What is Force Majeure clause under contracts?

422 votes

The COVID-19 pandemic has shaken the workforce, business operations and lives to the core in an unprecedented manner, which will be remembered as a catastrophic moment causing adverse effects not only to human lives but also the business, commerce and the economies at the global level.

With the unexpected and sudden change in working patterns and the logjam in the economy because of lockdown and restricted movement in the country, it is imperative that many contractual obligations have become impossible to perform.

Section 37 of the Indian Contract Act, 1872 renders a joint obligation on the contracting parties to either perform or offer to perform their respective promises, except if the obligation to perform has been relieved by law.
 

What is Force Majeure?

The law relating to Force Majeure (a French phrase that means a ‘superior force’) is embodied under Sections 32 and 56 of the Indian Contract Act, 1872. It is a contractual provision agreed upon between the parties. The occurrence of a force majeure event protects a party from liability for its failure to perform a contractual obligation.
 

What does Force Majeure include?

Typically, force majeure events include an Act of God or natural disasters, war or war-like situations, labour unrest or strikes, epidemics, etc. The intention of a force majeure clause is to save the performing party from consequences of something over which it has no control. Force Majeure is an exception to what would otherwise amount to a breach of contract. Whether a particular contractual obligation can be avoided would however depend upon the factual analysis. The courts would examine, whether in a given case, the impact of the COVID-19 epidemic prevented the party from performing its contractual obligation. Indian courts have generally recognised this concept and have enforced it where appropriate.
 

Can one take defence under Force Majeure for not performing its contractual obligations during lockdown?

Due to the supply chain disruptions caused by the lockdown, it is likely that the performances under many contracts will be delayed, interrupted or even cancelled. Parties to a contract may seek to delay or avoid their responsibilities under the contract, either because the lockdown has legitimately prevented them from performing their contractual obligations, or because they are seeking to use it as an excuse to free themselves from an unfavorable deal. They may also cite COVID-19 as a basis for renegotiation of the cost or other key contractual provisions. This is why it is important to determine whether COVID-19 will be considered as a ‘Force Majeure’ event.

In India, the Department of Expenditure, Procurement Policy Division, Ministry of Finance issued an Office Memorandum on February 19, 2020, in relation to the government’s ‘Manual for Procurement of Goods, 2017’, which serves as a guideline for procurement by the government. In the Memorandum, the ministry has stated that the COVID-19 outbreak could be covered by a force majeure clause on the basis that it is a natural calamity. Therefore, parties to a contract can take defence under force majeure for not performing their contractual obligations during lockdown.
 

How can a lawyer help?

Looking at the complexity of the issue, it is highly impossible for a layman to understand the technicalities involved in the issue. Interpretation of terms of a contract in accordance with the law is in itself a very technical task and beyond the scope of expertise of a layman. This is why it is imperative in times like these to have a corporate lawyer by your side who can help you understand the technicalities involved and can formulate the right strategies to ensure the desired result in contract-related litigation.

LawRato LawRato

526 votes

Black's Law Dictionary defines force-majeure clause as 'A contractual provision allocating the risk if performance becomes impossible or impracticable, esp. as a result of an event or effect that the parties could not have anticipated or controlled.'
Whether the outbreak of Covid-19 and the ensuing lockdowns ordered by the Central and State Government would be sufficient to invoke the force majeure clause in the contract would depend on the following factors:

Establishing the causal connection between the force majeure event and hindrance to the performance of the contract;
Harmonious construction with all the provisions; and
Compliance with the condition precedents contained in the force majeure clause.

Advocate Tushar Kumar LawRato

647 votes

I have perused the contents of your query and would advise you to seek a detailed consultancy from a lawyer having expertise. The contents of the clause needs to be perused to enable us to give you an opinion

Advocate Anubhav Kathuria LawRato