Saturday, April 20, 2024

Force Majeure Clause: An Act of God

The clause was an underrated provision in agreements as it was invoked in the most unimaginable of scenarios where contractual obligations couldn’t be fulfilled. Due to the lockdown, it’s become relevant now. By Kamakshi S Mehlwal

The BCCI, the world’s most extravagant cricket board, sent a notice to its official broadcasters, Star India, on April 7, 2020, reportedly activating the force majeure clause. This was to safeguard its interests should there be a suspension or delay in hosting the 13th edition of the Indian Premier League.

Generally, the term force majeure applies to natural disasters such as earthquakes, floods, etc. But the BCCI invoked the clause in the wake of the Covid-19 outbreak. This suggests that with the pandemic getting exasperated each passing day, even the BCCI management is losing hope of going ahead with IPL 2020. And in order to shield itself from harm and act in accordance with contractual commitments, it has decided to invoke the said clause. The BCCI is also invoking it with sponsors, including its title sponsor, VIVO, as a result of the lockdown.

But is this lockdown a force majeure? A broad range of businesses is increasingly affected by the growing restrictions on a throbbing economy —travel and trade. There are apprehensions over predicaments such as whether the railways, tour operators or airlines will refund cancelled tickets or what happens to drug manufacturers whose unprocessed materials originate from China.

The throbbing entertainment business is not invulnerable by any paradigm. For example, what if a production agreement stipulated filming in Hollywood or in the Spanish archipelago of Canary Islands or for that matter, Mumbai next week?  What if an artiste is unable to leave his/her place of residence for a performance next week? What if he/she is compelled to undergo compulsory segregation due to Covid-19?

Barring a few instances in the commercial world, force majeure has been a distinctively underrated provision that is often only invoked in the most unimaginable of scenarios. The party claiming that a force majeure event has occurred must show that it fell within the definition of force majeure set in the contract. It must also demonstrate that the occurrence incapacitated it from fulfilling its contractual obligations and was beyond its control. In the wake of Covid-19 and the resultant lockdowns, such a clause has become exponentially relevant.  

In a judgment delivered on April 20, 2020, the Delhi High Court in M/s Halliburton Offshore Services Inc. Versus Vedanta Limited & Anr. observed that the present lockdown was prima facie in the nature of a force majeure and passed an interim order restraining the invocation of bank guarantees. The Court observed: “Such a lockdown is unprecedented, and was incapable of having been predicted either by the respondent or by the petitioner.”

Beautifully describing the predicament of the world today, the Court further observed: “We are placed, today, in uncomfortably peculiar circumstances. A pandemic, of the nature which affects the world today, has not visited us during the lifetime of any of us and, hopefully, would not visit us hereinafter either. The devastation, human, economic, social and political, that has resulted as a consequence thereof, is unprecedented.”

The WHO announced on March 12, 2020, that the outbreak of the coronavirus is now characterised as a “pandemic”, which is a worldwide spread of a new disease which is simply out of control. Governments have had to resort to unprecedented measures to contain its ferocity.  Since this announcement, commercial enterprises are now aware that it could be more difficult for parties to perform their obligations under many types of contracts. In these circumstances, force majeure claims may arise. The coronavirus has already had an earth-shattering impact on the global economy as it increasingly disrupts production, supply chains and travel, with borders, ports and airports sealed. Prudent organisations with prescience should consider the potential legal risks and how to protect themselves against them.

Force majeure, which is known by lawyers and non-lawyers alike as an “Act of God” clause, is a French term that literally translates to “superior force”. Its clauses are fairly standard in many legal contracts across businesses. Unless one is in an industry that is prone to be disrupted by natural disasters or other “Acts of God”, it doesn’t get much scrutiny during the course of ne­gotiating an agreement or a transaction.

Under international contract law, a force majeure clause in a contract seeks to eliminate liability for unexpected and unavoidable disasters. These may include: natural disasters, acts of God, epidemics or pandemics and war. Force majeure clauses are often included in commercial contracts to avoid certain circumstances arising that prevent the fulfilment of contractual obligations. These clauses operate to delay or absolve one or both parties to a contract of all or part performance of their obligations on the occurrence of certain events outside their control. Generally, any kind of contract negotiation is an exercise in predicting the future; but very few lawyers or drafters had the foresight to envisage something like this pandemic.

There must be a fundamental relationship between the force majeure event and the failure to perform the contractual obligation. The affected party must be able to clearly establish that the force majeure event is the cause for the non-performance of the contractual obligation. Such an event is an objective event or situation which is:

  • Unforeseeable at the time of entering into the contract
  • Inevitable in terms of occurrence or impact
  • Impossible to overcome.

In order to invoke a force majeure event, one must look at the specific wording of the clause in the contract. The definition of force majeure is generally broad but some clauses can be specific in nature. Moreover, some provisions of it mandate a notice requirement and preventing relief if the relevant notice is not given during the necessary time period stipulated in the contract. Such provisions are generally enforceable, and so complying fully with all notice requirements will be important for parties seeking to invoke force majeure. These provisions universally require the affected party to demonstrate that it has taken all reasonable actions to avoid or prevent the event and its effects.

The impact of invoking force majeure is: 

  • Suspension of contractual obligations
  • Non-liability
  • Extensions with regard to fulfilling contractual obligations
  • Commitment to mitigate losses
  • Contract termination.

There are diverse ways a contract can be deliberated and drafted. Parties to a contract should examine whether it includes the force majeure clause and if a pandemic is included in it. If so, a careful assessment of the facts, contractual provisions and legal principles in the region of force majeure would be required, including any notice periods. If not, it is suggested that parties include a pandemic as a force majeure event and have provisions which deal with the effects of invoking this clause. Last but not least, parties need to be watchful of acting in good faith and espouse pragmatic business standards of fair dealing—predominantly in times of exceptional circumstances such as those in which the world currently finds itself.

Regardless of whether one subscribes to a specific faith or belief system, the phrase “Act of God” is one that most people understand as being an event or occurrence that is beyond the control of humans. More often than not, a force majeure clause encompasses natural disasters such as floods, hurricanes and earthquakes. A pandemic of this magnitude was not foreseen by the “powers that be” nor by legal experts who drafted contracts and combined agreements for different enterprises, tourism and hospitality businesses, manufacturers and the entertainment and sports industry.

Nevertheless, force majeure provision can safeguard one in diverse ways. For non-governmental and other agreements where there is a prerequisite for this clause, the benchmark is that the Covid-19 outbreak will fall under the meaning of that provision. If the contract does not contain a force majeure provision or Covid-19 falls beyond the scope of that agreement, the parties will have to determine whether they can invoke the “doctrine of frustration” to discharge them from their contractual obligations.

In the event of there being no force majeure clause, some common law defences including the doctrines of “impracticability” and “impossibility” of performance may provide appropriate re­lief. The doctrine of impossibility will excuse a party’s breach of contract where its own performance has, without its fault, become impossible due to an unforeseen change in circumstances.  The party should have made all logical efforts to perform its part of the contract. The doctrine of impracticability requires a party to show that although performance was technically possible, it had become very complicated and financially not viable, making it almost impossible. Or the performance had become useless from the point of view of the object and purpose which the contracting parties had contemplated. A violation may also be excused because of extreme and unreasonable difficulty in performing the contract due to unavoidable loss or injury.

Although parties may try to invoke Covid-19 as resulting in impossibility or impracticability of performance; the benchmark for proving that is very high. It is a strict standard and courts will be reluctant to invoke it; as the sanctity of the contact is paramount and must be safeguarded.

In the absence of force majeure, “Change of Law” provisions can come to your rescue. A contract may have certain remedies or procedures in place if a change in law makes it impossible or impractical to perform under the contract. At the state and local level, governments are issuing orders and changing laws daily to address the growing Covid-19 pandemic. For example, if a government issues an order suspending all non-essential travel, a party could argue that such an order represents a “change of law” under the terms of their agreement. Parties should carefully review their agreements to see if they have “change of law” provisions and what remedies, if any, these provide.

—The writer is Advocate-on-Record, Supreme Court


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