Force Majeure Clauses and its treatment in Arbitration

Written by Gaurav Rai[1]

Edited by Justice A.K. Patnaik[2]


A. Introduction


Force Majeure is a French word which means Superior Force. It is broader than its latin counterpart Vis Major which means Act of God. Ideally clauses in the contracts dealing with the consequences on the happening of a contingency should be called contingent clauses and that is how they are treated under Section 32 of the Indian Contract Act. The Indian Contract Act, 1872 does not provide for the modalities and intricacies of such clauses but, Section 32, only recognizes the right of the parties to make such clauses in their contracts.


B. Legal Position


As a way of general commercial practice, the scope of Force Majeure Clauses is defined in the contract itself. For eg., Force Majeure Clause may state that “all such events beyond the reasonable control of the parties which hinder the performance of the contract will be Force Majeure”. Such clauses are not only broad to the extent that they include all events which traditionally would not fit within the definition of Force Majeure but may also have a lower threshold for invocation. In many cases, a mere “hindrance” may be enough to invoke a Force Majeure Clause as compared to the requirement of impossibility under the second limb of Section 56 of the Indian Contract Act, 1872 for the contract to become frustrated due to a supervening impossibility. Hence it is to be noted that if a Force Majeure Clause exists in the contract, the language of the Force Majeure Clause in the contract becomes extremely relevant to govern the invocation and the consequential relief from the same.


Frustration of contracts is dealt with in the second limb of Section 56 of the Indian Contract Act, 1872. It states that all contracts become void if the performance of the contract becomes impossible after the contract has been entered into and such impossibility was not foreseen at the time of making the contract. This paragraph of Section 56 is generally referred to as the contract becoming frustrated due to ‘supervening impossibility’. There need not be any clause in the contract between the parties for a contract to become void under this Section 56 of the Indian Contract Act, 1872. If this section of the Act is attracted, in the absence of the Force Majeure Clause in the contract between the parties, the contract becomes void and the parties will not be required to perform their obligations under the contract any longer.


However, the parties will be able to get payment for any work already done under the contract by invoking Section 65 of the Indian Contract Act, 1872. The second limb of Section 56 of the Indian Contract Act, 1872 however, will not be attracted if the contract has a Force Majeure Clause and particular event which is causing the delay in performance of the obligations of the parties under the contract is covered under this Force Majeure Clause of the contract. In a situation where the unforeseen event is not covered by the Force Majeure Clause of the contract, it may be a frustration of the contract under the second limb of Section 56 of the Contract Act. The seminal judgment on the interpretation of second limb/paragraph of Section 56 of the Indian Contract Act, 1872 is the case of Satyabrata Ghose v. Mugneeram Bangur AIR 1954 SC 44.[3] In this case, the Supreme Court has held that:


“The second paragraph enunciates the law relating to discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done. The wording of this paragraph is quite general, and though the illustrations attached to it are not at all happy, they cannot derogate from the general words used in the enactment. This much is clear that the word "impossible" has not been used here in the sense of physical or literal impossibility. The performance of an act may not be literally impossible but it may be impracticable and unless from the point of view of the object and purpose which the parties had in view; and if an untoward event or change of circumstances totally upsets the very foundation upon which the parties rested their bargain, it can very well be said that the promisor finds it impossible to do the act which he promised to do.”

………

In cases, therefore, where the Court gathers as a matter of construction that the contract itself contained impliedly or expressly a term, according to which it would stand discharged on the happening of certain circumstances the dissolution of the contract would take place under the terms of the contract itself and such cases would be outside the purview of Section 56 altogether. Although in English law these cases are treated as cases of frustration in India they would be dealt with under, Section 32 of the Indian Contract Act which deals with contingent contracts or similar other provisions contained in the Act.[4]


(Emphasis supplied)


Most recently in the case of Energy Watchdog v. Central Electricity Regulatory Commission, (2017) 14 SCC 80 [5] the aforesaid position is affirmed, and it was held therein:


32. "Force Majeure" is governed by the Indian Contract Act, 1872. In so far as it is relatable to an express or implied Clause in a contract, such as the PPAs before us, it is governed by Chapter III dealing with the contingent contracts, and more particularly, Section 32 thereof.


This case has summarized and analysed many previous cases and discussed the issues connected with Force Majeure Clauses of the contract and Section 56 of the Indian Contract Act, 1872 and is a good reference point.


A fundamental difference between Force Majeure Clauses and the second limb of Section 56 of the Indian Contract Act, 1872 is that Force Majeure Clauses in contracts are generally drafted in such a manner as to keep the contract alive. These clauses mostly provide consequences which aim at the contract surviving the contingent event and the parties not being in violation of deadlines under the contract. They give the parties some relief such as extending the time period of performance, sharing of costs of extended time period, delay in payment etc. These clauses anticipate that the Force Majeure event will only last for a particular amount of time and hence the parties intend to continue the contract after the Force Majeure period subsides. However, such clauses generally also provide that if the Force Majeure period extends beyond a particular time period, say 90 days, then contract will become frustrated.


Hence, it can be concluded from the aforesaid discussion that, if there is no Force Majeure Clause in the contract between the parties, the parties can only get relief under Section 56 of the Indian Contract Act, 1872 that too if they pass the threshold of impossibility as laid down in the Act and as interpreted by the Supreme Court in Satyabrata Ghose v. Mugneeram Bangur. However, if there is an express Force Majeure Clause in the contract between the parties which outlines certain events as contingencies and also provides the consequences on the occurrence of such events then the parties will be governed by the express terms of the Force Majeure Clause of the contract. Further, the threshold for invoking the same will have to be passed as per the terms of the contract and the parties will only get the benefits or remedies as outlined under the contract. Any relief under Section 56 of the Indian Contract Act,1872 cannot be invoked in such circumstances.


C. Practical Analysis


Commercial contracts in India generally have Force Majeure Clauses wherein they define contingencies under which certain protections or consequences follow on the happening of such contingencies. Any vague Force Majeure Clauses, however, cannot be enforced in the Court of Law. The rights of the parties in these contingencies have to be specifically provided under the contract. Some examples of contingencies, may be war, epidemic, riots, act of God such as tsunami, earthquake or hurricane. On the happening of these contingencies the parties may decide the consequences, eg. extension of time period for performance of contract, sharing of increased cost due to delay in performance of the contract, right to terminate the contract without being in breach of the same due to prolonged time of existence of Force Majeure conditions etc.


In my experience in assisting the Presiding Arbitrator, I have come across 3 cases wherein the arbitral Tribunal accepted that the Force Majeure Clause of the contract was attracted in the facts of the case and as per the terms of the contract and held that the parties were to be governed by the consequences as stated in the clause. The issue of Force Majeure as discussed in these cases are broadly stated hereunder:


a. In a road construction case, a particular stretch of land which was handed over to the construction company to develop could not be utilised as the District Collector had disallowed cutting of trees in the particular stretch. The order of the District Collector was passed pursuant to the Orders of the Supreme Court of India, wherein the Supreme Court had protected the trees and disallowed their cutting until further orders. The construction company waited for some time for the orders to be reversed, but when the orders were not reversed, the Employer delinked the particular stretch from the scope of the work. The construction company claimed that it was entitled to idling charges for its labour and machinery deployed at the site for the period it was not able to work on the stretch until the delinking of the stretch. The Employer however took the defence that this contingency fell under Non-Political Force Majeure Event, which could not have been reasonably avoided by the Employer and because of which the parties were to bear their own cost during the subsistence of the orders passed by the Supreme Court and the District Collector. The argument of the Employer was accepted based on the terms of the agreement and the facts of the case and consequently the parties were to be governed by the terms of the Non-Political Force Majeure Event wherein it was stated that the parties will bear their own cost during the subsistence of the contingent event. The construction company lost this particular claim in the arbitration.


b. In a contract for supply and installation of transformers, the contractor was unable to procure the transformers from the list of vendors approved by the buyer. All the vendors in the list were either unable to provide the exact specification of transformers as sought by the buyer or were unable to manufacture the transformer in the required time period as they had heavy backlog of orders. Major delay was caused in supply and installation of the transformers for which liquidated damages had been deducted by the buyer from the price of the contract. In arbitration, it was found that the Force Majeure Clause in the contract between the parties was very wide. It characterised every instance which was beyond the control of the parties and which caused delay in performance of the obligations of the parties as a Force Majeure Event. Further, the Force Majeure Clause also gave certain examples of such events and stated that the same were not exhaustive. Looking at the circumstances that none of the buyer’s approved vendors were in a position to supply the transformers to the contractor within the time period as prescribed in the contract, which the contractor could then install, the arbitral Tribunal held that the same amounted to a Force Majeure Event and the contractor must be given extension of time for performance of the contract as per the terms of the Force Majeure Clause. Further, liquidated damages deducted by the buyer on an incorrect interpretation of the contract was asked to be paid to contractor. However, the parties were not held to be liable for any increased cost due to the Force Majeure event because the terms of the contract specifically denied such a right to the parties.


c. A telecom service provider company had a contract with a tower installation company. The contract had a defined lock—in period which, if broken, would entitle the tower company an exit price from the telecom service provider for premature exit from the contract. The telecom license of the company was cancelled by the Hon’ble Supreme Court in the 2G case based on which the telecom service provider terminated its contract with the tower installation company. The tower installation company sued for a premature Exit Amount from the contract as per the terms of the contract. The Force Majeure Clause in the contract defined Force Majeure as an act or event affecting the performance by a party of its obligations from events beyond its reasonable control including several factors and specifically order or directive of any court or competent Government Authority in India. The clause however also stated that the party whose performance is affected has to take all steps (if any) which it could reasonably be expected to have taken in order to prevent such act or event occurring. Further, the contract also stated that the Exit Amount was payable only if the termination was voluntary. The telecom service provider argued that the termination was not a voluntary termination rather an involuntary termination as their licenses had been cancelled by the Hon’ble Supreme Court of India and no foul play could have been attributed to the service provider in the license being cancelled. The telecom service provider had taken all the steps to fight the case so that their licenses are not cancelled but the same was not within their hands as the telecom licenses were cancelled for reasons beyond their control. After a discussion of all the facts and circumstances of the case, the arbitral Tribunal agreed with the reasons given by the telecom service provider and held that the Exit Amount will not be payable as the termination was an involuntary one based on the Force Majeure Clause.


D. Conclusion


The author hopes that the aforesaid examples will give the readers an insight into treatment of Force Majeure Clauses in arbitration and can be kept in mind by drafters of commercial contracts and by arbitration practitioners. The language of the Force Majeure Clause becomes extremely relevant in its treatment. It is suggested that Force Majeure Clauses should be specific in the events which would entitle the parties to claim protection from being in breach of the contract but it should also be made clear in the clause that if the Force Majeure Event extends beyond a particular time then it would give the parties the right to terminate the contract without any negative consequences for any actions during the Force Majeure Period. Such a clause creates a balance and would be beneficial for all the parties to the contract.

[1] Gaurav Rai has completed his BBA.LLB(Hons.) from National Law University Odisha in 2015 and his Master of Laws (LL.M) from University College London in 2016. He is an Advocate registered with the Bar Council of Delhi and has been working in the office of Justice A.K. Patnaik, Former Judge, Supreme Court of India as a Legal Assistant. His primary focus is on arbitration and he assists Justice Patnaik in his duties as an arbitrator. He can be contacted at raigaurav.legal@gmail.com [2] Justice A.K. Patnaik is a Former Judge of the Supreme Court of India. Since his retirement in 2014 he is actively working as an arbitrator dealing with Domestic, International Commercial and Foreign Seated Arbitrations. [3] Satyabrata Ghose v. Mugneeram Bangur and Company & Ors. AIR 1954 SC 44 [4] Satyabrata Ghose v. Mugneeram Bangur and Company & Ors. AIR 1954 SC 44 [5] Energy Watchdog v. Central Electricity Regulatory Commission (2017) 14 SCC 80

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