Coronavirus: Decoding the Force Majeure Clause
Note: The content herein is only for informational purpose and does not constitute any legal opinion or advice on behalf of Legal Minds LLP.
The unexpected outburst and proliferation of the COVID-19 Pandemic conferred fame to the rarely invoked Force Majeure Clause. Amidst the diversity in opinions, it is important to understand the law vis-a-vis Force Majeure Events.
Generally, the Force Majeure Clause (either inclusive or exhaustive) spells out the obligations of a Party in the event of the occurrence of an unforeseen circumstance that is beyond the reasonable control of the Party(ies) and prevents/hampers the performance of the contract.
The intention of a Force Majeure Clause is to save the performing party from the consequences of anything over which it may not have any control. It is important to note herein that the term ‘Force Majeure’ finds no mention in the Indian Contract Act, 1872 (“Contract Act”).
The Contract Act embodies the ‘Doctrine of Frustration’ (“Doctrine”) which states that an Agreement to perform an act impossible in itself is void. Section 56 of the Contract Act states that a contract shall be void if the subject matter therein becomes impossible or unlawful after the contract is concluded. The emergence of the Doctrine traces back to Taylor v Caldwell (1861) wherein the court held that “If some unforeseen event occurs during the performance of a contract which makes it impossible to perform, it need not be further performed”.
In India, the Court in the landmark case of Satyabrata Ghose v Mugneeram Bangur & Co. (1954) observed that a contract may be frustrated if its performance becomes impracticable from the point of view of the object and purpose of the contract or if an unexpected event completely upsets the very fundamentals of the contract. Further, the Court observed that if a contract embodied a Force Majeure Clause (express or implied), then the scenario would be analysed on basis of that Clause and not by the application of Section 56. Furthermore, in the case of M/s Alopi Parshad & Sons Ltd. v Union of India (1960) the Court held that a contract shall not be frustrated merely because the circumstances in which it was made are altered.
The Supreme Court of India in the recent case of Energy Watchdog v CERC (2017) reiterated the law of the Doctrine of Frustration (Doctrine). The Court held that the application of the Doctrine shall be within narrow limits and if a contract has an express or implied Force Majeure Clause, it will apply over the principles of Section 56. Further, the Court reiterated that an alteration in the circumstances shall not frustrate a contract as long as the fundamental basis of the contract is intact. The Court also held that a Force Majeure Clause will not apply if alternative modes of performance are available.
Therefore, we may conclude that the frustration of a contract is a fact-specific determination and it is unlikely that COVID-19 be a valid ground for invoking the Force Majeure Clause/Doctrine of Frustration in all circumstances.
Case Update: On 15.05.2020, The Delhi High Court in M/s Halliburton Offshore Services Inc. v Vedanta Limited & Anr held that the non-performance of a contract shall not be excused on the ground of force majeure due to COVID-19. Although it recognised COVID-19 to be a Force Majeure Event, it held that its applicability will depend on the facts of the matter. It laid out an assessment test to determine whether COVID-19 would justify the non-performance or breach of contract. It held that the Court would have to determine the conduct of the parties prior to the outbreak, the deadlines of the contract, the measures are undertaken to mitigate the impact, and if the terms of the contract were complied with.
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