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Force Majure: Contract Offer A Remedy?

Covid 19 is the best example to understand Doctrine of Force Majeure. Covid19 has either made performance difficult or impossible. It has caused commercial hardship to many parties in performance of their contracts, while rendering others completely impossible of performance of contractual obligation. So to perform contractual obligations one needs to enter into an contract first.

The contract is said to be an agreement when two or more parties agreed to create obligations that are either enforceable or recognizable at law. So when execution of these obligations may be affected by unforeseen or supervening events, i.e., events which are unexpected or incapable of being known in advance by either of the parties and which ultimately discharge the parties from their contractual obligations by Force majeure which is a French term that means greater force.

Ordinarily, this implies a severe or a fundamental change to the substance of the contract that is brought about by an event that cannot be anticipated by the parties and beyond to control, that results in non-performance of their contractual obligations. The COVID-19 pandemic or the resultant lockdown, won't be treated as force majeure, if there are different methods of performing the terms of the contract. The performance of the contract actual obligation might be suspended or extended during the operation of 'force majeure' event.

Parties have the option of renegotiating and modifying the written agreement terms, termination is the last step if the force majeure event continues beyond the time prescribed under the contract.

Therefore, considering COVID-19 lockdown a 'force majeure' event will depend on the contractual obligations binding the parties and the manner of its performance.

Legal Provision in India
In India, the belief of force majeure is not codified into law, it is necessary to coin this as a part of the contract. Scores of precedents have address that the contract overrides the regulation and therefore 'force majeure' clauses are now part of the standard clauses in any contract along with confidentiality and dispute clauses. Several examples of force majeure clauses exist. One such instance is as under:
  1. The event of 'force majeure' such as an act of God, fire, earthquake, flood, accident, an act of governmental authority, lockdown or any event which is beyond the reasonable control for any of the parties that hinder the performance or render it incapable to perform it.
  2. The duration of force majeure event should be between 15-60 days.
  3. The way during which this clause must be invoked as well as notices etc.
  4. Suspension or termination of contract in case the event continues beyond the stipulated time period.

Majority of the 'force majeure' clauses, do not specifically mention 'pandemic' or perhaps 'epidemic' for that matter, as an event. Essentially, COVID-19 will find a mention in contracts in the form of epidemic, pandemic, or perhaps natural calamity. However, it is noteworthy that wherever the failure to perform an obligation is primarily due to lockdown implemented by the Government, the force majeure clause must also contain term 'lockdown', for it to be invoked.

According to Indian statutes the concept of force majeure has not been defined, but this concept has been dealt below the Section thirty two of the Indian Contract Act, 1872 managing contingent contracts it refers to:
“Enforcement of contracts dependant on an event happening Contingent contracts to do or not to do something if any unsure future event happens, can't be implemented by law unless and till that event has happened. If the event becomes beyond reasonable control, such contracts become void.”

In the written agreement read, the belief provides a temporary escape to the parties under the contract, to perform the contractual obligations on the occurrence of a inevitable accident event, that renders a contract void once an occasion upon that performance of contract is contingent becomes not possible.
  1. An unexpected/unforeseen intervening event occurred;
  2. The parties to the agreement assumed that such an occurrence won't occur;
  3. Such an occurrence has created the performance of the obligations below the contract impossible or impracticable;
  4. The parties have taken all such measures to perform the obligations below the agreement or at least to mitigate the damage; and
  5. The affected party claiming relief below cataclysm, can have the burden of proof to point out that the inevitable accident event has affected such party's performance of the contract.

Does your Force Majure contract offer a remedy?
If your contract does not contemplate the occurrence of an event that renders the performance of the contract not possible or felonious, and therefore the event happens, the remedy would possibly consist section fifty six of the Contract Act. However, a claim of frustration it'll be useful for parties to hunt legal recommendation on establishing or defensive a claim supported frustration of contract, as this can involve an analysis of things like the impact of the event, the thing of the contract etc.[i]

In distinction, Section fifty six may have very little application wherever parties expressly ponder within the contract, the recourse to be adopted by them within the event there's any amendment in circumstances or an incident of an occasion that renders it not possible for the parties to perform the contract. To the extent that the parties have already contemplated the implications of a supervening event in their contract, identical would stay binding on the parties.

For example, it's open for the parties to agree that if on account of any cataclysm condition it's not possible to perform a contract, a celebration would compensate the opposite for the efforts created even so that it's not possible to completely perform identical. In such Nishith Desai Associates 2020 Impact of Covid-19 on Contracts Indian Law necessities seven cases, the written agreement provisions would prevail over the plain language of Section 56 of the Contract Act.

However, such claims will be defended on many counts, one being failure to satisfy the notice demand. Similarly, if the parties have contemplated the chance of AN intervening circumstance which could have an effect on the performance of the contract, however have expressly stipulated that the contract would stand despite such circumstances, there will be no case of frustration as a result of the premise of the contract would be to demand performance despite the happening of a selected event. It can be tough to make a case for performance in such cases.

However, defences square measure accessible to parties seeking to make a case for non-performance, one in every of them being unequal talks powers between the parties to the contract. In some cases, wherever parties could have expressly provided for the case of a restricted interruption through cataclysm, however a supervening event renders performance indefinitely not possible for an indefinite amount a celebration may build a claim for frustration of the contract.

To assess whether or not Covid-19 may trigger the relevant force majeure clause, or frustrate the contract, it'll be vital to gauge the operational aspects of the relevant industrial dealing and therefore the sort of force majeure clause within the contract

Formal requirements in a very potential case of inevitable accident, contracts could need fulfilment of formal necessities by a party proposing to justify itself from non-performance. For example, a contract could need a party to issue a notice informing the opposite party that a inevitable accident has been triggered by the prevalence of an occasion coated below the cataclysm clause.

Throughout the operation of the inevitable accident event, a celebration may be needed to report or consult frequently with the opposite party. A celebration can also be needed to point out proof of mitigation and calculable timings for managing the actual event of cataclysm.

AN instance of a cataclysm clause with notice necessities is provided below:
The Party suffering a cataclysm event shall: a. inform at once the opposite Party by notice, giving details of the cataclysm event; b. inform the opposite Party once the cataclysm event is at an finish and resume performance of this agreement immediately thenceforth unless the Parties have determined otherwise. Ought to the hindrance, impossible performance, or delay resulting from such force majeure event persists beyond a period of ninety (90) calendar days, and therefore the Parties have didn't reach an agreement or notice means that to overcome the force majeure event, then any of the Parties could request the termination of the agreement by means of a notice.

Recent Judgements:
  1. Bombay High Court: Invocation of LC's: Standard Retail Pvt. Ltd. V. G.S. Global Corp April 8, 2020
    • Steel importers appeared in Apex Court seeking restraint of encashment of letters credit provided to Korean based exporters claimed because of lock down performance of contract become impossible;
    • Bombay High Court refused the injunction: letters of credit are independent contracts with the bank; distribution of steel was recognised by government advisories as an essential service no restriction on movement and the lockdown was for from limited period;
    • The clause of force majeure was only to aid exporters, this clause is not for importers. [ii]
       
  2. Bombay High Court: Transcon Iconica Pvt Ltd. v. ICICI Bank April 11, 2020
    • Writ petitions filed by Transcon Sky City and Trancscon Iconica which had availed financing facilities from ICICI Bank defaulted on payments due on January 15, 2020 and February 15, 2020;
    • Determination of whether the moratorium is excluded for NPA classification;
    • Bombay High Court held that period from March 01, 2020 to May 31, 2020 during which there is a lockdown will stand excluded until the lockdown is lifted.

End-Notes:
  1. https://economictimes.indiatimes.com/small-biz/legal/what-is-force-majeure-the-legal-term-everyone-should-know-during-covid-19-crisis/articleshow/75152196.cms
  2. https://www.scconline.com/blog/post/2020/06/16/force-majeure-the-sudden-apprising

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