This post has been written by Shivangi Khattar pursuing 2nd Year BBA LLB from JIMS Schools of Law, IP University 

INTRODUCTION

Force majeure clause is a clause which is generally provided in Contact Acts and in Insurance Policies Acts, as sometimes a situation may arise due to which the parties were not able to perform their respective duties. So, this provision allocates the risk of non-performance of their contractual obligation in those cases where the circumstances are beyond the parties’ control. These circumstances may include an Act of God or any other uncertain event (COVID-19) which makes it impossible to fulfill the contractual obligation. Therefore, the parties can be relieved for non-performance only if they have mentioned force majeure clause in their contract.

Nowadays, due to the corona-virus and other events such as cyclones, earthquakes etc, the supply chains are being significantly disrupted, and business rights and obligations under contracts are coming into sharp focus.

Hence, a question that is being frequently arising is that whether a force majeure clause excuses parties from performing their obligations or from doing so on time? The answer to this question is that, the parties can be excused or not will depend on the wordings used in the clause, the allocation of risk between the parties provided for the contract as a whole, the circumstances in which the parties have entered into the contract, and the situation that has arisen.

During the global pandemic a change in the use of Force Majeure clause was seen in Life Insurance Companies. These companies took a step-in order to help their customers in their most difficult times, by saying that the Force Majeure clause won’t be applied in cases of COVID-19 death claims.

FORCE MAJEURE

Force Majeure or Act of God is recognized as a valid defense for the purpose of liability under the rule of Strict Liability[1]. it is kind of an inevitable accident with a difference that in case of Act of God, the resulting loss arises out of the working of natural forces such as exceptionally heavy rainfall, storms, tempests, tides, volcanic eruptions etc.

The Act of God has been explained in Halsbury’s Laws of England as under[2]:

“ An Act of God , in legal sense, may be defined as an extraordinary occurrence of circumstances, which could not have been foreseen and which could not have been guarded against, or, more accurately, as an accident due to a natural cause, directly and exclusively, without human intervention, and which could not have been avoided by any amount of foresight and pains and care reasonably to be expected of the person sought to be made liable for it, or who seeks to excuse himself on the ground of it. The occurrence need not to be unique, nor need it be one that happens for the first time, it is enough that it is extraordinary, and such as could not reasonably be anticipated, and it must not arise from the act of man.”

Two important essentials that are required for this defense are:

  • There must be working of natural forces[3]
  • The occurrence must be extraordinary and not one which could be anticipated and reasonably guarded against[4]
  • In Indian Statutes force majeure has not been defined, but some references were found in Section 32 of the Indian Contract Act, 1872 which lays down that if a contract is contingent on the happening of an event and because of that event , it is impossible to perform the contract, then such contact will become void. Therefore, a clause of force majeure in a contract provides temporary reprieve to a party from performing its obligation under a contract upon occurrence of an uncertain event or a force majeure event.  This clause will be applicable only if the parties have provided this provision in their contracts.

[1] Ryland v Fletcher (1868)

[2] R.K. Bangia, Vol.8, 3rd ed, P.183

[3] Ramalinga Nadar v Narayan Reddiar, A.I.R (1971)

[4] Nichols v Marsland (1876)

IMPORTANCE OF FORCE MAJEURE CLAUSE

The Force Majeure clause is usually found in contracts such as power purchase agreements, supply contracts, manufacturing contracts, distribution agreements, project finance agreements, home buyers, agreements between real estate developers etc.

It is possible that after the parties made the contract an uncertain event may took place due to which the parties were not able to fulfill their contractual obligations. In such situations Force Majeure clause plays a very essential role as it relieves the parties from performing their obligations. They can be excused or not will depend on the language that is being used in the Force Majeure clause, but it is not enough for the parties to show that due to an Act of God or any uncertain event made it very difficult to fulfill their duties. Therefore, to invoke the provision of Force Majeure, the parties must show that performance of the contractual obligation has been prevented by that event.

Hence, taking precautionary measures or taking voluntary decisions not to perform is not the same as being prevented from performance.

WHAT HAPPENS IF A CONTRACT DOES NOT INCLUDE FORCE MAJEURE CLAUSE?

If a contract does not include the provision of Force Majeure Clause, then the parties who are affected, have to look for other provisions of the contract in order to find out potential routes out of their difficulties. If the contract does not provide any such route, then in certain circumstances the parties have to rely on the Doctrine of Frustration of contact which is provided under Section 56 of the Indian Contract Act,1872. According to this section an agreement to do an act impossible in itself is void.

The courts in India have held that the word “impossibility” used under Section 56 of the Contract Act must be interpreted in a practical form and not in a literal sense.

Thus, a contract would come under the purview of Section 56 of Indian Contract Act,1872 even if it is not an absolute impossibility, but the contracts have fundamentally changed, which the parties were not able to foresee at the time of making the contract.

MEANING OF FORCE MAJEURE CLAUSE IN LIFE INSURANCE

The first thing which is very essential to understand is that Life Insurance is a contract between the policyholder and the Life Insurance Company. In this contract, the obligation of the policyholder is to pay the premium regularly, on the other hand the obligation of the Life Insurance Company is to honor the claim.

According to Insurance Regulatory and Development Authority of India (IRDAI) the Force Majeure Clause is defined as “an event where company’s performance or any other obligations are being prevented or hindered as a consequence of any act of God or State, strike, lock out , legislation or restriction by any government or any other statutory authority or any other circumstances that are beyond the company’s anticipation or control, then the performance of the policy shall be wholly or partially be suspended during the continuance of such Force Majeure.  The company shall resume its obligations towards the Policy as soon as Force Majeure event ceases.”

Therefore, from the above definition it clear that Life Insurance Company may breach a contract and may not pay the claim amount if an event occurs which cannot be anticipated or prevented by the Company.

IMPACT OF COVID-19 ON FORCE MAJEURE CLAUSE

The COVID-19 has affected cross- border trade, real estate markets, especially the developers, the home buyers, commercial lease agreements, joint venture agreements etc.

It has also impacted the parties ability to perform their contractual obligations due to the restrictions in the movement, shortage of production, increase in costs due to scarcity of raw materials, shortage of labor, shortage of funds, disruption in supply chain etc. Due to this some companies have already declared and some will likely to declare the Force Majeure clause.

Therefore, as there is widespread disruption in business, manufacturing and transport due to COVID-19, a stage will come in India where a flood of Force Majeure clause invocations will be seen. It is also expected that more and more of Indian Companies may invoke this provision in their contracts.

In such events the courts and arbitrators will evaluate and decide each dispute on individual merits, which would be based on the terms of the contract, the intent of the parties and the steps taken to mitigate.  The courts also have to ascertain that whether the contract has become impossible to perform or whether the doctrine of frustration would be applicable to such contract.

APPLICATION OF FORCE MAJEURE IN LIFE INSURANCE POLICIES     

During the global Pandemic, it was announced by the Life Insurance Council of India that the “Force Majeure” clause will not be applied in any of the COVID-19 death claims. Moreover, the Secretary General of Life Insurance Council said that, “the spiraling global and local impact of COVID-19 pandemic has emphasized the fundamental need for life insurance in every household. So, the Life Insurance is taking every measure to ensure that the disruption caused to policyholders, due to the lock-down is minimal, by providing the uninterrupted support digitally, be it for honoring death claims related to COVID-19 or for serving their policy. We reiterate that all Life Insurance companies stand by their customers in these difficult times and the customers should not be swayed by misinformation or misrepresentation.”[1] Apart from this, the Insurance Regulatory and Development Authority of India has also provided additional grace period of 30 days for the payment of premium in case of Health Insurance policies.

CONCLUSION

The Force Majeure Clause is considered as an essential clause because it allocates the risk of non-performance of the contractual obligations by the parties when the circumstances are beyond their control. Whether the parties will be excused on not will depend on the wordings of the clause, allocation of risk between the parties and the circumstances when these parties entered into the contract.  If there is no Force Majeure clause, then the parties may rely on Doctrine of Frustration of contract. During the Global Pandemic a change was seen in the application of Force Majeure Clause in Life Insurance policies. The Life Insurance Council said that the Force Majeure Clause will not be applied in any of the death claims of the COVID-19. Apart from this, some other measures were taken by the council in order to help the policyholders during their most difficult times. However, as the corona-virus pandemic is also creating lots of challenges and disrupting contractual relationships, the parties should be ready to invoke and defend against the Force Majeure Clause and related doctrines that may operate to excuse the performance.

[1]https://economictimes.indiatimes.com/wealth/insure/life-insurance/force-majeure-clause-wont-apply-to-coronavirus-death-claims-in-life-insurance-policies/articleshow/75004294.cms?from=mdr

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