Understanding Force Majeure Clause

By Karan Shelke, Advocate at Lex Credence and Samriddhi Singh, Legal Intern at Lex Credence.
August 01 2024

The concept of “pacta sunt servanda”, a Latin phrase meaning “agreements must be kept”, is a sacrosanct principle of contract law. It is not supposed to be easy to escape contractual liability, and proving that events were unforeseeable, for example, is difficult. Human threats like cyber, nuclear, and biological warfare capabilities or natural disasters have raised questions about what is and is not foreseeable in a legal sense. This triple contagion of cyber attacks, nuclear weapons and biological warfare if effervesced together into an acid can corrode the moral metal of humanity. In the event of any catastrophe, force majeure can play an important role in the protection of wealth. However, the force majeure clause conflicts with the concept of pacta sunt servanda as it removes the liability for unforeseeable and unavoidable catastrophes interrupting the expected timeline and preventing participants from fulfilling their contractual obligations.

Understanding Force Majeure Clause

Force majeure is a French word meaning “major force” or “greater (or superior) force.” The concept originated in the civil laws of France – part of the “Napoleonic Code” and has since then become part of common law in most countries across the world.

Force majeure is a clause included in contracts to remove liability for unforeseeable and unavoidable catastrophes that prevent participants from fulfilling obligations. A force majeure clause in a contract specifically spells out the type of events or circumstances that the parties to the contract agree would constitute a force majeure occurrence and trigger the clause into effect. It generally covers natural disasters and catastrophes created by humans. In some jurisdictions, the event must be unforeseeable, external, and irresistible. In 2015, Morocco was fined $1 million for putting off the African Nations Cup football tournament.¹ The Moroccan government invoked the force majeure clause to limit its legal liabilities, citing the Ebola outbreak in West Africa as the reason. The Court of Arbitration ruled that hosting the event had become difficult but not impossible and thus Morocco had to pay the fine. Examples of events that might trigger a force majeure clause into effect include a declaration of war, a disease epidemic, a hurricane, an earthquake, or other natural disaster events that fall under the legal term, “act of God” or “vis major”.

However, the mere occurrence of such events is not sufficient to trigger a force majeure clause. In the case of Re Dharnrajmal Gobindram v. Shamji Kalidas², the Supreme Court of India held that even if a force majeure clause covers the relevant supervening event, the party unable to perform would not have the benefit of the clause where performance merely becomes more difficult, more expensive, and/or less profitable. It must be the case that the catastrophic event directly prevents at least one of the parties to a contract from fulfilling their contractual obligations. Similarly, the Supreme Court of India in the case of Energy Watchdog vs. Central Electricity Regulatory Commission³  said that the force majeure clause will not be applicable in a situation where the party can perform the contract through an alternative mode. ‘Alternative means of performance’ refer to the ability of a party to fulfil their contractual obligations through different methods or avenues than initially specified, often to address the impact of a force majeure event or other unforeseen disruptions. This concept allows for flexibility and adaptability in maintaining contractual relationships despite challenges. For example, if a supplier is unable to deliver goods to a specific location due to a natural disaster, they might arrange for delivery to an alternative location that is accessible to both parties to the contract. The ability to utilize alternative means of performance can help mitigate the adverse effects of disruptions and ensure that the parties can still achieve the overall objectives of the contract. It promotes resilience and problem-solving in contractual relationships, allowing for continuity and minimizing potential losses or disputes.

The Essential Elements of Force Majeure Clause to come into force are:

• An event must be unforeseeable.
• The circumstances must be external to the contract parties.
• The event must be serious enough to render it impossible for the party to perform contractual obligations.

In the case of, Sri Ananda Chandra Behera vs. Chairman, Orissa State Electricity Board ⁴, the Orissa High Court laid down that the contract stands frustrated only when there has been a causal relationship between the force majeure event and the resulting circumstances, for this the immediate and direct cause of the resulting situation shall be assessed.  For example, a contract is established to book a hall for a specific event on a specific date, but the hall is destroyed by accidental fire before the event takes place. This situation would likely be considered frustration, as the event’s purpose cannot be fulfilled, and neither party is at fault.

Force majeure and frustration share a common goal to provide relief when unexpected events prevent contract performance. However, force majeure requires explicit inclusion in the contract and typically specifies the events that qualify, whereas frustration applies more broadly and relies on judicial interpretation to determine if the contract can be discharged. The Supreme Court of India in the case of Satyabrata Ghose vs. Mugneeram Bangur & Co⁵. determined the meaning of the word “impossible” stating that for performance to be impossible, it is not necessary that the performance should be literally or physically impossible. Even if the occurrence of the event disturbs the very foundation of the contract rendering the object or the purpose of the contract useless, the performance will be deemed to have become impossible. Similarly in the case of Naihati Jute Mills Ltd. vs. Hyaliram Jagannath,⁶ the Supreme Court of India laid down that a contract will not be said to have been frustrated merely on the grounds that the circumstances that existed while the contract was formed are now altered or there has been a turn of events.

Abuse of Force Majeure Clauses

While force majeure clauses provide necessary protection for parties facing unforeseen and uncontrollable events, there is a growing concern about their potential abuse. Some parties might invoke force majeure in situations where it is not applicable, using it as an excuse to avoid fulfilling their contractual obligations. For example, during the COVID-19 pandemic, there were instances where businesses attempted to declare force majeure for financial difficulties rather than actual impossibility to perform. This misuse can lead to disputes and legal challenges, as the affected parties may contest the validity of the force majeure claim.