what-counts-as-act-of-god

Context: Recently, the finance minister attributed the shortfall in GST collections to disruptions due to Covid-19 which is an Act-of-God.

  • 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 clarifies that the pandemic “should be considered a case of natural calamity and FMC may be invoked, wherever considered appropriate”.

Background

  • The law of contracts is built on a basic premise 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 compensated by the failing party. 
  • Exceptions: A force majeure clause is an 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.

Force majeure clause

  • FMC is a legal arrangement that is present in most commercial contracts.
  • 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.
  • 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 tsunami.
    • War, riots, natural disasters or acts of God, strikes, 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.

International practice

  • The International Chamber of Commerce’s Model Code on the force majeure clause states that the impediment triggering the operation of the force majeure clause 
    • Must be beyond the party’s reasonable control; and 
    • That it could not reasonably have been foreseen at the time of the conclusion of the contract; and 
    • That the effects of the impediment could not reasonably have been avoided or overcome by the affected party.

 

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 performance of the contract.

  • In a 2017 case, the Supreme Court cited a 1961 House of Lords decision that ruled that the closure of 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 supply of steel. 

Vaguely indicating that the pandemic failed the contract would face a legal challenge. The court would look into specifics like whether a lockdown imposed to contain the pandemic locally prevented performance of the contract.

Image source: Rediff