Author - Sushila Ram
In recent times due to the COVID-19 Pandemic force majeure is an often used term in relation to commercial contracts. Quite simply put force majeure or vis major (Latin) – means "superior force. Generally force majeure is a common clause in contracts that essentially frees both parties from a liability or accountability when an extraordinary event or circumstance beyond the control of the parties, such as a war, riot, strike, pandemic or an event described by the legal term act of God (flood, tsunami, earthquake, volcanic eruption) prevents one or both parties from fulfilling their obligations under the contract.
In practice, most force majeure clauses do not excuse a party's non-performance entirely, but only suspends it for the duration of the force majeure. In such cases the defaulting party cannot take the claim of waiver. As all that is done is extension of time by the aggrieved party.
In recent times, due to the Pandemic, several contracts have been breached due to this force majeure clause. However that is not to say that parties can be absolved from their responsibility only by claiming force majeure condition.
In the first matter of invocation of force majeure since the Pandemic, the Bombay High Court in the matter of “Standard Retail Pvt. Ltd. v. M/s G.S. Global Corp & Ors., Commercial Arbitration Petition (L) No. 404 of 2020” (decided on 08.04.2020) dismissed the petition filed by Steel Importers under section 9 of the Arbitration and Conciliation Act seeking directions to restrain the encashment of letter of credit by Korean Based Steel Exporters.
In the above Petitions the Petitioners were seeking directions restraining the Respondent–Bank from en-cashing the Letters of Credit. It was the case of the Petitioners that in view of the COVID-19 pandemic and the lockdown declared by the Central/State Government, its contracts with Respondent No. 1 were terminated as unenforceable on account of frustration, impossibility and impracticability. The Petitioners had relied upon Section 56 of the Indian Contract Act, 1972.
As per the Contracts the Respondent No. 1 which has its head office at South Korea was to supply certain steel products, the shipments of which were to be dispatched from South Korea, to the Petitioners at Mumbai. The contracts were subject to General Terms and Conditions, Article 11 dealing with force majeure read as follows:
“Article 11. Force Majeure: In the event of an Act of God (including but not limited to floods, earthquake, typhoons, epidemics and other natural calamities), war or armed
conflict or serious threat of the same, government order or regulation, labor dispute or any other similar cause beyond the control of “Seller” or any of its suppliers or sub- contractors which seriously affects the ability of “Seller” or any of its suppliers or sub- contractors to manufacture and deliver the “Goods”, “Seller” may, at its sole discretion and upon written notice to “Buyer” either terminate the Contract or any portion affected thereof by such event(s), or delay performance of the Contract, in whole or in part, for a reasonable period of time. Any such delay of performance by “Seller” shall not preclude “Seller’s” later right to terminate the Contract or any portion affected thereof by such event(s). In no event shall “Seller” be liable to “Buyer” or to any third party for any costs or damages arising indirectly or consequentially from such non-fulfillment of or delay in the performance of all or part of the Contract”
The single Judge Bench of Justice A. A. Sayed of the Bombay High Court declined to accept the Petitions and was of the view that the Petitioners were not entitled to any ad-interim reliefs for the reasons stated herein-below:
“a. The Letters of Credit are an independent transaction with the Bank and the Bank is not concerned with underlying disputes between the Petitioners who are buyers and the Respondent No. 1 who is the seller. b. The Force Majeure clause in the present contracts is applicable only to the Respondent No. 1 and cannot come to the aid of the Petitioners. c. The contract terms are on Cost and Freight basis (CFR) and the Respondent No. 1 has complied with its obligations and performed its part of the contracts and the goods have been already shipped from South Korea.
The fact that the Petitioners would not be able to perform its obligations so far as its own purchasers are concerned and/or it would suffer damages, is not a factor which can be considered and held against the Respondent No. 1. declared as an essential service. There are no restrictions on its movement and all ports and port related activities including the movement of vehicles and manpower, operations of Container Freight Station and warehouses and offices of Custom Houses Agents have also been declared as essential services.”
It further held that the Notification of the Director General of Shipping, Mumbai, states that there would be no container detention charges on import and export shipments during the lockdown period. e. In any event, the lockdown would be for a limited period and the lockdown cannot come to the rescue of the Petitioners so as to withdraw from its contractual obligations with the Respondent No. 1 of making payments.
Therefore, the Court rejected the petition stating that the “force majeure ” clause in the aforesaid contracts is applicable only to the Respondent No. 1 and cannot come to the aid of the Petitioners.
Under both Indian and English law, force majeure does not simply mean anything outside the control of the parties to a contract. Its meaning, and applicability, depends on the particular contract, and the particular wording used. The contractual language must intend to anticipate unforeseen events and provide for what happens on their occurrence. Hence a force majeure clause does not allow a party to get out of contractual obligations. If the clause refers only to performance of obligations being prevented by the relevant event, then a party can rely on the clause if its performance is interrupted, delayed or made difficult. Hence each case of force majeure will depend on the circumstances.
Under Indian law, the doctrine of frustration of contract is an aspect or part of the law of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done.
Frustration will apply when an unforeseen event makes it impossible – through no fault of either party – to perform the contract but the contract has not catered for that. The unforeseen event is so fundamental that it strikes at the root of the contract and far beyond what was contemplated by the parties when they entered the contract. It renders further performance impossible, illegal or makes it radically different from that contemplated by the parties at the time of signing the contract.
When the performance of the contract becomes impossible, the purpose, which the parties have in mind is frustrated. If the performance becomes impossible, because of a supervening event, the promisor is excused from the performance of the contract. This is known as doctrine of frustration under Indian law, and is covered by Section 56 of the Indian Contract Act.
Readers interested in getting a birds eye view of frustration on contracts may also view Effects of Frustration on Youtube called TIL Legal Fundamentals.
Sushila Ram Chief Consultant The Indian Lawyer & Allied Services