Force Majeure in Indian Contracts: Navigating Legal Implications

By Aditi Utkarsha

Introduction

Force Majeure is a French term that translates directly to ‘a greater force’. It refers to an unavoidable force that is beyond human control. It is used to refer to a circumstance where the contract becomes suspended or void due to unforeseeable circumstances which could not be avoided.

It has its origin in the merchants’ law which existed in the Roman Empire. The two Latin maxims: “Pacta Sunt Servanda” and “Rebus Sic Stantibus” contain provisions that notably contain the principle of Force Majeure. The maxim “Pacta Sunt Servanda” means that agreements must be complied with, and the maxim “Rebus Sic Stantibus” means that in case of a fundamental change in circumstances, the parties may terminate or suspend the agreement in question. Both of these maxims have played a crucial role in shaping of the principle of Force Majeure. The concept finally emerged in modern times in the Napoleonic Code or the French Civil Code which dates back to the year 1804.

In Merriam-Webster’s Law Dictionary, it is defined “as superior strength that is unforeseeable and unavoidable, outside the control of a party to a contract that renders it incapable of carrying out contractual duties”.

It is generally used to mitigate risks in a contract where the fulfilment of the contract becomes impossible. It has a wide ambit and does not only take natural causes into account but events arising out of human conduct as well. Natural occurrences such as floods, earthquakes, weather disruptions, tsunamis, hurricanes, etc, and human-induced actions, including war, terrorism, labour strikes, epidemic or pandemic outbreaks, national emergencies, etc are within the ambit of this principle.

Act of God is merely a part of Force Majeure and the Supreme Court of India also recognizes this. In the case of Dhanrajamal Gobindram v. Shamji Kalidas & Co[1], the difference between Act of God, i.e., Vis Major, and Force Majeure was laid down.

The primary purpose of incorporating a force majeure provision in a contract is to restrict the extent of strict liability imposed on a party for failing to fulfil their contractual obligations after the happening of an unexpected event that obstructs the party’s performance. If a party unable to fulfil its contractual obligations demonstrates that its inability to perform is a result of an event covered by the force majeure definition, that party will escape liability.

Force Majeure under Indian Law

In India, since the concept of force majeure is not codified into law, it would be necessary to coin this as part of the contract. Scores of precedents have held that the contract overrides the law and therefore ‘force majeure’ clauses are now part of the standard clauses in any contract along with confidentiality and dispute clauses.

Although this concept is not mentioned explicitly in Indian laws, its references can be found in the Indian Contract Act of 1872.

Section 32 of the Indian Contract Act of 1872 states that contracts that depend on the occurrence of an uncertain future event cannot be legally enforced until that event actually takes place. If the event becomes impossible, these contracts are rendered void. This section contains in itself the doctrine of Force Majeure as it says that a contract is enforceable only after the occurrence of an event and if that event becomes impossible, the contract will be considered null and void. Hence, this is applicable for cases when specific conditions of a contract are not fulfilled leading to the contract becoming void.

Section 56 of the Indian Contact Act of 1872, however, states that an agreement to do an act impossible in itself is void. It further says that if a contract involves doing something that later becomes impossible or unlawful due to an event beyond the promisor’s control, the contract becomes void when that act becomes impossible or unlawful. If the promisor knew or could have reasonably known that the act was impossible or unlawful, and the promisee didn’t know, the promisor must compensate the promisee for any losses caused by not fulfilling the promise.

This section is based on the Latin maxim “lex non cogit ad impossibilia”. This means that the law does not compel one to do impossible things. So, a contract cannot be fulfilled if it is impossible to be performed. It refers to the doctrine of frustration in Indian Contract law.

In the case of Satyabrata Ghosh vs Mugnareem Bangur & Co.[2], the Supreme Court ruled that when a force majeure event is related to an express or implied clause in a contract, it is governed by Section 32 of the Contract Act whereas if a force majeure event occurs outside the scope of the contract, Section 56 of the Contract Act applies. It also defines what is considered impossible to perform in a contract. For such, the new circumstance should ruin the main basis of the contract and it should be unreasonable to continue with it because the goal of the contract can no longer be achieved.

Force Majeure and the Doctrine of Frustration

It is also to be noted that Force Majeure in a contact is slightly different from the frustration of a contact. The doctrine of frustration in Indian contract law says that a contract is void if something unforeseen makes it impossible, impractical, or unlawful to be carried out in a way the parties didn’t expect, and there’s no way to continue it under the new circumstances. Here both parties are released from their obligations, and they can’t sue each other for breaking the contract. However, if the parties can fulfil their duties once the unexpected issue is resolved and if there is no time limit, any delay isn’t considered frustration of a contract.

A Force Majeure clause is a contractual provision that specifically addresses certain unforeseen events and deals with them, while the frustration of contract is a principle that is used when an unforeseeable event fundamentally undermines the contract itself, rendering it void. Force Majeure provision is also included in the contract itself while frustration of contract is generally used by courts as a principle to settle disputes.

In the case of Energy Watchdog v. Central Electricity Regulatory Commission & Ors.[3] The Supreme Court ruled that if a contract doesn’t have a specific force majeure clause, the injured party may seek relief under the doctrine of frustration present in Section 56 of the Indian Contract Act of 1872. However, to successfully establish that the contract is frustrated, it needs to be proven that fulfilling the contractual obligations has become genuinely impossible, not just difficult or financially taxing.

In the aforementioned case, the Supreme Court also made certain guidelines that are to be kept in mind while using a force majeure clause of a contract. These are certain essentials that are to be fulfilled to take the benefit of this principle.

To invoke force majeure in a contract, certain essentials are needed to be fulfilled. The first essential is that the new event should render the contract incapable of being completed. It must be established that the basis of the original contract has been disrupted and fulfilment of it is now impossible due to the new circumstances arising whether it be an Act of God or conduct of any human.

A contract can also not be frustrated in case of rising costs or expenses for its fulfillment. The event must be unforeseeable and should not be a result of a party’s inability to pay the expenses. Force Majeure can be invoked only in a case where there is a supervening event. If an event does not prevent a party from fulfilling the contract completely, then this principle cannot be used.

The event must be unpredictable which could not be reasonably foreseeable by a person. If there has been a prior warning of the new event then this principle will not apply.

The parties must also make efforts to mitigate the impacts and losses caused by the new circumstances. Adequate care must be taken to ensure minimum damage is caused by the non-performance of the contract.

Many Force Majeure clauses require the non-performing party to inform the other party before invoking this clause of the contract. If the conditions for invoking it are not complied with as laid down in the contract, then such use of this clause is not valid.

If a situation arises where this principle has to be applied, the parties may suspend or dissolve the contract of their own volition. Steps must be taken to make a non-restrictive contract that adequately addresses situations where the need for such provisions may arise. It is necessary to include both Act of God and the conduct of humans in the ambit of a force majeure event. The period of suspension must also be specified, which means the duration after which parties can once again start to fulfil their contractual obligations after the occurrence of an unforeseeable event.

When creating a force majeure clause, it’s crucial to cover various aspects. Firstly, it needs to identify events considered force majeure based on the parties’ business understanding and contract nature. Additionally, it must address the consequences of a force majeure event, such as mitigating its effects, excusing the affected party from full or partial contract performance, allowing for performance delay or suspension, or providing the right to terminate the contract.

Conclusion

In conclusion, Force majeure provisions in the Indian Contact law serve as an excellent way to mitigate damage in case of unavoidable and unforeseen circumstances. However, proper drafting of the contract is essential to enjoy the benefits of this principle and to make sure that the rights of the parties are preserved. The contract is required to be inclusive and should contain the essentials necessary to invoke this clause. Therefore, parties should carefully consider their line of work and potential unexpected events when creating and interpreting Force Majeure clauses.

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[1] AIR 1961 SC 1285.

[2] 1954 SCR 310

[3] (2017) 14 SCC 80.