Act of God and force majeure

Subject: Economy

Context:

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

Concept:

• 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 performance of the contract becomes impossible to 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.
• Generally, an “Act of God” is understood to include only natural unforeseen circumstances, whereas force majeure is wider in its ambit and includes both naturally occurring events and events that occur due to human intervention. However, both concepts elicit the same consequences in law.
• War, riots, natural disasters or acts of God, strikes, introduction of new government policy imposing an embargo, boycotts, outbreak of epidemics and such situations are generally listed. If an event is not described, then it is interpreted in a way that it falls in the same category of events that are described.
• 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.