'No Penalty for Breach of Contract': Force Majeure

Human civilisation revolves around social interactions. A crucial aspect of such interactions is a contract. Humans are bound as parties to fulfil the desired promise/obligations, whether aimed at commercial or personal gain. The main characteristic of a contract is the legal liability to not falter on the terms and that a contract must be fulfilled with all due formalities.

Currently, the world is witnessing the surge of the COVID-19 pandemic, which has led to innumerable deaths, along with the fall of economies and state functionaries. In such a state of commercial disbalance, the Courts have witnessed a spike in the number of cases of breach of contracts. It is time to question the liability of a contract in times of such commercial disruption. However, in light of the law, there is a remedy to all wrongs caused.

Force Majeure is a principle derived from the Napoleonic Code of the French, which means 'Superior Force'. The clause of force majeure discharges the liability of fulfilling a contract on account of unforeseeable events out of the parties' control, making the performance of contractual duties impossible. Generally, the clause highlights certain unforeseeable events like the act of God, war, acts of terrorism, etc. Such events make the execution of a contract impossible, as the parties had not expected them to happen, putting them in a state of risk/losses due to non-performance.

COVID-19: A Force Majeure?

The Deputy Secretary, Ministry of Finance, issued a note in the bearing of the Government of India clarifying the current situation of the Coronavirus pandemic as an act constituted under 'Force Majeure.' The Government, through its Memo No. F. 18/4/2020 PPD executed on 19th of February, 2020, said:

"...A doubt has arisen if the disruption of the supply chains due to the spread of coronavirus in China or any other country will be covered in force majeure clauses. In this regard it is clarified that it should be considered as a case of natural calamity and force majeure clause may be invoked whenever considered appropriate, following due procedure..."

Supporting the stance upheld by the Ministry of Finance, other departments of the Union of India executed similar orders in defining their fields of interest under the situation of force majeure, including the Ministry of New & Renewable Energy.

Applicability during the COVID-19 Pandemic

The relief from performing contractual duties because of force majeure requires an express provision in the contract itself. The Indian Contract Act, 1872 is the inheritance from British law. However, it has not provided the relief to force majeure expressly. Therefore, by itself, the law does not imply the occurrence of an act of force majeure as an excuse for the failure to perform contractual obligations. Nevertheless, the unforeseeable nature of a future event has been fed in the language of Section 32 of the Act, relating to Contingent Contracts; any contract that rests the obligations/duties of the parties on the possibilities of an uncertain future event. If the future event becomes impossible, such a contract shall become void. This provision allows for the parties to exercise the remedy of the force majeure.

Resorting to the remedy under force majeure must be fulfilled with certain vital conditions:

  1. The performance of an act is constituted in a valid contract.

  2. The act of force majeure has a direct bearing on such performance.

  3. The act of force majeure is uncontrollable by the party seeking the remedy.

Consequently, the parties must inculcate an express clause in the contract to make way for such a remedy, as the absence of the clause will not grant such a remedy.

Absence of Force Majeure Clause

The Indian Contract Act does not heed the absence of the force majeure clause; thus, it brings Section 56 of the Act into the picture, which deals with the Doctrine of Frustration. In simple terms, when any act to be performed as a part of the contract become unlawful or impossible which could not have been prevented, then such an act will be held void. The Hon'ble Supreme Court has laid down in Satyabrata Ghose v. Mugneeram Bangur & Co. that the word "impossible" does not primarily institute physical or literal meaning only. However, it also extends to the practicality of such performance.

However, it is highly intricate for the party under the burden of proof to establish the impossibility of performance within the scope of Section 56 on account of its limited applicability, which advocates that most of the commercial contracts are likely to have a pre-existing force majeure clause within.

The Hon'ble Supreme Court, in a landmark judgement case discussing the inclusion of the force majeure clause, held that:

"... so far as it is relatable to an express or implied clause in a contract, it is governed by Chapter III dealing with contingent contracts and more particularly, Section 32 thereof. 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 Act...."

The Implication of Invoking Force Majeure amid Crisis

In clarification to the notification issued by the Finance Ministry of the Government of India, it must be noted that the scope of invoking force majeure is restricted to commercial contracts bearing the aspects of supply chains. This, however, does not further limit the scope of judicial interpretation of such a contract. It is crucial to understand that errors are likely to exist in fact of law. Thus, it is sane to question the genuineness of the plea while addressing the contract because instances of misuse of the clause are foreseeable given the malice that may be involved against the discharge of performance. Therefore, the reliability of the remedy being invoked under force majeure stands to the scrutiny of the Court.

At the same time, the Hon'ble Supreme Court in certain precedents upheld that the remedy to be granted on the plea of force majeure will not be sure as it may vary from contract to contract based on the nature of the performance of duties.

The remedy may be granted for suspension of performance or discharge of contract. Nevertheless, it has a price to be paid, putting the burden on the country's economy.

In the recent phase, while considering India's dependency on China for pharmaceutical manufacturing, the government, while upholding force majeure, cut down a share of those imports into the country, relying on the Indian companies to provide alternates. In such a scenario, the price for discharge of such contracts with China has led to a significant increase in specific medications/drugs prices.

At the same time, various industries pan-India have approached the Courts seeking a remedy under the force majeure clause, which directly bears revenue generation since most of the contracts had been executed within corporations to establish various projects to foster development and sustainability of resources at hand.

Way Forward

The concept of a remedy under force majeure is the direct outcome of the Coronavirus outbreak, which holds within itself significant ambiguities in regards to the scope and interpretation as the Courts of law had not been well equipped to entertain the appeals on such a diverse topic while considering that the Indian Contract Act itself stands implicit in acknowledgement of such a clause.

It is fair enough to say that the remedy under force majeure appears to be a well-drafted principle to compensate for the failure of duties by providing relief. It is impossible to foresee every circumstance that may derail the execution of contracts. While the established norms amid the pandemic appear to cater to such demands of justice and relief, it must be understood that these are not adequate to sustain the economy or the commercial foundation. It shall be the duty of the parties to ensure the most efforts to mitigate the performance of duties to an extent suitable and foreseeable for smoother discharge of contract.

Nevertheless, the quorum remains open to the mind upon the question of competency of commercial organisations on account of increasing appeals to gain exemption from the performance of contractual duties.

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