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Force majeure and the Indian Contract Act: COVID-19 might open some issues of interpretation


Broadly speaking, a Force Majeure clause excuses the failure of a party to performs its obligations under the contract if there is an unforeseen supervening event that prevents a party from performing its duties under the contract.

Force majeure and the Indian Contract Act: COVID-19 might open some issues of interpretation
It’s a truism that once one enters into a contract, one has to fulfill one’s obligations under the contract. If contractual obligations are not performed, the party to whom the obligations were owed is entitled to compensation. Every party takes a risk that it will be unable to fulfill its contractual obligations and will have to pay for its non performance. Seen from this perspective, contracts are basically allocations of commercial risk between the contracting parties. But parties can inure themselves against risks in a contract through various provisions. One such risk mitigation strategy in contracts is the Force Majeure (FM) clause, which has given rise to much controversy today in the light of the COVID-19 pandemic.
Broadly speaking, a FM clause excuses the failure of a party to performs its obligations under the contract if there is an unforeseen supervening event that prevents a party from performing its duties under the contract. Usually the FM clause will detail the events such that the mitigation of risk under the contract will not apply if the enumerated event is not present. Typical FM clauses will go further and detail the steps through which it must be enforced by the parties. For example, the party enforcing the FM clause must first issue a notice to the other party as soon as the event leading to the FM clause takes place. Another example is that the FM clause might require a validation mechanism. For example, a FM clause relating to government lockdowns must be validated by a formal announcement from the government.
So far we have dealt with the FM clause as a purely contractual issue. But in India we have the Indian Contract Act (ICA), 1872, which also has a specific provision, section 56, that considers situations in which the performance of a contract has become impossible. Section 56 is categorical in nature. It says that a contract to do an impossible act is void. Section 56 is the statutory enactment of a common law rule that was already prevalent in the United Kingdom. The English courts had a peculiar way of dealing with situations where the contracting parties had not accounted for unforeseen events that made performance impossible; they held that such things were implied in the contract. This was a unique English tradition of make believe, designed to keep alive the pretence that all contractual consequences must flow from the contract itself, thus keeping alive the idea that all contractual consequences are entirely self imposed.
A contract that is declared void under the ICA, results in a situation where the law considers that there was no contractual relationship between the parties at all. In such situations, the only knock-on legal consequence is that any advantage given to a party under the erstwhile contract has to be returned. For example, a party that had received an advance under the contract must return the advance. Beyond this, there are no remaining legal obligations for the parties to the contract. A voided contract therefore puts the clock black for contracting parties, and while it might be disappointing that the contract has come to an end, at least the parties are relieved of their liabilities because of their failure to perform their duties under the contract.
This then is the nub of the problem. A contracting party may not be in a position to take advantage of a FM clause in a contract for various reasons. One reason could be that the FM clause does not refer to the events that prevent a party’s performance. For example, the FM clause may not refer to a pandemic and therefore any COVID-19 related frustration of a contractual performance will not excuse a party under the FM clause. Another example could be that the FM clause’s notice and validation requirements have not been complied with. In such cases an interesting question arises: can a party rely on section 56 of the ICA even though the FM clause has not been complied with? The answer to this question lies in the interpretation of section 56.
Section 56 can be interpreted as a straight forward rule of law, regardless of the niceties of the contractual relationship between the parties. Under this interpretation, if there is a supervening event that results in the impossibility of contractual performance, the contract is voided, never mind what the parties envisaged in their contract. However, there is another interpretation available, according to which section 56 is subservient to the actual intentions of the contracting party. If the contract lays out a certain procedure and mechanism for excusing performance in impossible or near impossible situations, then section 56 has to give way and only the FM clause will hold the field. In a recent case, when a hydroelectric project was cancelled because the government developed cold feet after several environmental objections were raised, the issue was who was going to pay for the expenses incurred by one of the contracting parties? Normally, it would be the other contracting party, but not if the contract was declared void under section 56, as a void contract disables contracting parties from seeking damages. However, there was a FM clause under the contract which was not used by the contracting party that pleaded impossibility of performance. The Delhi High court declared that because of the presence of the FM clause, section 56 was not applicable and upheld an appeal from an arbitral tribunal that had held that the expenses incurred by the other contracting party had to be compensated.
The decision of the Delhi High Court is interesting because section 56 is categorical in its terms and does nor appear to be provide any space for contracts to deny its effect. Yet, there is a longstanding tradition in the common law of contract inherited by the Indian judiciary according to which the contractual provisions of the parties are paramount and the ICA exists to provide the scaffolding and not the content to contractual duties. Seen from this perspective, subjecting section 56 to the will of the parties expressed in the contract is the right decision although it is unlikely that the decision would be the last word on the subject.
The author is the Dean, School of Law at BML Munjal University