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Force Majeure

Force majeure Clause and its application in COVID-19

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Contracts play a vital role in everyone’s life, especially in the Business sector of any economy. The contract creates an obligation to both the parties to perform their part of the commitment. But, if a party of the contract fails to perform or refuses to perform their duty, then it amounts to Breach of Contract. In that scenario, the aggrieved party may enforce their rights and reach the court for remedial action. However, there is a possibility that the party wants to perform its duty; but some unforeseen and unavoidable events prevent him. In that condition, two concepts evolve; Force majeure and Frustration of Contract. 

In the current situation, India along, with the world, is fighting with a common enemy, the COVID19. The Pandemic has an adverse consequence on every dominant sector in the world, inclusive of the Business sector. The Pandemic, COVID-19, is hindering the parties to fulfil their part of obligations, as COVID-19 has unpropitious the transportation system, traveling, industrial sector, and working of other sectors. So, in this scenario, the concept of Force majeure and Frustration of Contract becomes significant to rescue the parties to escape their liability. 

Introduction to Force majeure: 

In general, Force Majeure is the occurrence of some unforeseen and unavoidable events that are beyond the control of the parties, which hinder the performance of the contract. The following are some definitions of Force Majeure;

  • The Black Dictionary defines Force Majeure, 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.[i]
  • According to the Merriam-Webster Dictionary, Force Majeure refers to those uncontrollable events (such as war, labor stoppages, or extreme weather) that are not the fault of any party and that make it difficult or impossible to carry out normal business. A company may insert a force majeure clause into a contract to absolve itself from liability in the event it cannot fulfill the terms of a contract (or if attempting to do so will result in loss or damage of goods) for reasons beyond its control.[ii]

However, The Indian Contract Act,1872, does not define the term Force majeure. But section 32 of the Indian Contract Act refers to Contingent contracts to do or not to do anything if an uncertain future event cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contracts become void.[iii] It somehow explains the concept of Force majeure in this section. It provides a chance to the parties of the contract to escape their liability during the period that events continue. The Force majeure clause requires certain specific conditions and needs to meet the essential elements. In general, the essential elements includes;

  • The occurrence of unforeseen and unavoidable events;
  • It is beyond the control of the parties; or
  • The parties intended to fulfill their obligations, and they have tried to mitigate the effects of that event. 

Some contracts include such provisions that if such Force majeure events continue for a longer time, then they are permitted to terminate the contract. 

Significance of Force majeure:

The Force majeure plays a meaningful role in business-related contracts to relieve the parties from the contractual obligations and to escape the liabilities till that unforeseen and unavoidable event continues. It can prove very convenient for the parties of the contract in this crucial and critical time of the Pandemic. Because momentarily, people are facing heavy economic losses, prices of commodities are rising, transportation is expensive, the lockdown has been imposed in certain areas, and other reasons. 

These clauses are mainly observed in contracts like power purchase agreements, supply contracts, manufacturing contracts, distribution agreements, project finance agreements, agreements between real estate developers and home buyers, etc.[iv]

The Frustration of Contract:

The Indian Contract Act, 1872, does not hold a precise definition of the frustration of the Contract, but section 56 provides a vivid image of it. According to section 56 of the Indian Contract Act, An agreement to do an act impossible in itself is void[v]. It introduces two kinds of impossibility; Initial and Subsequent Impossibility. 

  • Initial impossibility makes those agreements void that compels a person to do an impossible act that is impossible from the very moment the contract was entered. For instance, if a person promises to find treasure with the help of magic, it is a void agreement.
  • Subsequent impossibility makes those agreements void, that was not impossible or illegal when the parties have entered the contract, but become impossible or unlawful due to some events or reasons. 

The doctrine of frustration of contract falls under the category of subsequent impossibility. In such circumstances, if the agreement becomes unlawful or illegal, the contract or agreement is said to be void or frustrated. For instances;

  1.  A and B made a contract to marry each other, but before the marriage, A became mad, It will be void.
  2.  There is a contract of sale of a horse, but if the horse dies before the sale, the contract will be declared void; because now it is impossible to execute the contract.

Cases for Frustration of Contract:

  • In the case of Taylor vs. Caldwell, A agreed with B to give him the use of the music hall and gardens for holding concerts on four different dates. Before the date of the performance arrived, the music hall was destroyed by the fire. B sued A for the breach of the contract. It was held that the contract had become void because it is now impossible as the hall is destroyed.
  • In the case of Syed Khursheed Ali vs. the State of Orissa, The court was of the view that the doctrine under section 56 is attracted in the event of the subsequent unforeseen event for which, neither of the parties is responsible[vi].   

The following are some essential elements of the Frustration of Contract;

1.   The existence of a valid contract

2.    The contract is not performed yet

3.     The performance of the contract has become impossible

4.    The impossibility has occurred due to events uncontrollable by both the parties.

Difference between Force Majeure and Frustration of Contract:

Generally, people do not differentiate in the Force Majeure and Frustration of contract, but these are quite different concepts in their scopes. 

  • Parties may insert a Force majeure clause in their contract themselves, but the same is not possible in the context of the frustration of the contract.
  • The parties insert the Force Majeure clause prior to the execution of their obligations, while it is not the case with section 56.
  • The scope of Force majeure is limited to the events described in the contract only, while Frustration of contract may include those events that fulfills the described essential elements.
  • Parties may invoke the Force majeure clause to provide extension of time instead of discharging from the obligations, while Frustration of Contract only discharges a party from contractual obligations.
  • Force Majeure does not apply to the situation where other modes of performances are available, while the doctrine of Frustration does not apply if the main basis of contract exists. 

So, these are some main differences between these two concepts.

Section 65 of the Indian Contract Act or Restoration of advantages in Void agreement: 

According to Section 65 of the Indian Contract Act, if any person has received any advantages in an agreement; that was initially void, or became void later, has to restore the received benefits and need to compensate the aggrieved party as well. It prevents a party from receiving undue advantage at the cost of another party. It obligates a party to return the received benefits and to compensate the party as well.

Conclusion:

Contracts are very significant to carry out business-related activities. Currently, the outbreak of the pandemic has made it quite difficult to perform their part of their obligations. At this time, the two concepts come to rescue; Force Majeure and Frustration of contract. Both of the concepts deal with unforeseen and unavoidable events that restrict the parties to execute the contract. They seem similar, but it is not the fact. These are two distinct concepts, and often people misunderstand these doctrines. It helps the parties to escape contractual liabilities and prevent them from fulfilling contractual obligations. Indian Contract Act does not provide any particular definition of these, but section 32 and 56 of the act referred to these concepts.

It can be concluded that both of these are very significant and acting as a savior to the parties of the contract. It is the fact that COVID-19 has adversely affected every major economy in the world, and lockdown in the countries made it difficult for the parties to act as per the contract. At such a crucial time, the law comes to rescue the parties and provides a chance to escape the liabilities.

Endnotes:

[i] ET CONTRIBUTORS, What is force majeure? The legal term everyone should know during Covid-19 crisis, (May 21, 2020, 10:42 AM IST),

https://economictimes.indiatimes.com/small-biz/legal/what-is-force-majeure-the-legal-term-everyone-should-know-during-covid-19-crisis/articleshow/75152196.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

[ii]Merriam-WebsterDictionary, https://www.merriam-webster.com/dictionary/force%20majeure

[iii]  Indian Contract Act, 1872, s.32

[iv] ET CONTRIBUTORS, What is force majeure? The legal term everyone should know during Covid-19 crisis, (May 21, 2020, 10:42 AM IST),

https://economictimes.indiatimes.com/small-biz/legal/what-is-force-majeure-the-legal-term-everyone-should-know-during-covid-19-crisis/articleshow/75152196.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

[v] Indian Contract Act, 1872, s.56

[vi] Narendra Kumar, The Doctrine of Frustration under the Indian Contract Act, 1872, (Apr 04, 2019),  https://enterslice.com/learning/doctrine-of-frustration-under-the-indian-contract-act-1872/#:~:text=In%20this%20regard%2C%20in%20the,of%20the%20parties%20is%20responsible.

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Ekta Sehra

Student, Jaipur National University

The author is a student pursuing B.A.LL.B.(Hons.) degree at Jaipur National University. She is always eager and enthusiastic to gain knowledge in various subjects and desires to change the wrong perspective of people through her writings. For any clarifications, suggestions and feedback kindly find her at sehraekta2@gmail.com

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