Force Majeure Clause
- A glimpse of the magnitude of the economic destruction wreaked was revealed at the 41st meeting of the Goods and Services Tax(GST) Council, where the shortfall in compensation cess for this year was estimated at around Rs 2.35 lakh crore.
- The Finance Ministry revealed that the Centre would not be able to make good the shortfall.
- Now, the businesses are looking towards a legal provision -the Force Majeure or “Act of God” clause that has its origins in the Napoleonic Code - to cut losses.
- Back in February, 2020, the Ministry had issued an official memorandum clarifying that the pandemic “should be considered a case of natural calamity and FMC may be invoked, wherever considered appropriate”.
About Force Majeure Clause
- The term ‘force majeure’ has been defined in Black’s Law Dictionary, as ‘an event or effect that can be neither anticipated nor controlled’.
- It is a contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event that the parties could not have anticipated or controlled.
Indian Jurisprudence on the Concept of Force Majeure
- The concept has neither been defined nor specifically dealt with under the Indian statutes.
- However, some reference can be found in Section 32 of the Indian Contract Act, 1872 (the "Contract Act")
- It isalso mentioned in the 2017 Manual for Procurement of Goods issued by the Department of Expenditure.
Difference between an “Act of God” and “Force Majeure”
- Generally, an “Act of God” is understood to include only natural unforeseen circumstances, whereas force majeure is wider in its ambit and includes both naturally occurring events and events that occur due to human intervention.
Situations Legally Qualify for Use of Force Majeure
- War, riots, natural disasters or acts of God, strikes, introduction of new government policy imposing an embargo, boycotts, outbreak of epidemics and such situations are generally listed.
- If an event is not described, then it is interpreted in a way that it falls in the same category of events that are described.
Incase Force Majeure Clause is Triggered
- When the clause is triggered, parties can decide to break from their obligations temporarily or permanently without necessarily breaching the contract.
- Companies in such situations use the clause as a safe exit route, sometimes in opportunistic ways, without having to incur the penalty of breaching the contract.
- If a party to a contract believes that the other party has invoked the FMC in an unjustified situation, it can move court seeking performance of the contract.
Incase of Absence of FMC in Contract
- In case a contract does not have a force majeure clause, there are some protections in common law that can be invoked by parties.
- For example, the Indian Contract Act, 1872 provides that a contract becomes void if it becomes impossible due to an event after the contract was signed that the party could not prevent.
Court’s View on FMC
- Court rulings have established that force majeure cannot be invoked when performance of the contract has become difficult, but only when it has become impossible.
- It looks into whether the party arguing impossibility of performance has tried all other avenues to fulfil its liabilities before invoking force majeure.
- The court would look into specifics like whether a lockdown imposed to contain the pandemic locally prevented performance of the contract.
- The court would also look into how unforeseen the cited circumstance really is when catalogued in the contract specifically.
- In April, 2020, the Bombay High Court did not accept the force majeure argument in a case where the petitioner argued that Covid-19-related lockdowns had frustrated a contract for supply of steel.
Importance of FMC for Businesses
- It can usually be found in various contracts such as power purchase agreements, supply contracts, manufacturing contracts, distribution agreements, project finance agreements, agreements between real estate developers and home buyers, etc.
- This provision is important for businesses as it relieves the parties from performing their respective obligations and which are to be undertaken under the contract and consequential liabilities, during the period that force majeure events continue provided that the conditions for clause to become applicable (which have been discussed above) are met.
Global Examples of Invoking FMC
- In China, where the Covid-19 outbreak originated, the Council for Promotion of International Trade is issuing force majeure certificates to businesses.
- Also, it had recognised the 2002 SARS outbreak as a force majeure event.
- Singapore enacted the Covid-19 (Temporary Measures) Act in April, 2020, to provide relief to businesses that could not perform their contractual obligations due to the pandemic.
- TheParis Commercial Court in July, 2020, ruled that the pandemic could be equated to a force majeure event.
Model Code on FMC