Act of God Vs Force Majeure

News:

• Amid disruptions caused by Covid-19, the Finance Minister has referred to an Act of God while businesses are looking at a legal provision, force majeure, to cut losses.

Evoking “Act of God”

• The force majeure or “Act of God” clause has its origins in the Napoleonic Code.
• The finance ministry had issued an office memorandum inviting attention to the force majeure clause (FMC) in the 2017 Manual for Procurement of Goods issued by the Department of Expenditure.
• It clarified that the pandemic should be considered a case of natural calamity and FMC may be invoked, wherever considered appropriate.

What is a force majeure clause?

• The law of contracts is built around a fundamental norm that the parties must perform the contract.
• When a party fails to perform its part of the contract, the loss to the other party is made good.
• However, the law carves out exceptions when the performance of the contract becomes impossible for the parties.
• A force majeure clause is one such exception that releases the party of its obligations to an extent when events beyond their control take place and leave them unable to perform their part of the contract.
• FMC is a clause that is present in most commercial contracts and is a carefully drafted legal arrangement in the event of a crisis.
• When the clause is triggered, parties can decide to break from their obligations temporarily or permanently without necessarily breaching the contract.
• Companies in such situations use the clause as a safe exit route, sometimes in opportunistic ways, without having to incur the penalty of breaching the contract.

Difference between Act of God and Force Majeure:

• Generally, an “Act of God” includes only natural occurring events, whereas force majeure includes both naturally occurring events and events due to human intervention. 
• However, both concepts have the same consequences in law.
• For example, a shipping contract would have a force majeure clause that could cover natural disasters like a tsunami.
• War, riots, natural disasters or acts of God, strikes, the introduction of new government policy imposing an embargo, boycotts, outbreak of epidemics, etc are generally listed as force majeure.
• A force majeure clause is negotiated by parties and is not invoked just by expressing that an unforeseen event has occurred.

 
Indian laws

• In case a contract does not have a force majeure clause, the Indian Contract Act, 1872 provides that a contract becomes void if it becomes impossible due to an event after the contract was signed that the party could not prevent.

Judicial interventions regarding FMC:

• If a party to a contract believes that the other party has invoked the force majeure clause in an unjustified situation, it can move the court seeking the performance of the contract.
• In a 2017 case, the Supreme Court cited a 1961 House of Lords decision that ruled that the closure of the Suez Canal, although unforeseen, had not rendered a contract to ship goods from Africa impossible since a longer route around the Cape of Good Hope existed.
• Singapore enacted the Covid-19 (Temporary Measures) Act in April to provide relief to businesses that could not perform their contractual obligations due to the pandemic.
• The Paris Commercial Court in July ruled that the pandemic could be equated to a force majeure event.
• Recently, the Bombay High Court did not accept the force majeure argument in a case where the petitioner argued that COVID-19-related lockdowns had frustrated a contract for the supply of steel.