The forgotten Force Majeure clause and its relevance today under Indian and English Law

In view of the COVID-19 pandemic, the much forgotten Force Majeure clause will now come under great scrutiny, especially in relation to commercial contracts.

The term ‘Force Majeure’ appeared in the common law world in the 1900s and was borrowed from the Napoleonic Code (see Lebeaupin v Crispin [1920] 2KB 714), although its origins can be traced back to Roman law.

Roman law recognized that the principle of sanctity of contract can be tempered by a competing principle ‘clausula rebus sic stantibus’, which means obligations under a contract are binding only as long as matters remain the same as they were at the time of entering into the contract.

Under Indian law, one of the first decisions to deal with the concept of force majeure was the Madras High Court decision in Edmund Bendit And Anr. vs Edgar Raphael Prudhomme. In this case, the Court cited with approval the passage from Matsoukis v. Priestman and Co, wherein the definition given by an eminent Belgian lawyer of force majeure as meaning "causes you cannot prevent and for which you are not responsible", was adopted.

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. It is contractual language intended to anticipate unforeseen events and provide for what happens on their occurrence [Chitty on contracts, Volume I, (31st Edition), Sweet & Maxwell].

Force majeure clauses vary. They can be specific (a list of specific events that are treated as being force majeure, such as fire, flood, war or similar) or general (referring simply to events outside the reasonable control of a party to the contract), or a combination of both.

The test for seeking to rely on a force majeure clause is:

The event that gave rise to a party's non-performance under the contract falls within the definition of force majeure in the contract [Lebeaupin], that is, the event is covered by the force majeure clause, and the non-performance was caused by the relevant event [Edmund Bendit].

• The event and the non-performance were due to circumstances beyond a party's control [see Dhanrajamal Gobindram v. Shamji Kalidas & Co]. Therefore, force majeure will not include economic problems like insufficient funds [see The Concadoro [1916] 2 AC 199].

• There were no reasonable steps that could have been taken to avoid or mitigate the event or its consequences.[Mamidoil - Jetoil Greek Petroleum Company SA Moil - Coal Trading Company Limited vs. Okta Crude Oil Refinery]

The party seeking to rely on the clause may also need to show it was not aware, at the time of entering the contract, that the circumstances giving rise to the event of force majeure was likely to occur.

For example, now that the COVID-19 pandemic has started, if parties enter into a contract after this point and then have problems performing as a result, they may not be able to rely on force majeure unless the contract specifically covers COVID-19 and its consequences, and provides for what happens if it affects performance of the contract.

Equally, parties entering into fresh contracts since the outbreak should be using COVID-19 force majeure clauses and seeking advice from the lawyers on their drafting.

If the clause refers only to performance of obligations being prevented by the relevant event, then a party may not be able to rely on the clause if its performance has been made more difficult or delayed, but not completely prevented (in other words, it can still perform, but it is more difficult to do so and/or it cannot perform as expected).

Note that in these situations, and others where force majeure may or may not apply, the non-performing party might also consider relying on the doctrine of frustration (a creature of English common law and pursuant to Section 56 of the Indian Contract Act).

However, in Energy Watchdog v. Central Electricity Regulatory Commission and Others, RF Nariman J, having found that force majeure does not get invoked in the facts of the case, cautioned that

“...once held that clause 12.4 applies as a result of which rise in the price of fuel cannot be regarded as a force majeure event contractually, it is difficult to appreciate a submission that in the alternative Section 56 will apply”.

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 and, hence, comes within the purview of S. 56 of the Indian Contract Act.

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.

The legal effect of a finding that a contract is frustrated is that all parties are discharged from their obligations. It is a high threshold, but in current circumstances, the English and Indian courts might be more open to frustration arguments.

However, a decision from Hong Kong indicates that it may not be that straightforward. In Li Ching Wing v Xuan Yi Xiong, popularly known as the “SARS” case, the court found that a 10-day isolation order by the department of health did not allow a tenant who had taken premises for a two year period to terminate the tenancy agreement by arguing that it had been frustrated by the unexpected outbreak of such a deadly virus.

However, each case will depend on the facts. The scenario would have possibly been different if the tenancy agreement was for a period of 6 months and the isolation order for 3 months.

The fact that it is more expensive to perform will also not normally entitle reliance on the force majeure clause (so a rise in underlying costs or expense will not normally be treated as a force majeure event). The fact that it is more inconvenient and/or more difficult to perform will also not normally entitle reliance on the clause.

If the difficulty was due to circumstances outside a party's control and was so great that no reasonable person in similar circumstances would be likely to overcome it, then that might be an exception.

This is linked into the fact that, in all cases, in order to rely on a force majeure clause, a party will have to be able to show that it has taken all reasonable steps to overcome or mitigate the problem. If there are steps that it can reasonably take (e.g. hiring temporary staff, invoking backups, spending some money), then it will need to have done it before it tries to rely on the force majeure clause.

Ordinarily, the failure of a third party in the supply chain (such as a sub-contractor) to comply with the contract to which they are a party will not be treated as an event of force majeure unless that situation is specifically contemplated in the force majeure clause.

Finally, a right of termination due to force majeure is not automatic; in accordance with the general principles in this area, it depends on what the clause says (some have delay to performance followed by termination after a period for example).

Laurence Lieberman is a partner in the Disputes and Investigations team at Taylor Wessing LLP, UK. Abhimanyu Bhandari is an advocate practicing in Delhi and an Associate Member of 4 Pump Court Chambers, UK.