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FAQ on Force Majeure – FINAL – AMA

Anant Merathia & Associates   →  FAQ on Force Majeure – FINAL – AMA

FAQ on Force Majeure – FINAL – AMA

FORCE MAJEURE VS FRUSTRATION OF CONTRACT UNDER

The term ‘force majeure’ is a French term which means ‘superior force.’ It refers to an event or effect that can be neither anticipated nor controlled. The phrase however has a more extensive meaning than “Act of God” or “Vis Major”. The Hon’ble Supreme Court of India in Dhanaramji Gobindram v. Shamji Kalidas & Co. (1961) 3 SCR 1020, has held that the expression force majeure is not merely a translation of the Latin expression ‘vis major’. The judges have agreed that strikes, breakdown of machinery which though not normally in vis major are included in force majeure. The intention is to save the performing party from the consequences of anything over which he has no control.

The Force Majeure Clause is a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, prevents one or both parties from fulfilling their obligations under the contract. In absence of a Force Majeure clause one may seek relief under the ‘Doctrine of Frustration’ wherein there is an impossibility to fulfil either party’s performance under the contract due to the occurrence of subsequent events. This doctrine under Indian Laws primarily falls under Section 56 of the Indian Contract Act, 1872.

A broad difference between the interpretation of a contract with and without Force Majeure clauses have been summarised below:(This is however not a ‘one size fit all’situation and varies on a case-to-case basis.)

Force Majeure Clause present in Contract No Force Majeure Clause in Contract
  • In such conditions, the Clause in the Contract/ Agreement will define the scope of applicability of the principle of Force Majeure.
  • The Force Majeure clause could either list a number of events in which it could be applicable or it could provide a broad interpretation of what events come under the ambit of this clause.
  • It is the language of the clause that enumerates the application of the principle and also defines its scope
  • There is a need for thorough review of the Contract/ Agreement to determine the exact applicability on case to case basis.
  • The Force Majeure Clause may be implied in the Contract based on the circumstance of the case.
  • In such conditions, one may rely on Section 56 read with Section 32 of the Indian Contract Act, 1872.
  • On taking into consideration the nature of Contract/Agreement, appropriate review and also the circumstances at which the force majeure event has occurred, it will be determined whether the Contract is void, Frustrated or whether a compensation is to be provided to any one of the parties.
  • To take shelter under Section 56 of the Indian Contract Act, it must be ensured that the parties have entered into a Contract/ Agreement wherein the force majeure event has disrupted the performance of its Terms.

The Hon’ble Apex Court of India held in Energy Watchdog and Ors. vs. Central Electricity Regulatory Commission and Ors., (2017) 14 SCC 80 held that

“In so far as a force majeure event occurs de hors the contract, it is dealt with by a rule of positive law under Section 56 of the Contract Act. The performance of an act may not be literally impossible but it may be impracticable and useless from the point of view.”

The key takeaways from the judgment are as below:

  • Force Majeure is not exhaustive but inclusive.
  • If the contract has an express or implied ‘force majeure’ clause, it will apply over the principles under Section 56 of the Indian Contract Act, 1872.
  • Application of the doctrine of frustration must always be within narrow limits.
  • A rise in cost or expense will not frustrate a contract.
  • Doctrine of frustration will not apply so long as the fundamental basis of the contract remains the same.
  • Force majeure clause will not apply if alternative modes of performances are available.

In NTPC v. Voith Hydro Joint Venture O.M.P.(COMM)–16/2017 the Hon’ble Delhi High Court has defined the scope of Sec 56 under the Contract Act, stating that it shall not prevail over the autonomy of the parties and the terms of the Contract. In brief it has been established that the Force Majeure Clause prevails over the provision for frustration of contract under the Contract Act.

The language of the force majeure clause will determine the remedies available to the parties. Some contracts may provide for immediate termination of the contract and others may be suspended upon the happening of the force majeure event. Some contracts may allow for only certain obligations to be suspended. A party may also be required to show proof of mitigation and estimated timings for dealing with the particular event of force majeure.

It is to be noted that under Indian contract law, it is required that a party shall do everything within its control to mitigate the loss to the other party. Therefore, a party can propose reduced/alternative performance during force majeure period. Such reduced/alternative performance may however not be enforced upon the other party unless the force majeure clause in the contract so provides.

The Force Majeure clause and the Frustration of Contract under the Indian Contract Act, finally boil down to the interpretation of the Contract, circumstances of non- performance of obligations under the Contract and the Force Majeure event itself. Although they have been used separately, the intent simply remains to save one from the contractual obligations in event of unforeseen and sudden occurrences. In practice, would it be prudent to have a Force Majeure clause in one’s Contract or leave it to Section 56 of the Indian Contracts Act? It is impossible to foresee and predict the perfect Force Majeure clause. However, one may draw out one’s limitations in a well drafted clause, maintaining a certain level of control over the consequences of the clause. It is a matter of whether one needs a closely knit Contract or a Contract for broad interpretation.