The Indian Contract Act, 1972 governs legally enforceable agreements between two or more parties. In addition to required pre-requisites and enforceable conditions, the Act also contains provisions wherein a contract cannot be enforced, and provides reasonable defences to defaulting parties when required. One such defence available to parties is the defence of Force Majeure.
The term ‘Force Majeure’ is derived from a French term which means ‘superior force’. Black’s Law Dictionary defines Force Majeure as ‘an event or effect that can be neither anticipated nor controlled.’
The occurrence of an event under Force Majeure protects a defaulting party from liability. Section 32 and 56 are the provisions under Indian Contract act which provide the laws relating to Force Majeure. While Section 32 elaborates about contingent contracts, stating that such contracts can be enforced if the event relied upon does not take place, Section 56 terms agreements wherein it is impossible to perform the same void.
A Force Majeure clause intends to provide parties with defence from suffering consequences of something of which they have no control over. The burden of proof in the case of Force Majeure lies on the party claiming a Force Majeure event. To avail defence of Force Majeure, the party claiming the Force Majeure has to prove that the event is beyond its control and could not be avoided even if that party has acted diligently.
The Force Majeure clause in the contract is to be referred to and perused carefully, along with the facts of the matter under dispute. In the absence of a Force Majeure clause, the parties have to refer to the factors and other clauses in the contract. In the case of an absence of a Force Majeure Clause, Section 56 of the Indian Contract Act can be utilised to prove the principle of Frustration of the Contract.
Additionally, it has to be proven that the parties which defaulted could not have foreseen or prevented the events which rendered it impossible for the parties to perform their obligations. The defence of Force Majeure is important to ensure that parties are not penalised for conditions that they have no control over or is unforeseeable by the party.
Is Enforcing Force Majeure in times of Coronavirus Lockdown Justified?
Typically, Force Majeure include natural calamities, war-like situations, epidemics, pandemics and others. With the Government enforcing lockdowns to prevent the spread of the COVID-19 pandemic resulting in all industries shutting down their factories and offices, it is important to look into whether Force Majeure can be applied as a defence in the case inability of parties to perform the contract.
With the drastic disruption of supply chains and limitation in the number of middlemen, there will likely be many contracts wherein the parties will delay their performance or default. COVID being a pandemic is included in the events provided under Force Majeure, however, it is more important to look into the foreseeability and prevention of the losses incurred which determines whether the lockdowns can be used as a defence to avoid penalties.
While the Pandemic arrived in India after other countries, the determination of its impact is difficult to ascertain. Additionally, looking at the rapid spread of the virus and the time taken to ascertain the symptoms among individuals, it is proven that there is no preventive measure/s taken to minimize the risks. Hence, it could be said that the pandemic was not only beyond the control of humans to avoid, but its risks and consequences were unforeseeable.
The Ministry of Finance, on the 19th of February, released a notification clearing up the matter. The Ministry, accepting COVID – 19 as a “natural calamity” stated in the notification that the ‘Force Majeure clause may be invoked and used as a defence not to excuse a party’s non-performance entirely, but only suspends it for the duration of the Force Majeure event.’
On March 20, the Ministry of New and Renewable Energy came out with a similar memorandum. Hence, for disputes arising out of contractual obligations to be fulfilled, the defence of Force Majeure can be adopted only to justify the delay of performance of the contract, but it does not justify the non-performance of a contract. Additionally, the defence can be applied for the period that the event persists for, and hence has limitations concerning the period as well.
Hence, given the present circumstances, it is acknowledged that there is a need to provide relief to parties that are unable to function as a result of the lockdown imposed as a result of the COVID–19 Pandemic.
Effects of Declaring COVID-19 as a Natural Calamities
With the lockdown in full force, providing relief through applying Force Majeure helps prevent losses for various parties. The Indian Government accepting the pandemic as a Force Majeure event helps parties avoid penalties that would arise as a result of an event beyond their control.
While the Government has accepted the defence of Force Majeure with certain limitations, it is yet to be observed as to how the Courts will interpret the Force Majeure provisions in relation the pandemic. In such cases, the courts will have to determine whether the performance of contractual obligations is impossible or whether the Doctrine of Frustration would be acceptable as means to reduce or avoid any liability by the party which has delayed or defaulted.
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