FORCE MAJEURE

In Part 1 and Part 2 of our series on Boiler Plate Clauses, we discussed boiler plate clauses such as assignment and severability. In Part 3 of our series, we shall discuss another important boiler plate clause – Force Majeure.

What is Force Majeure?

As defined by Black’s Law Dictionary, Force Majeure, a French expression, refers to a superior or irresistible force. The expression is taken from the Code Napoleon and is better known in India as an Act of God. The phrase however has a more extensive meaning than “Act of God” or “Vis Major”.The Supreme Court of India (“Supreme Court“) in Dhanaramji Gobindramv. Shamji Kalidas & Co. (1961)3 SCR 1020, has held that the expression force majeure is not merely a translation of the Latin expression vis major. The judges have agreed that strikes, breakdown of machinery which though not normally in vis major are included in force majeure.

A force majeure clause plays a pivotal role in any kind of contract. This clause allows the contracting parties to terminate the contract if the performance become impossible, illegal or commercially impracticable. The event must be beyond the scope of the contracting parties and unavoidable in nature. Typical force majeure triggering events include both acts of nature and acts of people, and range from fires and floods to labour strikes, riots, and war.In Esjay International (P) Ltd. v. Union of India (2011) 6 Mah LJ 750,the Court stated that the force majeure condition is something which is unforeseen, unexpected and which happens suddenly and over which a person has no control. Thus, where reference to force majeure is made, the intention is to save the performing party from the consequences of anything over which he has no control.

Indian laws do not contain an explicit provision defining the term force majeure. However, Section 56 of The Indian Contract Act, 1872 (“Act“), deals with the Doctrine of Frustration which states that an agreement to do an act which is impossible in nature is void. Indian Courts have recognised that the doctrine of frustration includes in its ambit, acts of force majeure. The Supreme Court inIndustrial Finance Corporation of India Ltd. Vs. The Cannanore Spinning & Weaving Mills Ltd. and Ors., (2002) 5 SCC 54, held“It may be noticed here that the Statute itself has recognised the doctrine of frustration and encompassed within its ambit an exhaustive arena of force majeure under which non-performance stands excused by reason of an impediment beyond its control which could neither be foreseen at the time of entering into the contract nor can the effect of the supervening event could be avoided or overcome. The decision of the Court of Appeal in F.A. Tamplin Steamship Co. Ltd. v. Anglo Maxican Petroleum Products Co. Ltd. (which stands quoted (with approval by this Court) in Naihati Jute Mills v. Khyaliram, seems to have settled the law on the same. on a true perspective of Section 56 of the Contract Act, three essential conditions appear to be the realistic interpretation of the Statute. The conditions being (i) a valid and subsisting contract between the parties; (ii) there must be some part of the contract yet to be performed; and (iii) the contract after it is entered into becomes impossible of performance.”

Repercussions of Exceptions to Force Majeure

In a recent case, Energy Watchdog and Ors.vs. Central Electricity Regulatory Commission and Ors2017 (6) SCJ 398, Power Purchase Agreements were signed, and thedecided tariff was adopted by the respective State Electricity Regulation Commissions. However, due to some changes in the laws of an importer country, there was an increase in the export prices of coal which had been same since the past 40 years. The appellant industries had filed a petition seeking discharge from the performance on the ground of frustration of the contract. It is noteworthy to notice that in the present case the purchase price agreement included a force majeure exclusion clause: any increase in the cost of the coal was excluded from the purview of force majeure.

The Supreme Court in this case held that:

  • In so far as a force majeure event occurs de hors the contract, it is dealt with by a Rule of Positive Law under section 56 of the Contract.”The mere absence of the force majeure clause in entirety in the contract does not leave the matter to be determined according to the intention of the parties and is governed by Section 56 of the Act.When an event or change of circumstances occurs which is so fundamental as to be regarded by law as striking at the root of the contract as a whole, it is the court which can pronounce the contract to be frustrated and at an end.
  • It further stated that since in the present case the force majeure exclusion clause applies, as a result of which rise in the price of fuel cannot be regarded as a force majeure event, Section 56 of the Act cannot be relied on.

Drafting a Force Majeure Clause

Although the Act has a doctrine of Frustration under Section 56, including a force majeure clause in a contract is important for parties to clearly agree on the events that would constitute force majeure and those that won’t. For instance, would failure to make payment contract the contract be an event of force majeure? If not, this must be specified so that the person making the payment doesn’t claim any Act of God as a reasons for not making payment. What else could the parties wish to exclude? Rise in fuel prices in power purchase agreements, rise in cement costs in construction contracts are just a few examples of circumstances that a party may wish to exclude. Given the possible implications of a force majeure clause, it is important for parties to carefully evaluate force majeure events and analyse at the contracting stage itself, which risks would constitute force majeure and which are to be excluded. Further, the consequences of occurrence of the agreed upon force majeure events must also be defined.