Context: Amid disruptions caused by Covid-19, the Finance Minister has referred to an Act of God while businesses are looking at a legal provision, force majeure, to cut losses. How does it work, and when can it be invoked?
What is a force majeure clause?
- The law of contracts is built around a fundamental norm that the parties must perform the contract.
- When a party fails to perform its part of the contract, the loss to the other party is made good.
- However, the law carves out exceptions when performance of the contract becomes impossible to the parties.
- A force majeure clause (FMC) is one such exception that releases the party of its obligations to an extent when events beyond their control take place and leave them unable to perform their part of the contract.
- FMC is a clause that is present in most commercial contracts and is a carefully drafted legal arrangement in the event of a crisis.
- When the clause is triggered, parties can decide to break from their obligations temporarily or permanently without necessarily breaching the contract.
- Companies in such situations use the clause as a safe exit route, sometimes in opportunistic ways, without having to incur the penalty of breaching the contract.
- Generally, an “Act of God” is understood to include only natural unforeseen circumstances, whereas force majeure is wider in its ambit and includes both naturally occurring events and events that occur due to human intervention. However, both concepts elicit the same consequences in law.
What situations legally qualify for use of force majeure?
- A force majeure clause is negotiated by parties, and events that could potentially hamper the performance of the contract are catalogued.
- It is not invoked just by expressing that an unforeseen event has occurred.
- In case a contract does not have a force majeure clause, there are some protections in common law that can be invoked by parties.
- For example, the Indian Contract Act, 1872 provides that a contract becomes void if it becomes impossible due to an event after the contract was signed that the party could not prevent.
- Court rulings have established that force majeure cannot be invoked when the performance of the contract has become difficult, but only when it has become impossible.
- For example, in a 2017 case, the Supreme Court cited a 1961 House of Lords decision that ruled that the closure of the Suez Canal, although unforeseen, had not rendered a contract to ship goods from Africa impossible since a longer route around the Cape of Good Hope existed.
Are there other global precedents dealing with pandemics and force majeure?
- China’s Supreme People’s Court had recognised the 2002 SARS outbreak as a force majeure event.
- Singapore enacted the Covid-19 (Temporary Measures) Act in April to provide relief to businesses that could not perform their contractual obligations due to the pandemic.