From UPSC perspective, the following things are important :
Prelims level : Doctrine of Force Majeure
Mains level : Doctrine of Force Majeure, frustration of a contract
The recent spread of the Coronavirus has triggered a global slowdown and has rendered ongoing business operations of several organisations to almost a standstill. This has resorted them to invoking the ‘force majeure’ clause to seek some relief.
Practice question for mains:
Q) What is the doctrine of Force Majeure and Frustration of a Contract? Discuss how it can worsen the NPA crisis in India.
What is Force Majeure?
- Force majeure is purely a contractual remedy available to an affected party under a contract and for seeking relief, the reference would be to the express terms of the contract.
- 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.
- While force majeure has neither been defined nor specifically dealt with, in Indian statutes, some reference can be found in Section 32 of the Indian Contract Act, 1872 (the “Contract Act”).
- It envisages that if a contract is contingent on the happening of an event which event becomes impossible, then the contract becomes void.
Where are such clauses found?
- Force majeure clauses can usually be found in various contracts such as power purchase agreements, supply contracts, manufacturing contracts, distribution agreements, project finance agreements, agreements between real estate developers and home buyers, etc.
Circumstances qualified for force majeure
- A force majeure clause typically spells out specific circumstances or events, which would qualify as force majeure events, conditions which would have be fulfilled for such clause to apply.
- As such, for a force majeure clause to become applicable the occurrence of such events should be beyond the control of the parties.
- The parties will be required to demonstrate that they have made attempts to mitigate the impact of such force majeure event.
- If an event or circumstance qualifies, the consequence would be that parties would be relieved from performing their respective obligations to be undertaken by them under the contract.
Why it is in news, now?
- Due to the lockdown restrictions placed by the government, the parties’ ability to perform and fulfil their contractual obligations is affected.
- Where the contract does not specifically cover the current situation is a matter of debate.
- The Indian Contract Act, 1872 is more than a century old and does not have any specific provisions relating to suspension of contracts or termination of contracts in cases of a pandemic.
- The Act clearly provides that an agreement to do an act impossible in itself is void (Section 56).
- After a contract is made, if any act becomes impossible or unlawful by reason of some event, such a contract becomes void.
What is the difference between force majeure and frustration of a contract?
- Under the doctrine of frustration, the impossibility of a party to perform its obligations under a contract is linked to the occurrence of an event/circumstance subsequent to the execution of a contract and which was not contemplated at the time of execution of the contract.
- However, under in case of a force majeure, parties typically identify, prior to the execution of a contract, an exhaustive list of events, which would attract the applicability of the force majeure clause.
- The doctrine of Frustration renders the contract void and consequently, all contractual obligations of the parties cease to exist.
What did the Supreme Court say?
- Recently, the Supreme Court observed that the doctrine of frustration as enumerated in the Act would apply only where the parties have not specified the consequences of an event which renders the performance of the contract impossible.
- Termination of a frustrated contract would be possible only in cases where the contract becomes impossible to perform which means the damage to the contract should be of permanent nature and not something which can be performed with the passage of time.
- Hence a temporary inability or force majeure event would not qualify under the doctrine.
What lies ahead?
- The force majeure clause in contracts should not be misconstrued as an event of frustration covered under the Act.
- Force majeure is purely a contractual remedy available to an affected party under a contract and for seeking relief; the reference would be to the express terms of the contract.
- However, a party claiming frustration of contract and seeking to escape liability or other obligation under a contract will necessarily have to approach an appropriate judicial forum.
- It is likely that ‘force majeure’ clauses in contracts need to be more heavily negotiated to include references to epidemics or pandemics, in addition to other situations.