Force Majeure in Indian Contract Act 1872
Updated: May 15, 2021
When two parties agree to a business agreement, they are bound to a contract to perform the duties assigned to them and failure of it shall lead to a breach of contract, where the affected party can sue the other party for damages. But in general, they are certain scenarios that are unpredictable and unforeseen in the future which can prevent parties from performing their duties due to events such as Act of God (Natural Calamities), War, Lockdown, Strikes, Epidemic, Riots.
For Instance, in the current situation many organizations, factories aren't able to deliver on their business agreements due to Lockdown and Covid Measures. The Force Majeure clause protects both the parties from contractual obligations and liabilities that would have arisen during this time period. But the clause doesn't excuse a party's non-performance entirely but only suspends it for the duration of the period. A party would have to send notice to another party apprising of the scenario, during the event but it can't be done ex-post facto.
In the Indian Contract Act 1872, there are no predefined definitions regards to Force Majeure but there have been judgments where the judiciary has taken reference from certain sections for cases dealing with Force Majeure. In the case of Energy Watchdog and Ors. v/s Central Electricity Regulatory Commission and Ors, April 2017. The Supreme Court observed that "Force majeure" is governed by the Indian Contract Act, 1872. In so far as it is relatable to an express or implied clause in a contract, such as the PPAs(Power Purchase Agreement) before us, it is governed by Chapter III dealing with the contingent contracts, and more particularly, Section 32 thereof. In so far as a force majeure event occurs de hors (0ut of the agreement) the contract, it is dealt with by a rule of positive law under Section 56 of the Indian Contract Act.
In short, events that have been mentioned as part of the agreement can be referred to Sec 32, and events that are out of the agreement can be referred to Section 56 of the Contract Act.
Sec 32. Enforcement of Contracts contingent on an event happening - Contingent contracts to do or not to do anything if an uncertain future event happens, cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contracts become void. So what is a contingent contract, the definition of a contingent contract is in Sec 31, A “contingent contract is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen. Example: A makes a contract with B to buy B's horse if A survives C. This contract cannot be enforced by law unless and until C dies in A's lifetime. A makes a contract with B to sell a horse to B at a specified price, if C, to whom the horse has been offered, refuses to buy him. The contract cannot be enforced by law unless and until C refuses to buy the horse. Sec 56. Agreement to do impossible act - An agreement to do an act impossible in itself is void.
Contract to do act afterwards becoming impossible or unlawful. A contract to do an act which, after the contract made, becomes impossible or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.
Compensation for loss through non-performance of act known to be impossible or unlawful. Where one person has promised to do something which he knew or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promise for any loss which such promisee sustains through the non-performance of the promise.” Example:
B contracts to take in cargo for C at a foreign port. B's Government afterwards declares war against the country in which the port is situated. The contract becomes void when war is declared. X contracts to act at a theatre for six months in consideration of a sum paid in advance by Z. On several occasions, X is too ill to act. The contract to act on those occasions becomes void.
COVID as part of Force Majeure:
The current pandemic of Covid has ravage businesses around the world. The Government of India, Ministry of Finance, and through the Office Memorandum dated 19.02.2020, has said COVID will be covered in the Force Majeure Clause.
M/s Halliburton Offshore Services Inc vs Vedanta Limited O.M.P.(I)(COMM.) No. 88/2020 was one of the earliest judgments wherein the High Court of Delhi specifically held COVID-19 to be a force majeure event. The court also has said that the question as to whether COVID-19 would justify non-performance or breach of a contract has to be examined on the facts and circumstances of each case.
Every breach or non-performance cannot be justified or excused merely on the invocation of COVID-19 as a Force Majeure condition. The Court would have to assess the conduct of the parties prior to the outbreak, the deadlines that were imposed in the contract, the steps that were to be taken, the various compliances that were required to be made and only then assess as to whether, genuinely, a party was prevented or is able to justify its non- performance due to the epidemic/pandemic.
To conclude, with the current scenario and rising cases businesses would be severely affected by the COVID, the parties should enforce it as part of the Force Majeure to keep their contractual obligations on hold for the time period if they feel they wouldn't be able to perform the business duties due to being directly affected by COVID related restrictions and measures in the nation.
Reference:
Energy Watchdog vs Central Electricity Regulatory ... on 11 April, 2017: https://indiankanoon.org/doc/29719380/
M/S Haliburton Offshore Services ... vs Vedanta Limited & Anr. on 29 May, 2020: https://indiankanoon.org/doc/123403504/