This piece is part of the series intended for business leaders, providing them working knowledge of various business laws. By its very nature, it is neither comprehensive nor is it supposed to replace the guidance of a law expert. Read more about this series.
In the wake of current coronavirus pandemic and consequent helplessness, a lot of people sought the protection of the concept of force majeure. Many tried to do so even though there was no such clause in their Agreement.
The Delhi High Court, in their judgment dated 21st May 2020, in the case of Ramanand & Ors Vs. Dr. Girish Soni & Anr, interpreted and expounded the law relating to force majeure clause, specifically in a contract of tenancy, and its effect on the performance of the contract. They also dealt with the law relating to frustration of the contract. In the absence of a force majeure clause in the lease agreement, covering such a situation, they dismissed the request of the tenant for waiver of rent.
Since force majeure is a term being thrown about a lot these days, it is perhaps wise to understand what it is. Simply put, force majeure means Superior Power. And what is a force majeure event? It is an event that occurs because of a Superior power, beyond the control of the parties, and it prevents one or both of the Parties from performing their contractual obligations.
An even simpler explanation, though not a complete one, is that it is an act of God or the State (Government). In Indian vernacular, it means aasmani ya sultani.
A force majeure event clause in an Agreement absolves a party affected by such an event from performing his or her part of the agreement. However, the event has to fall strictly in the definition of force majeure event as provided for in the Agreement. A force majeure event clause gets the statutory support of section 32 of the Indian Contract Act. The said section 32 provides for Agreements which are dependent on some contingencies.
There are some clear cut rules for the interpretation and invocation of a force majeure clause:
- The clause is viewed strictly, and simple commercial difficulty of performance is not sufficient cause to seek invocation of the clause as a defence.
- The event in question should either be specifically mentioned in the clause, or could reasonably be deemed to be included in some general expression therein. Of course, if a party is depending on the protection of a general clause, it is likely to lead to litigation.
- Performance cannot be excused because the contract has become commercially more burdensome.
- If the clause requires a particular notice of the event to be given to the other Party, it should be so given in the manner provided in the clause.
- The obligation sought to be avoided should not be in the list of exceptions specified in the clause. (Quite frequently, payment obligations are excluded from the purview of the clause).
Now, the case mentioned at the start was one of tenancy. There was no force majeure clause in the Lease/License Agreement. Since this was the case, the Court rightly rejected the request for a waiver of rent for the lockdown period. The Hon’ble High Court also examined the issue from the perspective of section 56 of the Indian Contract Act. This section provides for frustration of the contract – when the performance of the contract becomes impossible. The Court compared and contrasted the situation envisaged in section 56 and the situations covered by force majeure clauses.
Section 56 of the Indian Contract Act absolves the Parties to the Contract from performing the contract if the performance has become impossible (not merely difficult). Such impossibility should not arise out of act or omission of the Party seeking the cancellation of the contract. To repeat, it should be noted that just because it is more burdensome to discharge one’s obligation, there is no relief. Such impossibility should also not arise out of an act or omission of the Party itself, which is seeking to get the contract declared frustrated. Nobody can be permitted to take advantage of one’s own default. On the other hand, impossibility does not mean literal impossibility.
While section 56 of the Contract can be invoked even though there is no mention of it in the Agreement, the benefit of a force majeure clause can be availed only if it is specifically mentioned in the Agreement. Therefore, if an agreement is to run for a significant duration and/or is critical to either party, it is desirable that it should have a well-drafted comprehensive force majeure clause. Ideally, such a clause should provide for the procedure to be followed to invoke the force majeure clause or to seek relief on that account. It should also provide for exceptions (for example, payment obligations and especially payment obligations in arrears, i.e. pertaining to a period prior to the force majeure event).
If you are one of the parties, then depending on your needs, you can even agree that a force majeure event shall only defer the obligations and not cause an outright cancelation of the contract. You can even make deferment and cancelation depend on your choice, to be made at the time of occurrence of the event. It all depends as to how critical the project is to you.