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Significance of force majeure clause amid unprecedented Coronavirus

Updated: Jul 7, 2020

Force majeure is a common clause of the contract, which has gained much relevance in the current situation.

The ongoing lockdowns and social distancing measures, in place worldwide due to unprecedented novel coronavirus, has widely disturbed the economic, political, social, etc. structures.

Inter alia, the stock markets retrograde, falling oil prices, increased unemployment, reduction in manufacturing output, reduced demand and sales are impacting businesses. It essentially includes the MSMEs and businesses involved in nonessential activities, globally.

Elseways, businesses are revisiting contracts and assessing contractual obligations in reference to the impact of the pandemic. This has brought the term 'force majeure' in relevance to contracts, nationally and internationally. The term primarily means a contractual clause that discharges the liability of non-performance because of uncontrollable and catastrophic events. Nonetheless, the party should endeavour to perform the contract and the non-performance be the immediate cause of uncontrollable and catastrophic events.

Although, the concept of force majeure has its roots in the French civil law. The principles behind the clause originated in the case of Taylor v. Caldwell [1]. The English court viewed that if the circumstances are beyond the control or fault of the parties to a contract, the performance of the contract be excused.

This rule was adopted and applied by the US Supreme Court in the case of The Tornado. [2] If the clause of force majeure is not included in the contract perhaps the common law principles are relied on by the Courts. Likewise, the common law principle is referred to in India law.

Apparently, the 'force majeure' clause of the contract is not defined or patently included in Indian Statute. It is relatable to section 32 and section 56 of the Indian Contract Act, the former pertains to contingent contracts whereas the latter deals with the frustration of contracts. In the case of section 32 of the Indian Contract Act, the event on which the contract is contingent is not unknown and its impossibility makes the contract void. But, in cases of section 56 of the Indian Contract Act that carves out the doctrine of frustration the event is not known at the time when parties enter into a contract. So far as the general understanding goes 'force majeure' finds a place in these provisions. Nevertheless, they are indifferent as force majeure suspends or excuses the obligation under the contract due to a temporary event, subsequently, it does not trigger a breach of contract. Force majeure may lead to frustration of the contract but not necessarily at the inception of invocation.

Edmund Bendit And Anr. v. Edgar Raphael Prudhomme was the foremost Indian case that dealt with force majeure. A contract was made out and the respondent (Mr. Prudhomme) was to ship groundnuts to the appellant. The shipment was to be shipped from in December-January (1916-17) from certain ports on the Coromandel Coast and the steamer called Sea-pool was booked for transit of the necessary tonnage. However, the steamer was commandeered for war purpose on November 14, 1916 and the respondent was unable to ship the tonnage on time even after the best of his endeavours. Now the question laid before the court was whether the inability of the defendant to obtain tonnage is within the scope of force majeure or not? Edmund (plaintiff) sought damages for non-performance of the contract whereas Edgar Raphael Prudhomme would be discharged from performing by the force majeure clause. The contract between the parties had an explicit clause of force majeure that could absolve parties to the contract from performance in certain scenarios. The force majeure clause included unforeseen causes and events-war, epidemics, strikes, revolution, etc.

The Madras High Court dismissed the appeal and discharged the defendant from the performance of the contract due to force majeure clause. It was identified that in so far as the non-performance of the contract goes it must be the immediate cause of the event or circumstances or scenario. [3]

In a recent case Energy Watchdog v. CERC [4] the Apex Court determined the terms of the contract to be force majeure or not. It was noticed that abnormal rise or fall of the price of fuel is not a force majeure event in this case. Since an alternative mode of performance of the contract was available, force majeure will not apply.

The ongoing situation of lockdown raises two quintessential scenarios to determine lockdown a force majeure event, they are being:

Contracts entered before lockdown- The obligation under such contract was to be performed during the lockdown period.

Contracts entered during lockdown- Whether the draft of these contracts would consciously include events and situations like lockdowns and pandemic or not.

This lockdown phase is witnessing a change in the legal drafting of the contract clauses in reference to the current pandemic. Further, it unlocks complexities revolving around non-performance of contract due to lockdown or pandemic.

It may be pertinent to know that contracts may expressly or impliedly incorporate 'force majeure' clause and the current situation faced by business and traders will insinuate them to categorically include 'force majeure' clause. In fact, it calls for an exhaustive list of the events or circumstances that may be 'force majeure'. Perhaps the list could include novel terms 'pandemic' or 'lockdown' or 'Union and State government act/restrictions/prohibition' or uncontrollable epidemic, etc. by legal advisors.

The affirmative evaluation of non-performance because of lockdown or pandemic may rescue parties from the performance. The force majeure contract clause will come in great scrutiny due to the impact of Covid-19. It will, therefore, be observed that legal experts explicitly and exhaustively include the force majeure clause in their contracts. The interpretation and extent of the force majeure clause may vary and lay in the hands of legal advisors. The clause can include events in general or listed specifically or be a concoction of the two.


Reference:

[1] 122 ER 309; 3 B. & S. 826 (1863).

[2] 108 U.S. 342 (1883).

[3] Edmund Benoit And Another v. Edgar Raphael Prudhomme, Volume 48 (1925)ILR48MAD538.

[4] (2017)14 SCC80.


Author - Anchal Mittal

Faculty of SGT University.




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