notices. Some clauses may also require updates to be provided and/or an express obligation to mitigate.

Here, it is important to refer to Section 56 of the Indian Contract Act states that “a contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.”

Effect of invoking the clause

The usual remedy if a force majeure clause is invoked is for one or more of the parties to be excused from its obligations and/or liability under the contract, without any damages being payable. Force majeure clauses also sometimes provide for extension of time, suspension of time, or termination in the event of continued delay or non-performance. A right of termination could be commercially important, as it may provide leverage to renegotiate contractual terms.

If no force majeure clause

If there is no force majeure clause, an affected party will have to look to other provisions of the contract for potential routes out of its difficulties. If the contract does not provide any such routes, it may in certain circumstances be possible to rely on the doctrine of frustration of contract.  In such a case, the parties can seek to invoke section 56 of the Indian Contracts Act that has its basis in the doctrine of frustration.

However, one must note that Frustration requires that an unforeseen subsequent event outside the control of the parties has made the contract impossible to perform, or has transformed the performance of the obligations under the contract into something so radically different from that which the parties intended that it would be unfair to hold the parties to their obligations. Simply the fact that performance has been made more difficult or costly will not be enough.

All businesses should evaluate all its contracts and implications as well before invoking force majeure clause in any of the contract.