Force majeure
Force majeure is a legal term that refers to extraordinary and unforeseen events that prevent parties from fulfilling their contractual obligations. The phrase originates from French, meaning "superior force" or "greater force," and it is commonly included as a clause in contracts to protect parties from liability when such events occur.
A force majeure clause in a contract specifies which events will trigger its application. For a party to successfully invoke this clause, the event must be external (not caused by the parties involved), unpredictable (not anticipated), and irresistible (resulting in unavoidable consequences that make it impossible for one or both parties to fulfill their obligations).
Official Definition of the Term
The term force majeure refers to an extraordinary and unforeseen event that releases parties from their contractual obligations. This legal concept is rooted in French civil law, specifically within the Napoleonic Code, and has been adopted in various legal systems around the world.
According to the definition, force majeure incidents typically encompass events such as wars, natural disasters (like earthquakes), terrorist attacks, epidemics, and civil unrest, including riots. When a force majeure event occurs, it can free the parties involved in an agreement from certain responsibilities, allowing them to avoid penalties for non-performance due to circumstances beyond their control.
In India, the concept of force majeure is recognized under the Indian Contract Act, 1872. Section 56 of the Act deals with agreements that become impossible to perform, stating that a contract becomes void when it is impossible to perform due to an event that could not have been anticipated. This aligns with the principles of force majeure, where events such as natural disasters, wars, or other extraordinary circumstances can excuse a party from liability for non-performance. Additionally, many contracts in India include specific force majeure clauses that outline particular events considered as force majeure and the procedures for invoking such clauses. These clauses typically specify the types of events that qualify, such as acts of God, government actions, or other significant disruptions.
Case Laws
In Satyabrata Ghose v Mugneeram Bangur & Co (1954)[1], the Supreme Court of India addressed the doctrine of frustration in contract law, ruling that a contract could be discharged if an unforeseen event fundamentally alters its nature. The case involved a contract for the lease of land that became impossible to perform due to a natural disaster. The court held that the occurrence of such an event could excuse performance under the contract, emphasizing that parties should not be bound to fulfill obligations rendered impossible by circumstances beyond their control. This landmark judgment established important precedents regarding the application of force majeure and frustration in Indian contract law
In Indian Oil Corporation Ltd v Amritsar Gas Service (1990)[2], the Supreme Court of India dealt with the invocation of a force majeure clause concerning the supply of gas. The case arose when Indian Oil Corporation (IOC) sought to terminate a contract with Amritsar Gas Service, claiming that the supply of gas was hindered by circumstances beyond its control, including regulatory changes. The court ruled that while force majeure could excuse performance under certain conditions, it must be invoked in good faith and cannot be used to avoid contractual obligations without sufficient justification. The judgment emphasized the need for clarity in force majeure clauses and reinforced that parties must demonstrate that they took reasonable steps to mitigate the impact of the force majeure event before seeking relief from their contractual duties.
In Energy Watchdog v Central Electricity Regulatory Commission[3] which is one of the more recent cases, the Supreme Court of India addressed the invocation of force majeure clauses in power purchase agreements. The case arose when certain power producers sought to invoke force majeure due to increased coal prices and regulatory changes that affected their ability to supply electricity at contracted rates. The court ruled that while force majeure can be invoked, it must be clearly defined within the contract, and economic hardship alone does not qualify as a force majeure event unless explicitly stated. The judgment emphasized the importance of contractual clarity and the need for parties to demonstrate that they took reasonable steps to mitigate the impact of the event before seeking relief from their obligations. This decision underscored the balance between protecting contractual rights and ensuring fair performance in light of unforeseen circumstances.
Research that engages with force majeure
The invocation of force majeure clauses by Western buyers during the COVID-19 pandemic led to widespread order cancellations without considering the impact on vulnerable workers in global supply chains. This resulted in significant job losses and financial hardship, particularly in the Ready-Made Garment sector. Such actions contradict the UN Guiding Principles on Business and Human Rights, advocating for responsible business practices that prioritize ethical considerations and human rights due diligence. It is suggested that companies should build more resilient and transparent supply chains to better withstand future disruptions.[4]
Following the onset of the COVID-19 crisis, concerns emerged regarding its impact on contractual obligations, particularly through the lens of force majeure—a doctrine in many legal systems that excuses parties from fulfilling contracts due to unforeseen external events, often referred to as "Acts of God." This concept is also applicable in public international law, where states can invoke force majeure to justify non-compliance with obligations during such events. However, both in international law and private contracts, successfully invoking force majeure is challenging due to the principle of pacta sunt servanda, which upholds the sanctity of agreements. It was explored how the pandemic has highlighted both the potential and limitations of using force majeure as a defense in contractual performance.[5]
To address issues posed by the vagueness of the term, it is recommended that parties clearly define force majeure events in their contracts, specify applicable laws, and manage risks associated with parallel proceedings for contract and treaty claims. By doing so, they can better navigate the complexities of force majeure and mitigate potential legal conflicts.[6]
The uncertainties posed by the sanctions against Russia in the enforcement of force majeure clauses posed challenges in contracts. The UK Supreme Court's ruling in RTI Ltd v MUR Shipping BV emphasized the tension between certainty in contractual obligations and the need for commercial pragmatism. The court ultimately ruled that a party could not invoke force majeure if it could have reasonably accepted an alternative performance that was not part of the original contract. The solution offered involves clarifying the drafting of FMCs to ensure they explicitly define what constitutes a force majeure event and the expectations regarding reasonable endeavors.[7]
Way Ahead
The implementation of force majeure clauses (FMCs) is likely to evolve significantly in response to recent global events, particularly the COVID-19 pandemic and geopolitical tensions. One key development is the emphasis on clearer and more precise drafting of FMCs in contracts. Parties are encouraged to explicitly define what constitutes a force majeure event and outline the expectations regarding reasonable endeavors to mitigate its effects. This clarity can help prevent legal uncertainties and ensure that all parties understand their rights and obligations when invoking force majeure.
Another important development is the recognition of the need for flexibility in contractual obligations. The Supreme Court's decisions have time and again suggested that contracts could benefit from provisions allowing for alternative performance methods, such as accepting payments in different currencies under certain conditions. This flexibility can help parties navigate unforeseen circumstances without breaching their agreements. As businesses increasingly face disruptions from various external factors, incorporating adaptable terms into contracts will be crucial for maintaining commercial relationships and ensuring fair treatment for all parties involved. Overall, these developments point towards a trend of enhancing the clarity and adaptability of force majeure clauses to better address the complexities of modern commerce.
- ↑ 1954 AIR 44
- ↑ AIRONLINE 1990 SC 139
- ↑ AIR 2017 SC (SUPP) 43
- ↑ John F Sherman III, Irresponsible Exit: Exercising Force Majeure Provisions in Procurement Contracts (Working Paper No 77, Corporate Responsibility Initiative, Harvard Kennedy School, January 2021) https://www.hks.harvard.edu/sites/default/files/centers/mrcbg/programs/cri/files/wp_77_Irresponsible%20Exit.pdf accessed 18 November 2024.
- ↑ Bjorklund, Andrea K., 'Force Majeure in International Law during a Pandemic: Lessons from the COVID-19 Crisis', in Philippe Bourbeau, Jean-Michel Marcoux, and Brooke A. Ackerly (eds), A Multidisciplinary Approach to Pandemics: COVID-19 and Beyond (Oxford, 2022; online edn, Oxford Academic, 19 May 2022), https://doi.org/10.1093/oso/9780192897855.003.0017, accessed 18 Nov. 2024
- ↑ Yong Wang and Yifan Shan, The Impact of COVID-19 on Foreign Direct Investment: A Perspective from China (FDI Perspectives No 358, Columbia Center on Sustainable Investment, 2020) https://ccsi.columbia.edu/sites/default/files/content/docs/fdi%20perspectives/No%20358%20-%20Wang%20and%20Shan%20-%20FINAL.pdf accessed 18 November 2024.
- ↑ Cleary Gottlieb, 'Context for Analyzing Force Majeure Clauses in the UK' (Oxford Law Blog, 2024) https://blogs.law.ox.ac.uk/oblb/blog-post/2024/06/cleary-gottlieb-discusses-context-analyzing-force-majeure-clauses-uk accessed 18 November 2024.
