ARADHANA BHANSALI, AARTI JUMANI and MANASI PADWALKAR discuss important legal aspects for contractors to consider on the clause.
With the COVID-19 global pandemic causing a knee-jerk stoppage of almost all economic and commercial activities except those covered under essential supplies, even non-legal professionals have got used to hearing the term ‘Force Majeure’ (FM).
The purpose of a FM clause is to relieve parties from performing their contractual obligations when certain circumstances beyond their control arise, making performance impracticable, illegal or impossible, and thereby saving them from penalties and court battles. FM is governed by the Indian Contract Act 1872 (ICA) in so far as it is relatable to an express or implied clause in a contract. If the clause appears in a contract, it is governed by ICA, dealing with contingent contracts and, more particularly, Section 32 thereof. If an FM event occurs dehors (out of) the contract, it is dealt with using the rule of positive law under Section 56 of ICA which provides for a contract to do an act which, after the contract is made, becomes impossible or, by reason of some event which the promisor could not prevent, either becomes unlawful or void or becomes impossible as laid down in the famous case law of Satyabrata Ghose Vs. Mugneeram Bangur & Company (1954 AIR 44). Normally, a FM clause will not be construed to apply where the contract provides for an alternative mode of performance, which is clearly and expressly embedded in the contract as was laid down by the Apex Court in Alopi Prasad & Sons Vs. Union of India (1960 SCR (2) 793).
Depending on the terms of the agreement, on account of a FM provision, either an extension may be sought or the performance of a particular obligation may be excused or the agreement may thereafter be terminated. Normally, a notice invoking the FM clause is to be given by the party who is aggrieved by such an event and the period for which the effect of a FM event is expected to continue. In the absence of a specific FM clause, a party may consider an alternative for frustration of contract.
The purpose of a FM clause is to suspend performance in certain situations, mitigate losses, modify milestones, and avoid disputes going to court. It generally specifies the intimation period and waiver or suspension of performance under the agreement to mitigate the damage that may be caused and bearing of losses and, at the option of the party, may also lead to termination of the agreement.
For instance, in a well-defined FM clause in a development agreement for constructing flats, a situation like COVID-19 is considered a FM event and the developer is able to obtain an extension for completion of the project; thus, no penalties will be levied for the entire period of lockdown. Owners will not be able to seek termination of a contract or levy penalties.
Infact, in these trying times and unprecedented situation, the Government of India has taken upon itself to safeguard the interest of various stakeholders in commercial contracts and ministries have issued circulars/office memoranda to grant a reprieve to certain industries. For instance, the Ministry of Finance recently declared that any disruption in supply chains owing to the spread of Coronavirus will be covered in the FM clause in the contract; this may be invoked, wherever considered appropriate, following due procedure. The Ministry of Road Transport and Highways, among other relief measures, has permitted the release of retention money (forming part of the bank guarantee) in proportion to the work completed, based on certain criteria. The government has also advised real-estate regulatory authorities to extend the project completion date by a few months for ongoing projects.
About the authors: Aradhana Bhansali is Partner while Aarti Jumani and Manasi Padwalkar are Associates at Rajani Associates.
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