Force Majeure: Boiler Plate Clause Or Panacea For Polycrisis

Force Majeure, has gained its spot back on the front-page news once again within the same decade due to the ongoing war in West Asia. Last invoked at this scale during the pandemic, Force Majeure is no longer a boiler plate clause, many times overlooked at the time of signing of any contract.

For anyone unaware of the concept of Force Majeure it is a French term which literally translates to a “superior force”. In the international law of contracts, it refers to a clause which exempts the parties under a contract from liability due to non-performance of obligations occurring in the event of an extraordinary or uncontrollable circumstances such as war, natural disasters or pandemic. It is wider in concept than its sister phrase - ‘vis major’ which means an Act of God. It is a safety net which covers Acts of God and such other situations which cannot be anticipated or controlled, and which can also be man-made. Depending on the clause, invocation of Force Majeure clause could lead to suspension of performance (limited to the duration of the event only), extension of time or termination of contract.

Force Majeure clauses are subject to strict and narrow interpretation¹. There are also several types of Force Majeure clauses, each having its own nuance when implemented. :

1. Inclusive: the clause may extensively list down the events which would be covered under the Force Majeure It may describe the events as ‘unforeseen’, ‘extraordinary’ or ‘beyond reasonable control’ or include specific events like ‘earthquakes’, ‘floods’, ‘acts of government’, ‘lockouts’, wars, etc. It might also be illustrative where specific events are followed by descriptive phrases.
2. Exclusive: the clause may exclude events such as ‘increase in cost’, ‘economic hardship’, ‘insufficiency of raw materials’ etc.
3. Procedural: the clause may provide an elaborate procedure for invoking it like serving of prior notice. Failure to comply with such procedure can be fatal to invocation of the clause and lead to liabilities.²
4. Consequential: the clause may also provide for consequences such as liability to bear costs, termination in case the event subsists beyond a particular period, etc. 

Although, the Indian Contract Act, 1872 does not directly provide for Force Majeure, it is indirectly covered by Section 32 which talks about contingent contracts (i.e., contracts, the performance of which is dependent on happening or not happening of an event); and Section 56 (i.e., doctrine of frustration). However, the difference between frustration under Section 56 and Force Majeure is that the former is a principle enshrined in the Act itself which comes into action as soon as the frustration event takes place whereas, the latter has to be included in the contractual terms to take benefit thereof.

For cases governed by Indian Law, situations of unavailability of raw material, late deliveries, insufficiency of funds, increase in cost of labour, etc. and economic hardships which can be attributed to the parties or their sub-contractors cannot be termed as Force Majeure or frustration. These events merely make the contracts more onerous and do not lead to a situation which could not have been foreseen, controlled or fulfilled but for foresight and planning.³ Hence, in order to invoke Force Majeure clauses, the Force Majeure event must be the sole reason for non-performance and all reasonable efforts must be made to perform the obligation⁴ or at least to mitigate all possible losses.

As stated above, Force Majeure clauses are interpreted very strictly and cannot be used to include anything more than what they literally state. They cannot be expanded to accommodate any price variation, etc. unless it is expressly allowed by the contract. Moreover, they cannot be used to escape from supplementary independent contracts governing the transaction such as bank guarantees or Letters of Credit. In Standard Retail Pvt. Ltd. v. G.S. Global Corp, [2020 SCC OnLine Bom 704] taking in consideration the COVID-19 lockdowns, the court held that these are independent contracts which cannot be avoided due to temporary lockdowns that do not constitute frustration of contracts especially because the goods had already been shipped.⁵ For the last 3 years, various countries have been in a state of war starting from Russia and Ukraine and now to the USA and Iran.

The war in West Asia has led to the closure of the Strait of Hormuz. Nearly 21% of the world’s crude oil supply passes through this strait and Qatar’s main sites for production of Liquified Natural Gas (LNG) have been bombed in this ongoing conflict. Qatar Energy declared Force Majeure on LNG deliveries.⁶ Further, Qatar, Bahrain and Kuwait have also declared Force Majeure on gas exports following disruptions in shipping due to closure of Strait of Hormuz.

This has not only led to a disruption in the international oil supply market but has also started hitting the operational stability and supply chain of the Indian commercial establishments operating both within and outside India which either have shortage of fuel or have already ran out of it. These units are not only facing shortages in fulfilling their orders but are even looking at potential shutdowns. Even industry giants are facing issues of unit shutdowns.⁷

The current situation demands a thorough review of contracts, both upstream with vendors as also with downstream customers to analyze whether the conflict falls within the scope of Force Majeure Clause of the specific contract or not. In case, it does not, the parties may turn to Section 56 of the Contract Act. However, a claim under Section 56 can only be made if the performance of the contract becomes impossible. Irrespective, suppliers must issue notices to their customers in order to obtain the benefit of the Force Majeure clause or Section 56 of the Indian Contract Act, 1872. It can otherwise, be treated as wrongful termination or repudiation creating further liability. Other important clauses such as extension of time clauses, price amendment clauses, change-in-law clauses, material adverse changes clauses, insurance, etc. must also be considered apart from other ways like re-routing of ships for mitigating losses. Thereafter, the parties may renegotiate their bargains and record everything in writing to minimize losses for everyone involved.

All of these crises have led to one imminent conclusion -  weak drafting of boiler plate clauses can lead to great risks and greater liabilities. Clauses like Force Majeure, Change-in-law, Insurance, etc. are not mere boilerplate. They are essential tools which might determine any company’s ability to enforce, re-negotiate or exit contracts without incurring liabilities and in turn losing capital. Many contracts refer to ‘war’ or ‘Acts of God’ but do not explicitly cover border skirmishes, defense related sanctions, tariff sanctions, import / export bans, etc. creating grave ambiguities. Taking a hint from the present circumstances, drafters must specifically include sanctions, shipping route closures, government emergency orders and border issues in the clause. In fact, they must also include clauses in the nature of cascade clauses allowing downstream suppliers of a vendor to take benefit of the same. One may even think of proactive architecting of such clauses instead of the present reactive approach. Now is the time to take stock of your contracts so you can proactively protect your company in the unfortunate event of an unforeseeable crisis.

Footnotes

1 Energy Watchdog v. CERC [(2017) 14 SCC 80]; Markfed Vanaspati and Allied Industries v. Union of India (2007) 7 SCC 679.

2 Madura Coats v. ARKAY Energy (Rameswaram) Ltd. and Ors. [2009 SCC OnLine Mad 2087].

3 Satyabrata Ghose v. Mugneeram Bangur, [AIR 1954 Supreme Court 44].

4 Edmund Bendit And Anr. v. Edgar Raphael Prudhomme [ILR (1925) 48 Mad 538].

5 Ramanand v. Dr. Girish Soni, 2020 SCC OnLine Del 635.

6 ‘Force majeure’ in LNG contracts: Why QatarEnergy is using it after Ras Laffan, Mesaieed attacks, Money Control ( https://www.moneycontrol.com/news/business/commodities/force-majeure-in-lng-contracts-why-qatarenergy-is-using-it-after-ras-laffan-mesaieed-attacks-13850743.html )

7 Mounting gas shortages disrupt some steel plants at India's JSW, one unit may face shutdown | Reuters, Reuters ( https://www.reuters.com/world/india/mounting-gas-shortages-disrupt-some-steel-plants-indias-jsw-one-unit-may-face-2026-03-16/ )

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