15 March 2020

#CancelEverything: Interpreting 'Force Majeure' Clauses and Contractual Obligations

With everything from art exhibitions, plays, sports matches, and book fairs being cancelled in the wake of a pandemic, the one question which many of those who are involved in organising and participating in these events are being forced to deal with is: What is the effect of the cancellation on agreed obligations?

Most of the relevant contracts do, of course, have 'force majeure' clauses which take into account what should happen if plans don't materialise as hoped but interpreting those clauses is not always entirely straightforward.

The Historical Bases of Interpretation

The term force majeure tends to be used as a generic catch-all term whilst speaking of how supervening circumstances may affect contractual obligations. It is, however, a French term (drawn from the Latin vis major) which was brought into the Common Law primarily through the factual matrices which English courts dealing with mercantile and commercial matters had to determine.

English Common Law courts have themselves historically veered towards absolute contracts with only a few exceptions such as incapacity in contracts requiring personal performance or the total destruction of the subject matter of a contract leading to frustration.

The exceptions to absolute contracts in Common Law tended to be extremely narrow and,  without the subject matter of the contract having been destroyed, it was no easy matter to convince a court to free a party from contractual obligations. For example, in the 1647 case of Paradine v. Jane, a tenant who was sued for rent was held liable to pay it despite the land having been in the possession of the king’s enemies for two years.

Unsurprisingly, having the law veer so strongly towards requiring that contractual obligations be honoured was not ideal, and the Common Law began to recognise ‘impossibility’ increasingly often as an reason to free parties from their obligations which, in its turn, led to the development of the law of commercial impracticability in the United States of America.

'Commercial impracticability' was succinctly explained in the 1981 US Restatement (Second) of Contracts, § 261, which stated: “...after a contract is made, a party’s performance is made impracticable without [the party’s] fault by the occurrence of an event, the non-occurrence of which was a basic assumption on which the contract was made, [the party’s] duty to render that performance is discharged as a result, unless the language or the circumstances indicate the contrary.”

All things said and done, Common Law courts have generally not been especially enthusiastic about recognising ‘force majeure’ – in inverted commas to mark its use as a generic term – although ‘force majeure’ and its associate, the doctrine of frustration, are a part of the jurisprudence to which they adhere. India, too, has usually been hesitant to relieve parties of their obligations as a perusal of the discussion of precedent in the 2017 case of Energy Watchdog v. Central Electricity Regulatory Commission decided by the Supreme Court reveals. (Paras. 34 to 40)

In Civil Law courts, the judicial approach  to addressing the effects of supervening events has historically been more flexible than it has been in Common Law Courts. Two extracts from the ‘Codex Legum Anglicanarum; or, a Digest of Principles of English law Arranged in the Order of The Code Napoleon' by George Blaxland (published in 1839 by Henry Butterworth) highlight the difference in no uncertain terms.

The translation of the relevant Articles of the Code Napoleon, reproduced below, is followed by a note leading one on to the ‘parallel principle’ in English law.

1147. The debtor is condemned, if there be ground, to the payment of damages and interest, either by reason of the non-performance of the obligation or by reason of delay in its execution, as often as he cannot prove that such non-performance arises from a foreign cause which cannot be imputed to him, although there be no bad faith on his part.
1148. There is no ground for damages and interest, when by consequence of a superior force or of a fortuitous occurrence, the debtor has been prevented from giving or doing that to which he has bound himself, or has done that from which he was interdicted.

Following the note leads one to Blaxland’s statement of the parallel principle in English law (quoted here without its footnotes): “If a person enter into an express and positive stipulation, though it may be hard, false, and absurd, yet he must abide by it. And a fortuitous occurrence, though it arises from a foreign cause, not imputable to him, does not discharge a party from liability for breach of the contract; but he must answer in damages.”

Thus, even in the mid-nineteenth century, the English understanding of ‘force majeure’ was limited though it was perhaps not quite as rigid as it had been in the seventeenth century.

About 30 years after the publication of Blaxland’s comparative study, the British enacted the Indian Contract Act in which they included a provision which, in effect, codified ‘force majeure’ in Indian law.

Indian Contract Law

The 1872 Indian Contract Act is a sparely-worded statute which lays down the parameters within which parties may contract with each other. It allows them the freedom to contract assuming they fulfil the criteria of competence although the freedom is not absolute: the law also explains such subjects as when an agreement would be void or voidable, when restitution is payable, and what procedure should be followed to enter into a valid contract.

India, of course, did not share English history and the nuances of power struggles between various courts for jurisdiction were lost when the British brought their laws halfway across the world to what was then their colony. Thus, Indian contract law crystallised into the essence of what was most workable in English law although, in its underlying rationale, there came to be no rigid lines between jurisprudential aspiration and statutory code.

Running through the length of the 1872 Act is a strong flavour of equity intended to be public policy: the statute could be said to codify principles which had previously existed in doctrine to form a coherent whole allowing persons to treat with each other whilst simultaneously attempting to curb them from taking unfair advantage of each other. In doing so, however, statute did not come to supplant doctrine, and the two have continued to co-exist.

Thus, in India, 'force majeure' is not only reflected in Section 56 of the Indian Contract Act but is also closely allied to the doctrine of frustration. It is one of a series of concepts associated with the law as part statutory provision and part theoretical doctrine.

That not all jurisdictions have the same understanding of 'force majeure' is unsurprising considering that its prototype was gleaned from the ancients; Justinian’s digest in the 6th century CE made reference to the effects of supervening events and, even at that time, such considerations were not new. Since then, the notion has had to withstand the tides of time and disparate histories.

Nonetheless, the underlying rationale of ‘force majeure’ clauses finds a place in all systems of law that trace their roots, whether directly or indirectly, to Roman law.

The Indian Understanding of ‘Force Majeure

The fact that 'force majeure' has numerous avatars is not in itself reason to assume that it is ‘boilerplate’ signifying nothing or that it is implicit in all contracts or that it must be strictly interpreted although, at various times and in varying jurisdictions, each one of those assumptions has individually found itself to be justifiable with reference to case law.

In India, an agreement does not easily become void for on account of alleged vagueness in the 'force majeure' clause. In the case of M/S Dhanrajamal Gobindram vs M/S Shamji Kalidas & Co. decided on 27 February 1964, the Supreme Court held that an agreement would not be void due to vagueness and uncertainty on account of its using the phrase ‘subject to the usual force majeure clause’ as the intention of the parties could be adduced through evidence; they must have had a form of the clause in mind when they signed the agreement.

The approach of the Supreme Court is interesting not so much because it clarified the law on vagueness in the such circumstances but because it referred to the history of 'force majeure' without disputing it or isolating the Indian corpus juris from it.

The Supreme Court both acknowledged the ancient roots of the modern understanding of  'force majeure'  and recognised the continental tradition which differs from Common Law upon which Indian law tends to rest. What the approach of the court suggests is that Indian law is not opposed to becoming better acquainted with understandings of 'force majeure' which do not stem directly from Common Law.

This, of course, leaves the door open to having 'force majeure' and clauses which articulate it be understood with reference to the jurisprudence of both Common and Civil Law systems. Such interpretation allows them to be understood not just as narrow independent agreements between parties to deal with supervening events but as expressions of intent between parties realising the equitable rationale writ large in the 1872 Indian Contract Act, the statute which facilitates their entering into contracts in the first place, and as instruments which could be used to level extremely uneven power structures.

Articulations of Reasonableness 

In India, 'force majeure' clauses have the potential to be bulwarks against unreasonableness in contractual relationships. They may be used not merely to protect contracting parties from unfairness but to stand against unreasonableness within contracts; they help realise concepts that have been known since Roman times; ad impossibilia nemo tenetur: nobody is held to the impossible, and can be interpreted through the numerous lenses each tending towards equity.

After all, the general notion that persons are not obliged to do what becomes beyond them on account of supervening circumstances has, in our own time, found expression both in statute and in legal doctrine. Along with other concepts (such as those against unjust enrichment and undue influence), all of which tend to coalesce to form a reasonable framework — i.e. a justifiable, workable, and  equitable framework whose construction has been guided by reason — within which contracting parties are not set against the impossible or penalised for not being able to achieve the impossible, ‘force majeure’ has become an instrument through which reasonableness can be pursued within the context of a contract.

The result of having reasonableness embedded in Indian contract law in this manner has meant that, in the interpretation of a contractual provision, it is both possible and prudent to interpret clauses not just with reference to the (lone) applicable Section of the 1872 Indian Contract Act which is immediately impacted but also with reference to the other Sections of that statute, with reference to sui generis statutes which may impact the subject matter of a contract, with reference to legal theory, with reference to tort law, and with reference to Common Law — Indian contract law, for all the brevity of its primary statute, has become a melting pot of diverse legal traditions and sources amenable to being moulded to forms which are equitable.

(This post is by Nandita Saikia and was first published at IN Content Law.)