Preeti Kulkarni | MoneyControl | May 28, 2020
A contract is like a promise. But what happens if you aren’t able to fulfil your contractual obligations for reasons beyond your purview. When a superior force faces off against a legal obligation, something’s got to give. In business contracts, for a situation such as the COVID-19 pandemic, a term called Force Majeure is introduced. It’s a legal term that aims to address the promises in agreements that could face the heat due to unforeseen reasons.
Retail homebuyers are not alien to inordinate delays in completion of under-construction housing projects. Now, however, due to the novel Coronavirus Disease-induced (COVID-19) nationwide lockdown and economic crisis, developers have the legal sanction to postpone project completion as per Real Estate Regulatory Authority (RERA) timelines.
Tracing Force Majeure’s origins
As part of the Rs 20-trillion economic package rolled out recently, Finance Minister Nirmala Sitharaman allowed under-construction real estate projects to invoke the ‘Force Majeure’ clause and extend project completion by six months. Earlier in February, when the pandemic was still largely confined to China and a few other countries, the finance ministry had clarified that supply chain disruptions due to COVID-19 could be treated as Force Majeure events.
Little would individual home-buyers or policyholders, who often find the legalese in financial services contracts daunting, have known that a term that came to be used in the legal sphere in the 19th century would come to haunt them two hundred years later. “The term is French for, literally, ‘major force’, i.e., unforeseen circumstances that prevent you from fulfilling a contract,” explains Shashi Tharoor, Congress leader and Thiruvananthapuram Lok Sabha Member of Parliament (MP).
The Taylor vs Caldwell case, adjudicated in 1863 in England, is seen as a landmark judgement on the impracticability of fulfilling terms of the contract. The latter owned a music hall that was leased out to Taylor & Lewis, the complainants, for concerts. However, the hall was damaged due to fire and, hence, the concerts could not take place. The court ruled that since the music hall, critical to fulfilment of the agreement, was not in a position to be used for the fault of neither of the parties, both were excused from their obligations under the contract. “Taylor vs Caldwell is a leading English case which established the doctrine of common law impossibility, corresponding to the doctrine of frustration which is contained in the Indian Contract Act,” explains Rajesh Gupta, Partner, SNG & Partners.
In France, an epidemic was held to be a ‘Force Majeure’ event in the Letelier versus Carvalho case, adjudged in 1869, as per a paper published in the YALE Law Journal. What started off as a trigger in England’s courts found a more solid and nuanced mention in the French courts, it appears.
When the force is against you
Put simply, Force Majeure is a clause in contracts – typically high valued ones with high stakes – that absolves one party from fulfilling its obligations if any event, that hampers its ability to fulfil its normal obligations, occurs because of completely unforeseen circumstances. The Force Majeure clause can encompass a range of events. These include acts of god: earthquakes, floods, tempest and tsunami, war, riots and so on.
“Change in applicable law or government regulations, strike or other labour disputes, lockout and civil commotion also come within the ambit, though the applicability largely depends on the wordings or interpretation of the clause. Essentially, it is a clause that can enable parties to the contract to postpone the performance of their obligations,” explains Ashish Bhakta, Head, Litigation and Private Client Practice, ANB Legal.
Acts of God events are linked to natural causes, hence the term. In the case of Chidambarakrishna Iyer Nataraja Iyer Vs South India Railway Company, the court decreed that not every inevitable accident could be considered an Act of God. For an event to qualify as an Act of God, it has to be traced back to natural causes, the court had held. “Force Majeure is a broader concept and an extension of the principle of ‘Act of God.’ It also takes into consideration various circumstances that emerge due to the intervention of human agency,” says Rajesh Gupta, Partner, SNG & Partners. Put simply, these clauses are included in contracts to limit losses of the parties concerned. “The essence of a contract arises from a conventional maxim “Pacta Sunt Servanda,” which implies that the ‘agreement must be kept.’ However, this is not an absolute and stringent rule as in certain situations it becomes impossible for the parties to perform their obligations because of some external forces which are neither controllable nor predictable,” he adds.
Force Majeure in insurance
Much to the relief of policyholders, however, the Life Insurance Council has clarified that Force Majeure will not apply to COVID-19 death claims. In health insurance contracts, injuries or illnesses attributable to war, invasion, civil war, unrest, nuclear weapons and so on are treated as exclusions – that is, where claims are not payable. However, health policyholders need not worry about COVID-19-related health claims, unless a pandemic is specifically mentioned as an exclusion in your contract. The Insurance Regulatory and Development Authority of India (IRDAI) has directed health insurance companies to expedite settlement of COVID-19 claims. Those who have invested in an under-construction house, have made a down payment and are discharging their EMIs, however, will not be that lucky, with the central government officially allowing extension of RERA timelines.