Force Majeure clause in contracts
The global COVID-19 outbreak has disrupted all industries and has impacted economies across the world, particularly to maintain operations and fulfill existing contractual obligations in all sectors such as automobile, real estate, hospitality, aviation etc.
On the issue of contracts, this outbreak has brought many new aspects to us, one of which is the "Force Majeure" clause that impacts formal contracts.
What is Force majeure?
Force Majeure means extraordinary events or circumstances beyond human control such as events described as an Act of God (like natural calamities) or events like war, riots, strikes, crimes (but not including negligence, wrong-doing, or predictable rain) or any other events specifically excluded in the clause.
However, the concept of force majeure may be considered differently under civil law and common law because in most of the common law countries like India, the concept of force majeure is not codified (not specifically mentioned in a act) and is introduced by way of contract (via agreements between the parties).Hence, it is important to first identify which law is applicable to a commercial understanding between the parties. The purpose behind inserting such clause is to save the performing party from the consequences of anything over which the party has no control.
An expressly mentioned force majeure clause is only one of the several ways by which a party can escape its obligations under a contract on grounds of impossibility of performance.
Is pandemic being termed as a Force majeure event in India?
On February 19, 2020, the Indian Government issued official Memorandum stating that COVID-19 pandemic shall be considered as natural calamity and force majeure clause may be invoked wherever necessary.
The Supreme Court in it's recent decision in Energy watchdog v. Central Electricity Regulatory Authority (2017), has expressed certain views on contractual impossibility in India. The case was concerned with the interpretation and application of the force majeure clauses in certain PPAs (Power Purchase Agreements). Under these PPAs, Adani power had agreed to supply power to state utilities in Gujarat and Haryana. Subsequent to the conclusion of contracts, there was an increase in the prices of coal exports, because of which, Adani sought relief on grounds of force majeure and also on grounds of Frustration under section 56 of the Indian Contract Act, 1872.
It was held by the apex court that, according to common law, a contract would be frustrated only if the fudamental basis of the contract was affected by the change in circumstances. The court found that the fundamental basis of the PPAs remained unaltered by the change in the price of the coal exports. Therefore, the Court observed that economic hardship cannot be considered as a force majeure event.
It is important to note that the failure to perform an obligation primarily due to lockdown implemented by the Government, the respective force majeure clause should also contain the term "lockdown" in order to be invoked.
However, many contracts may not contain the force majeure clause expressly to define the procedures to be conducted to claim benefits due to COVID-19 outbreak.
Whether a party can be excused from a contract on account of COVID-19 being declared a pandemic, is a fact-specific determination that will depend on the nature of party's obligations and the specific terms of contract.
If the contract does not include a force majeure clause, the affected party could claim relief under the "Doctrine of Frustration" under section 56 of the Indian Contract Act, 1872 (i.e, agreement to do an impossible act is void), except in cases of lease.
In cases where the courts dismiss such claims of force majeure or doctrine of frustration, the courts may order specific performance of the contract or award damages if losses have incurred due to non-performance of delay of the contractual obligations.