Force Majeure & Contracts: Indian Contract Act 1872 | Corporate Law Attorney in Delhi NCR | Corporate Lawyer in Delhi NCR | Corporate Attorney in India

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The World Health Organisation on March 11, 2020 characterized Covid-19 virus as a ‘Pandemic’, and has effected millions of lives across the globe. One of its effects is the inability faced by various businesses in performing their part of the contract. It is therefore incumbent to analyze the situation in the light of Force Majeure and the steps that can be taken by businesses to protect their interests.

The term ‘Force Majeure’ has been from the French language and translates to ‘a superior force’. A force majeure can defined as an unexpected event or effect that could not be reasonably anticipated or controlled and which has made the person under an obligation unable to discharge the same. It includes under its ambit both, acts of God (like floods, cyclone, etc) and acts of people (like war, strikes, etc)

Force Majeure is a ground of defense that is available under the Indian Contract Act, 1872 (the Act), to a Defendant against whom a suit for breach of contract has been filed. Force Majeure can be invoked under the following two sections:

1) Under Section 56 of Indian Contract Act, 1872 (Agreement to do impossible act)

Force Majeure can be invoked under section 56 of the Act when no clause related to it is included in the contract. Section 56 deals with the frustration of contracts and the contract can be made void in the case of Force Majeure if Defendant is able to prove that the performance of his/her part of contract has become impossible due to happening of an event which could not have been prevented by the claiming party and the same is not self-induced or caused due to negligence. Frustration of contract operates automatically from the day one which the performance of the such contract become impossible.

2) Under Section 32 of Indian Contract Act, 1872 (Enforcement of contracts contingent on an event happening)

Force Majeure can be invoked under Section 32 of the Act when an express or implied clause is present in the contract act. There can be two types of Force Majeure clauses in a contract i.e. firstly a specific clause that lays down all the events under which Force Majeure can be invoked and secondly is a general clause that acts as a catchall clause for all such events that could fall under Force Majeure.

Section 32 does not come into force automatically therefore, the party seeking to rely on it has to prove the following:
1) The event claimed or the consequences fall under the scope of the Force Majeure clause.
2) The event effected the performance of the contract as specified in the Force Majeure clause.
3) The party claiming took reasonable steps to mitigate the effect of the event on performance of contract.
4) The party claiming gave a notice to the other party on happening of Force Majeure event.
5) The event was the actual cause of the claiming party’s failure to fulfill its part of obligation.

In Energy Watchdog vs Central Electricity Regulatory Civil Appeal Nos. 5399-5400 of 2016, where the question before the Hon’ble Supreme Court was whether the decision of the Indonesian Government which led to escalation of the price of importation of coal from Indonesia which was the major supply source for the electricity producing bodies amounted to Force Majeure in order to discharge them from the obligations of the Power Purchase Agreement.

The Court while holding that change in price is not an event included under Force Majeure as the contract did not lay down that the coal has to be compulsorily imported from Indonesia, giving importers other options, laid down the following in rules in respect of Force Majeure:
1) In case contract expressly or impliedly contains a force majeure clause, it will prevail over Section 56 of the act.
2) The doctrine of frustration should always to be applied by the court in a narrow limit.
3) Doctrine of frustration would not be applicable unless the fundamental basics of the contract changes.
4) Force Majeure shall not be applicable in cases where the party has an alternate way to fulfill its obligation.

Thus, in light of the circumstances prevailing in the world at the current movement, it is important for all businesses to analyze their key contracts and assess their rights and obligations under it. Further, they should ensure that they abide by the Force Majeure clause present in the contract in respect of the notice and should take all steps to mitigate delay in fulfilling the obligation. Further, they should consider the ramification of the non-performance clause in the contract in order to prepare for the worst.
Authored By: Adv. Anant Sharma & Ananya Jain