This article has been written by TBL Associate Editor, Chandni Ghatak.

In a rather intrepid decision, the National Consumers Disputes Redressal Commission [NCDRC] has recently put an end to the perpetual shield ‘force majeure’ clauses have been seen to provide builder companies within standard form building contracts. The instant decision i.e. DLF Panchukla Pvt. Ltd v. D.S. Dhanda [“NCDRC Decision”] comes at a significant time also because the ‘Real Estate (Regulation and Development) Act, 2016’ is attempting to pave the way for creating more secure circumstances for real estate buyers.

In this particular decision, a classic situation seemed to emerge. An innocent buyer, wooed by a luring advertisement presented by a rather established Construction Company entered into a buyers’ agreement to buy a flat. This flat as per the terms of such buyer agreement was required to be handed over to the buyer within 24 months of the date of entering into such agreement. The construction company however, encountered some delays in obtaining the requisite sanctions and certificates as well as in completing construction. This the company alleged was on account of a stay order issued by the Hon’ble Supreme Court in 2014 on continuance of construction activities on the site of such project, thereby invoking the force majeure clause. In this post, we shall understand the interpretation of the force majeure as undertaken by the NCDRC in this instance and then move onto analysing the evolution of the concept of force majeure, especially in India.

Capturing the evolution of Force Majeure Invocation

A force majeure clause enables a party to absolve itself from performing its obligations as per the terms of the contract, in light of any supervening events which obstructs the party’s performance. In most situations, parties classify specific events as force majeure events, in order to avoid any conflict at a later stage. However, it is important to understand that force majeure finds its roots within the larger doctrine of frustration in contract law & that its application must kick in, in circumstances which are truly out of the control of the party whose performance is sought.

In light of the above stance, this instant decision clarifies a persistent query which emerges in force majeure related cases – Does the invocation of a force majeure clause, absolve parties even when obstruction has been created due to an event, which may have well been anticipated by the parties involved?

First, a perusal of the relevant English law on this point is necessary. In a 1973 decision of the Queen’s Bench, a three factor test was formulated to determine when a party would be disbarred from taking the benefit of a force majeure clause.[1] The test was as follows:

  1. The pre-existing cause was inevitably doomed to operate on the contract
  2. Existence of facts show that the expected cause is bound to operate is known to operate is known to the parties at the time of entering into the contract, or at least to the party who seeks to rely on the exception
  3. If the existence of such facts should have been reasonably known to the party seeking to rely upon them & would have been expected by the other party to the contract to be so known.

This test clearly indicates that a party seeking to absolve itself of any liabilities under the contract through invocation of the force majeure clause cannot do so, if the party would know that an obstruction was in fact subsisting and could possibly adversely impact performance of the concerned contract. In the aforesaid decision, the party invoking such clause had enough information earlier to anticipate that transportation of the concerned goods could not have been possible. The concerned party however, did not take prudent steps to ensure that transportation is not affected. This lack of action was one of the major reasons why the Court did not grant the benefit of the force majeure clause to the said party and formulated such three factor test.

In the NCDRC decision at hand, similar circumstances arise. The Commission notes that the Buyers’ Agreement contained clauses which indicated that all requisite land approvals and other construction related sanctions would be undertaken by the Builder itself. Relying upon such clauses, any reasonable man would be of the opinion that the Builder, who especially possesses immense experience in the construction business, would make a reasonable assessment as far as obtaining such sanctions and approvals were concerned. Merely because a Supreme Court stay order put construction activities into abeyance does not constitute a valid force majeure worthy event. It is pertinent to note that the said order came about due to some issues of illegality arising in acquisition of lands in 2008, vide an SLP filed in 2010.[2] By the facts of the instant matter, the buyers’ agreement was entered into in 2011. This would mean that the builder clearly knew that there existed a possibility of their being a hindrance to the construction activities, well before entering into such buyer’s agreement. Therefore, the instant case clearly fits into the three-factor test of evaluation.

This type of an analysis is not uncommon within the Indian jurisdiction as well. Take for instance, the recent decision of the Hon’ble High Court at Delhi in Vedanta Ltd v. Shenzen Shandong. Although various other issues were dealt with on a more in-depth basis in that matter, one can notice a similar recalcitrant approach adopted by the Court in allowing the benefit of the force majeure clause to be taken. In that case too, the defendant Company was fully aware about the Ministry of Environment’s mandate with respect to obtaining prior environmental clearances etc. However, no prudent step was taken to avoid the impact of such steps on the undertaken project. Accordingly, the Court did not allow the application of the force majeure clause in such circumstances.

These decisions along with a catena of others indicate the changing face of force majeure interpretation. Gone are the days when contractors could take the benefit of ambiguously worded force majeure clauses inserted within standard form contracts, for the Courts have now adopted a more vigilant approach toward determining the extent of such escape routes.

What does it mean for India?

India is an emerging economic powerhouse, having a long road ahead in terms of witnessing far more complex commercial contracts waiting to be undertaken. Decisions such as this not only make for more diligent parties but also help inculcate a higher sense of prudence in doing business. In the context of consumer contracts, such decisions pave the way for a more honest consumer-manufacturer relationship. In an era when ordinary persons are mindlessly subjecting themselves to standard form contracts, containing heavily lop-sided clauses, judicial interpretations such as these ensure equitable circumstances for such ordinary persons from escaping the high-handedness of larger players in the concerned industry.

The Indian construction industry employs over 33 million people and counting each year, making it one of the major contributors to development and growth in the Indian landscape. It is of the utmost importance that a major contributor such as this functions in an efficacious manner. A decision, such as in the instant case, lays the groundwork for ensuring that the industry itself works in a cohesive manner. For far too long, companies have been using the force majeure shield to escape their liabilities, without considering the undesirable impact it may have on not only the final consumer but also the remaining stakeholders (namely sub-contractors, workers etc). It is important that builders and developers understand the large scale impact their decisions have, and a protective stance taken by the Courts in this regard goes a long way in building a more prudent industry.

[1] Trade & Transport Inc v. Lion Kain Kaisha Ltd, the ‘Angelia’, [1973]  1 W.L.R. 210.

[2] ¶ 50, DLF Panchkula Pvt. Ltd v. D.S. Dhanda