DR.

RAM MANOHAR LOHIYA NATIONAL LAW

UNIVERSITY

2019-2020

CONTRACT ACT-I

Project – Force Majeure

Submitted To - Submitted by-

Prof. Ms. Priya Anuragini. Kasturi Birla.
Assistant Professor (Contract). Roll no. -190101080.
Dr. Ram Manohar Lohiya 1st Year (II Semester).
National Law University.

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TABLE OF CONTENTS:

1. Introduction- Force Majeure…………………………………………….………………...3

2. Governmental Notification in regard of COVID-19…...……………………..……….…..5
3. Force Majeure clauses in contracts………………………………………………………..6
4. Contracts with no force majeure clauses………………………………………………….8
5. Notice Provisions………………………………………………………………………….9
6. Causation and Mitigation………………………………………………………………...10
7. Landmark Rulings in India………………………………………………………………11
8. Conclusion……………………………………………………………………………….12
9. Bibliography……………………………………………………………………………..13

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FORCE MAJEURE:
The Black’s Law Dictionary defines “force majeure” as an event or effect that can be neither
anticipated nor controlled.

The doctrine of force majeure has its origin in French Law based on the Roman doctrine of vis
major. The concept of vis major was defined by the English House of Lords 1 as: “A circumstance
which no human foresight can provide against and of which human prudence is not bound to
recognize the possibility”.
However, it has been now expanded to cover events induced by men too and not alone nature.

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. 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 force
majeure clause to apply to the contract and the consequences of occurrence of such force majeure
event. As such, for a force majeure clause to become applicable, the occurrence of such events
should be beyond control of the parties and 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 comes within the ambit of a force majeure event and fulfils the
conditions for applicability of the clause, then the consequence would be that parties would be
relieved from performing their respective obligations to be undertaken by them under the contract
during the period that such force majeure events continue.

Further consequential liabilities, depending on the language of the clause, the parties may be
required to issue a notice formally intimating the other party of the occurrence of such event and
invocation of the force majeure clause.
Some contracts also contain a provision that if such force majeure event continues for a prolonged
time period, the parties may be permitted to terminate the contract.

The general principle is that an event will be regarded as a force majeure event on fulfilment of
the following conditions:

• An unexpected intervening event occurred: The event should be one which is beyond the
control of either of the parties to the agreement, similar to an Act of God.

• The parties to the agreement assumed such an event would not occur: A party’s non-
performance will not be excused where the event preventing performance was expected or was
a foreseeable risk at the time of the execution of the agreement.

1
Tennents v. Earl Glasgow (1864) 2 Macph HL 22

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 • The unexpected event made contractual performance impossible or
impracticable: Whether an event has made contractual performance impossible or
impracticable has to be determined on a case-to-case basis. It is to be analyzed whether the
problem is so severe so as to deeply affect the party, and thereby creating an impossibility of
performance. This has to be, however, relative to the counterparty so as to create an
impossibility of performance.

• The parties have taken all such measures to perform the obligations under the agreement
or at least to mitigate the damage: It is required that a party seeking to invoke force majeure
clause should follow the requirements set forth the agreement, i.e. to provide notice to the other
party as soon as it became aware of the force majeure event, and should concretely demonstrate
how the said situation has directly impacted the performance of obligations under the
agreement.

The Hon’ble Supreme Court in the case of Dhanrajmal Gobindram vs. Shamji Kalidas 2, has held
that the term force majeure is of wider import. Judges in the past have agreed that where the
reference is made to force majeure, the intention is to save the performing party from the
consequences from the anything over which he has no control. 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 envisages that if a contract is contingent on the happening of
an event which event becomes impossible, then the contract becomes void.

2 Dhanrajmal Gobindram vs. Shamji Kalidas (1961) 3 SCR 1020

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GOVERNMENTAL NOTIFICATION:

In India, the Ministry of Finance on February 19, 2020, has issued an office memorandum which
effectively declares that COVID-19 can be treated as a natural calamity and hence a force majeure.
The Government has taken note of the effect this pandemic is causing across various industrial
sectors as well as upon the economy of India and has released various notifications and advisories
to help stabilize the market.

It has been clarified that Force Majeure under Manual of Procurement of Goods 2017, would be
applicable in this pandemic due to disruption of supply chains. The Ministry of New & Renewable
Energy with respect to solar project developers, vide office memorandum dated March 20, 2020
has declared that parties can invoke the Force Majeure clause to avoid financial penalties if they
miss the contractual obligations on account of COVID-19. Similarly, other ministries have issued
respective notifications pertaining to invoking of Force Majeure clause.

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FORCE MAJEURE CLAUSES IN CONTRACTS:
A force majeure clause in a contract is an express provision of circumstances in which
performance under the contract will be excused3. The purpose behind inserting such clauses is to
save the performing party from the consequences of anything over which the party has no control 4.

The law on contractual impossibility under the Indian Contract Act, 1872 can be best understood
through a careful analysis of sections 9, 32 and 56 of the Act.

1. Section 32: It provides for the discharge of obligations due to the impossibility of an
express contingency. In other words, if the contract expressly provides that performance is
contingent on the occurrence of an event, the impossibility of that event shall lead to the
contract becoming void.
2. Section 9: It permits the courts to consider implied terms in contracts. Section 9 read with
section 32 provide the basis for discharge of obligations due to the impossibility of
an implied contingency. This means that though the parties may not have expressly
provided for it, there may be certain contingencies upon which performance of the contract
rests.
3. Section 56: It provides, that a contract to do an act becomes void when the act
becomes impossible. The only difference between section 32 and 56 is that,
under section 32 the link between the impossibility and the discharge of obligations is to
be found in express or implied contractual terms. Whereas, section 56 is concerned with
impossibilities which on an objective determination by the court, go to the root of the
contract.

Contracts often contain a force majeure clause that is negotiated between parties and specifies the
events that qualify as force majeure events such as, acts of god, wars, terrorism, riots, labor strikes,
embargos, acts of government, epidemics, pandemics, plagues, quarantines, and boycotts. If the
event that is alleged to have prevented performance under the contract, such as an epidemic, is
specifically mentioned in the force majeure clause and the event occurs, then the affected parties
may be relieved from performance.

The burden of proof rests on the party invoking the force majeure clause. The said burden can be
effortlessly discharged where force majeure clause in the contract explicitly provides for events
like epidemics, pandemics or government restriction. However, the situation may become

3 Pollock and Mulla, Indian Contract and Specific Relief Acts (13th edition., 2006).
4 Davis Contractors Ltd v Fareham Urban District Council, [1956] 2 All ER 145.

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convoluted where a force majeure clause is not explicitly worded and simply uses the term "act of
God" or "event beyond the reasonable control of parties".

Apart from this, a party's entitlement to the benefit of force majeure clause would depend on the
following factors:

• Majority of contracts would require the party invoking a force majeure clause to adequately
apprise the counterparty, within a stipulated time, regarding the event which prompted
invocation of force majeure clause. Further, the invoking party would be expected to
outline an estimation of the impact and duration of effects resulting from the said event.
• There is a possibility that parties have an obligation to mitigate damages. In that case, what
deserves consideration is whether there are other means through which a party can perform
the contract or whether the party not affected by the force majeure event is obligated to
mitigate the damages in some way. Depending upon the terms of a contract, the parties are
expected to take reasonable steps.
• Varied consequences of force majeure event should also be considered. For instance,
performance of the contract may be suspended during the operation of force majeure event
and performance may be suitably extended, the parties may have option of renegotiating
and modifying the contract's terms or termination of contract would happen if the force
majeure event continues for specific period of time.
• Nature of evidence on which the claim of force majeure would be based is of utmost
importance. It is vital that the party invoking the force majeure clause must keep all
documents related to the force majeure event, which might be required in case a dispute
arises in future.

In the present scenario, the said documents may include national and state government notice and
guideline imposing restriction of trade, news articles related to COVID-19 outbreak, quarantines,
restricted travel and mandatory shutdown of airports, trains stations and seaports, cargo booking
and freight agency agreement, cancelled flight or train ticket or anything other documents relating
to travel itinerary, and cancelled visa or rejected visa application.

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CONTRACTS WITH NO FORCE MAJEURE CLAUSE:
The Indian Contract Act, 1872, under Section 56 enshrines the doctrine of frustration of contracts.
The effects of the force majeure event will have to be examined to establish whether it renders the
contract impossible, unlawful or impractical to perform and due to which the contract is rendered
void automatically. If it is established that the circumstances have materially affected the parties
and obligations and there is no way to continue the contract while such circumstances exists, the
contract is voided and both contracting parties are discharged of their subsequent obligations and
neither party has the right to sue the other party for breach of such contract. It leads to immediate
termination of the contract and there are no positive steps taken to try and rectify the situation.

No damages have to be borne by either party since the doctrine suggests that circumstances have
made it impossible for the contract to continue in any manner. If the courts are of the opinion that
the doctrine was misused or one party tried to deceive the other party, the court can decide damages
to be paid by the party misusing the contract. Thus, this doctrine must be used as a last resort when
all other negotiations fail or there is no other recourse available.

In judgement, Satyabrata Ghosh v. Mugneeram Bangur5, the Supreme Court opined that the event
leading to frustration which is relatable to an express or implied clause in a contract, is governed
by Section 32 of the Act and if it occurs de hors the contract, it is dealt under Section 56 of the
Act.

Under the prevailing circumstances, reliance on Section 54 of the Act depends upon the following
conditions:

1. A valid and subsisting contract between the parties.

2. There must be some part of the contract yet to be performed.
3. The contract after it is entered into becomes impossible of performance i.e. subsequent
impossibility.

Apart from the above, the Government of India is taking necessary measures in order to prevent
further disruption in international trade and commerce by declaring outbreak of COVID-19 as a
force majeure event. For instance, Ministry of Finance issued an office memorandum dated
February 19, 2020, which states that Force Majeure clause can be invoked in Government contracts
if there is a "disruption in supply chain due to spread of corona virus in China or any other country".

5 Satyabrata Ghosh v. Mugneeram Bangur [1954] SCR 310

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NOTICE PROVISIONS:

Notice provision applies as a condition precedent to the operation of the force majeure
clause. Some force majeure event clauses state that a party affected by an expected
circumstance need to give notice to the other party. If they don’t, the provision might say
that the benefit of the clause is not available. If there is a requirement to give notice, it is
only the causes notified that are available to forgive non-performance.
But failure to comply with time bars like this does not necessarily mean relief will
unavailable for force majeure.
Where the notice provision appears in the contract it may be:
1. Condition Precedent- The other party must be told before they can rely on the clause
for the performance delay. The time bar prevents obtaining the benefit of the force
majeure event.

2. Warranty- The affected party is not disentitled from obtaining the relief made
available by the clause, despite not complying with the time provision.
Whether it is a condition precedent depends on 3 factors.
They include:
• The form of the clause itself:
➢ Whether the clause said that notice was a condition precedent or that
reliance on force majeure was only available provided such notice
was give.
➢ It can be said that the parties thought that the failure by one party to
inform the other immediately of the cause of its failure to perform,
or a failure to give all possible details as to the expected duration of
the cause, should disentitle the affected party from any reliance on
the force majeure event.
• The relationship between the force majeure clause and the contract as a
whole:
➢ Clear implication that the condition must have been intended for the
benefit of the clause.
➢ Whether the contract includes other cut off points or time bar.
• General considerations of law: The considerations will depend upon the
circumstances of the case.
The relevant background might include:
➢ Delay giving notice.
➢ The information that the party had at the time.
➢ What the party did next.

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CAUSATION AND MITIGATION:
Even if a pandemic like Covid-19 falls within the ambit of a force majeure clause, that, by itself,
would not relieve a party from performance of contractual obligations. The force majeure event
must have a direct impact on the non-performance and the party seeking to rely on the force
majeure event is also under duty to mitigate and/or explore alternate means of performance.

Complex issues pertaining to causal link could also arise where the immediate and direct cause is
not the Covid-19 pandemic itself but the actions of authorities in response to the same, e.g.
lockdown, curfew or restrictions on movement of people and goods. Such actions of authorities
may, depending on the language of the force majeure clause, constitute a separate and independent
force majeure event that excuses performance of a contract.

In a decision of the Bombay High Court in Standard Retail, the absence of a direct causal link
between Covid-19 pandemic and the non-performance was one of the other grounds on which the
Court refused to grant an injunction. An injunction restraining the encashment of letters of credit
was sought inter alia on the ground that the underlying contract for sale of steel had become
impossible to perform due to Covid-19 pandemic and the nation-wide lockdown. However, the
Court observed that distribution of steel was an essential service and, since there were no
restrictions on its movement, performance of the contract was not affected.

Another instance where the performance of a contract may not be affected due to Covid-19
pandemic is where employees of an organization in the service industry have to isolate themselves
at home. Depending on the nature of the service, it could be argued that since employees can
continue working from home, there is no impact on delivery of services. Similarly, any non-
performance due to an economic downturn or other general business conditions resulting from the
Covid-19 pandemic are not likely to be sufficient to seek excuse from performance of a contract
on ground of force majeure.

The language of the force majeure clause in a contract may also have a bearing on how direct the
causal link between the force majeure event and the non-performance sought to be excused thereby
must be. A clause that requires a party to be “prevented” by the force majeure event from
performing its obligations will likely be construed as requiring a more direct and proximate causal
link than one which only requires the party to be “impeded” or “hindered” in the performance of
its obligations.

The force majeure may require parties to take reasonable efforts to perform the contract by
alternate means. Even in the absence of an express provision, the party seeking to rely on a force
majeure event to excuse its non-performance will have to demonstrate that it was unable to perform
its obligations despite having taken steps to mitigate the effect of the force majeure event.

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LANDMARK RULINGS IN INDIA:

Deliberating on what is to be considered as a force majeure, in the seminal decision of Satyabrata

Ghose v. Mugneeram Bangur & Co.6, the Hon’ble Apex Court had adverted to Section 56 of the
Indian Contract Act. The Supreme Court held that the word “impossible” has not been used in the
Section in the sense of physical or literal impossibility. To determine whether a force majeure
event has occurred, it is not necessary that the performance of an act should literally become
impossible, a mere impracticality of performance, from the point of view of the parties, and
considering the object of the agreement, will also be covered. Where an untoward event or
unanticipated change of circumstance upsets the very foundation upon which the parties entered
their agreement, the same may be considered as “impossibility” to do as agreed.

In Naihati Jute Mills Ltd. v. Hyaliram Jagannath7, the Supreme Court also referred to the English
law on frustration, and concluded that a contract is not frustrated merely because the circumstances
in which it was made are altered. In general, the courts have no power to absolve a party from the
performance of its part of the contract merely because its performance has become onerous on
account of an unforeseen turn of events.

In Energy Watchdog v. CERC8, it was observed as follows:

“It has also been held that applying the doctrine of frustration must always be within narrow limits.
In an instructive English judgment namely, Tsakiroglou & Co. Ltd. v. Noblee Thorl GmbH9,
despite the closure of the Suez canal, and despite the fact that the customary route for shipping the
goods was only through the Suez canal, it was held that the contract of sale of groundnuts in that
case was not frustrated, even though it would have to be performed by an alternative mode of
performance which was much more expensive, namely, that the ship would now have to go around
the Cape of Good Hope, which is three times the distance from Hamburg to Port Sudan. The freight
for such journey was also double. Despite this, the House of Lords held that even though the
contract had become more onerous to perform, it was not fundamentally altered. Where
performance is otherwise possible, it is clear that a mere rise in freight price would not allow one
of the parties to say that the contract was discharged by impossibility of performance.”

6
Satyabrata Ghose v. Mugneeram Bangur & Co. 1954 SCR 310
7
Naihati Jute Mills Ltd. v. Hyaliram Jagannath, 1968 (1) SCR 821
8
Energy Watchdog v. CERC (2017) 14 SCC 80
9
Tsakiroglou & Co. Ltd. v. Noblee Thorl GmbH, 1961 (2) All ER 179

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CONCLUSION:
While several contractual parties may seek to resile from the contractual obligations in light of the
Covid-19 pandemic, successful reliance on either the force majeure clause in the relevant contract
or on Section 56 of the Act for doing so is not a given. The onus of demonstrating whether Covid-
19 actually affected performance of the specific contractual obligations in a particular case lies
heavily on the party seeking to have its non-performance excused. While checking whether the
Covid-19 pandemic fall within the scope of the relevant force majeure clause is a good starting
point, issues such as causal link and duty to mitigate also need to be examined in order to assess
the relative strengths and weaknesses of such party’s stand. Relevant letters and correspondence
should also meticulously document not just the fact that a force majeure event has occurred, but
also the specific effects of the same on the contractual obligation which the party seeks to be
excused from performing.

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BIBLIOGRAPY:
1. www.scconline.com
2. www.mondaq.com
3. www.roedl.com
4. www.corporate.cyrilamarchandblogs.com
5. www.alliottgroup.net
6. www.mayerbrown.com
7. www.lexology.com
8. www.bakermckenzie.com
9. www.fcl-law.com
10. www.venable.com
11. www.indiacorplaw.in
12. www.livelaw.in
13. www.barandbench.com
14. www.investindia.gov.in
15. www.jurist.org
16. www.indialegallive.com
17. www.ssrana.in
18. www.maritime-executive.com
19. www.bloombergquint.com
20. www.hallellis.co.uk

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