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The Emerging Importance of Force Majeure Clause in Commercial and Insurance Contracts Post Covid-19

INTRODUCTION:

The novel corona virus which is declared as a ‘pandemic’ by the World Health Organisation has created a massive and unexpected mutilation to the mankind as a whole.  It is considered to be the most dangerous health calamity faced by the humankind since the World War II.   Its rapid spread around the world have put the social, economic and financial lives of the people in a great peril. The declaration of nation-wide lockdown has stalled various sectors of the economy from its progress.  It has created an adverse impact on the domestic and international trade and has affected the supply chain as a whole, as a result of which there has been a delay in the execution and performance of ‘contractual’ obligations.  Be it the construction contracts or manufacturing and supply agreements, the kinds of contracts being affected is more in number.  Hence it has become more vital to analyse and evaluate the contractual provisions seeking appropriate rights and liabilities for discharging commercial contracts, especially in the case of force majeure.

FORCE MAJEURE – MEANING:

The word ‘force majeure’ translates from French as ‘superior force’.  It means ‘an event or effect that can be neither anticipated nor controlled[1].  A force majeure provision in a commercial agreement relieves one or both the parties to the contract from the performance of their obligation on the happening of certain events which is beyond the control of the parties. For an event to be a force majeure it must comply with the following requirements:

1.The event must be beyond the control of the parties to the contract.

2. The parties must have taken reasonable measures to alleviate the impact of the event or its consequence.

“Force majeure occurs when the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which the performance is called for would render it impossible. I promised to do this but I cannot due to some irresistible unforeseeable and uncontrollable event.”[2]

The force majeure clause is found in most of the commercial contracts, be it the construction contracts, supply contracts, manufacturing contracts, financial contracts etc.   It is necessary for every contract to encompass force majeure clause as it relieves the parties from the performance of their contractual rights and obligations on the happening of certain events which are beyond their control, provided that the requirements for the event to be a force majeure is met.  In cases where the contract did not expressly cover the force majeureclause, the aggrieved party can claim frustration of contract as enshrined in Section 56 of the Indian Contract Act, 1872[3]. Nevertheless when the contract expressly mentions about the force majeure clause, one cannot claim the frustration of contract.  It is also important to note that only those events which have been expressly mentioned in the contract can excuse the party from performance implying that the interpretation of this clause will be strictly narrow.[4]

SECTION 32 & 56 OF THE INDIAN CONTRACT ACT, 1872:

The Indian Contract Act, 1872[5] did not specifically define the word ‘force majeure’ anywhere, however it had made certain provisions regarding the happening of future uncertain or impossible events.

Section 32: “Contingent contracts to do or not to do anything if an uncertain future event happens cannot be enforced by law unless and until the event has happened”

Section 56: states that “A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful”.

Technically, both sections deal with the frustration of contract, that the contracts can be discharged on the happening of impossible events in the future but the parties may see an enticement to go under section 56 and not section 32 as the incentive is the compensation under the third paragraph of section 56 that the aggrieved party can seek for compensation for loss occurred because of the non-performance due to the impossibility.[6]  The main distinctive feature between section 32 and 56 is that section 32 will come to play when the contract is dissolved by its own force whereas section 56 will occupy the field when the contract crushes down due to an impact of the violent nature with an outside force.[7]

DOCTRINE OF FRUSTRATION – IMPOSSIBILITY (SEC 56)

This doctrine is enshrined in Section 56 of the Indian Contract Act, 1872.  It states that any act which has to be done after the contract is made, becomes impossible to perform and the said impossibility is beyond the control of the parties and the promisor could not have prevented it, then such act which becomes impossible or unlawful will become void.  The doctrine of frustration is applicable only in the circumstance where the subject matter of the contract itself becomes impossible or ceases to exist[8].  It is also applicable in the cases where a certain ‘thing’ or ‘event’ did not happen.[9]  The presence of force majeure clause in the contract will relieve the parties from their rights and obligations pertaining to the happening of the event which is beyond the control of the parties. In the cases where the said clause is not covered within the contract then the parties can use this doctrine and end the contract.

COVID 19 AND FORCE MAJEURE:

The global impact of Covid 19 pandemic has resulted in an enormous disruption of day to day business transactions and even the commercial activities. The parties’ ability to meet their contractual obligations have also been hindered by this pandemic due to the restraint in movements and the resulting temporary stoppage in production, increase in cost due to shortage in raw materials, shortage of labour and funds and disruptions in supply chain.  Most of the commercial contracts include a force majeure clause which relieves the parties from the performance of their rights and liabilities due to the happening of unforeseeable events.  Such clause includes not only the way in which the parties should deal with the occurrence of the event of force majeure, but also provides list of events which would constitute force majeure within the meaning in the said contract. Such forcemajeure events include act of god, acts of government, labour strikes, epidemics, pandemics, terrorism, plagues, quarantine, war, riots and boycotts. Even if the above-mentioned events are not included in the clause, most of them will contain a ‘catch all’ phrase in respect to events which are ‘outside the reasonable control of the affected party’.  In the case Halliburton Offshore Services Inc. vs Vedanta Limited and Anr, the petitioner applied for seeking interim protection against the respondent from invoking his bank guarantees issued in favour of him by the ICICI bank. It was contented that due to the complete lockdown owing to the pandemic, he was not able to perform the contract.  The court held that the sudden emergence of lockdown is considered to be an event of force majeure and also passed an ad-interim injunction order preventing invocation of the bank guarantees[10].

 It is important to note that every act which is beyond the control of the parties will not as such relieve them from their obligation. The onus actually lies upon the party who needs to invoke this clause to establish the existence of the events and circumstances which resulted in force majeure and hence the language of the contract should be given at most importance.

Many renowned companies in India have invoked the force majeure clause after the outbreak of this global pandemic to pause payments to their suppliers as the national lockdown created a furious increase in demand.  The companies that declared force majeure clause include Indian Oil Corporation, Mangalorean Refineries Ltd, Adani Ports in Gujarat, Gateway Terminals India Private Limited, Hero MotorCorp and Eicher Automobile etc. It is expected that over a period of time many other companies are likely to invoke this clause in their contract to avoid speculations.  In such cases, the courts and authorities are required to analyse and decide each dispute independently which would be based on the terms and conditions of the contract, the intent of the parties and the steps taken to mitigate.  Amidst the ongoing crisis the Government of India has also taken measures to protect the interest of the parties in the commercial contracts.  Currently, the Ministry of Finance, on 19.02.2020 by the way of an Office Memorandum (O.M. No 18/4/2020), had clarified that the disruption of supply chain due to the spread of corona virus in China or any other country should be considered as a case of ‘natural calamity’ and the ‘force majeure’ clause can be invoked by following the due procedure whenever considered appropriate.[11] Likewise, the Ministry of New & Renewable Energy with respect to ‘Solar Project Developers’ had issued an Office Memorandum (O.M. No 183/18/2020) dated 20.03.2020 stating that whoever misses the contractual obligation due to Covid-19 can invoke the force majeure clause to get rid of the financial consequences[12]. Nevertheless, such elucidation has been given only regarding the disruption of supply chain and the invocation of the force majeure clause can be enforced only on a case to case basis depending upon the contract entered by the parties.

COVID AND INSURANCE CONTRACTS:

The ongoing pandemic had not only affected the commercial contracts but also insurance contracts in numerous ways.  The immediate concern for insurers is the protection of employees, its distribution partners’ health and safety along with business continuity.  Due to such situation the insurers are challenged on multiple fronts- as capital managers, claim payers and employers.  Owing to the wide spread pandemic which primarily stands as a great threat to the health of the individuals, the health and life insurance companies are also facing various challenges. The Insurance Regulatory and Development Authority of India (IRDA) has issued various guidelines for all kinds of insurance sectors in which the insurers were advised to come up with appropriate products that would provide protection from risks arising out of this pandemic[13].

As per the press release from the Life Insurance Council, the force majeure clause will not be applicable in the case of Covid 19 death claim[14].  Perusal of an LIC policy has brought out the fact that the life insurance policy contains a force majeure clause in it.  The said clause reads as follows:

In the event where the Corporation’s performance or any other obligations are prevented or hindered as a consequence of any act of God or state, strike, lock-out, legislation or restriction by any government or any other statutory authority or any other circumstances that lie beyond the corporations anticipation or control, the performance of this policy shall be wholly or partially suspended during the continuance of such force majeure.  The corporation shall resume its obligations towards the policy as soon as the force majeure event ceases….[15]

The above clause of the LIC policy clarifies the doubt that the corporation does not obviate from its obligation of settling the claims of the policyholder in case of risk due to the pandemic like Covid-19, which is certainly an act of God.  The clause safeguards the corporation only from the consequences that may arise due to suspension of performance committed in the policy document during the continuance of the force majeure.  For example, in case if the corporation fails to settle the insurance claim of the insured within the stipulated time limit as committed in the policy due to situations like complete lockdown causing non-availability of officials to process the claim documents, the aggrieved person cannot sue the corporation citing breach of contract.

CONCLUSION:

Indeed, worldwide this Covid-19 pandemic has taught the importance offorce majeure clause in commercial contracts, as the magnitude of loss the parties involved in a contract would suffer is phenomenal, especially the executant of the contract, rather than the beneficiary, due to the incapacitation caused on the anvil of various measures taken by the governments and various other factors like complete lockdown, reduction in workforce in the name of social distancing, non-availability of contract employees due to migration etc.  In the ensuing days, dependence of trade and industry on the legal fraternity would surge as having a most meticulously drafted commercial contract, keeping in mind the situations like the one what we are witnessing today, is need of the hour.


[1] Bryan A. Garner, Black’s Law Dictionary 657 (7th ed. 1999).

[2] A.H Puelinckx, Frustration, Hardship, Force Majeure, Imprévision, Wegfall Der Geschäftsgrundlage, Unmöglichkeit, Changed Circumstances 3 J.Int’l Arb. 1986, No. 2, at 47, 50 et seq, (1986).

[3] Indian Contract Act, 1872, No 9, Acts of Parliament, 1872 (India).

[4] Energy watchdog & Ors v Central Electricity Regulatory Commission & Ors (2017) 14 S.C.C 80 (India).

[5] Indian Contract Act, 1872, No 9, Acts of Parliament, 1872 (India).

[6] Kirpal Das Jivraj Mal v Manager, Encumbered Estates, A.I.R 1936 Sind 36 (India).

[7] Durga Devi Bhagat v J B Advani, (1970) 76 Cal W N 528 (India).

[8] Taylor v Caldwell, (1863) 3 B&S 826, Court of Queen’s Bench (UK).

[9] Krell v Henry, (1903) 2 KB 740, Court of Appeal (England & Wales).

[10] Halliburton Offshore Services Inc. vs Vedanta Limited and Anr, (2020) O.M.P. (I) (COMM) 88/2020 & I.A. 3697/2020 (India).

[11] Office Memorandum No. F18/4/2020-PPD, Ministry of Finance, Govt of India (Feb. 19, 2020), https://doe.gov.in/sites/default/files/Force%20Majeure%20Clause%20-FMC.pdf.

[12] Office Memorandum No. 283/18/2020-GRID SOLAR, Ministry of New & Renewable Energy (MNRE), Govt of India (Mar. 20, 2020), https://mnre.gov.in/img/documents/uploads/file_f-1584701308078.pdf.

[13] Circular No. IRDAI/INSP/CIR/MISC/077/03/2020, Insurance Regulatory and Development Authority of India, (Mar. 30, 2020), https://www.irdai.gov.in/ADMINCMS/cms/whatsNew_Layout.aspx?page=PageNo4081&flag=1.

[14] Navneet Dubey, Force majeure clause won’t apply to coronavirus death claims in life insurance policies, Economic Times (Apr. 7, 2020), https://economictimes.indiatimes.com/wealth/insure/life-insurance/force-majeure-clause-wont-apply-to-coronavirus-death-claims-in-life-insurance-policies/articleshow/75004294.cms?from=mdr.

[15] Life Insurance Corporation of India Single Premium Endowment Plan (UIN: 512N283V02) 11 (Feb. 1, 2020), https://www.licindia.in/Products/Insurance-Plan/benefits.

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Author

Naga Swetha
Student - SASTRA Deemed to be University