COVID-19 crisis seems to have taken over our lives without any seeming end to it. This pandemic has made way for a nationwide lockdown which has brought up many problems that we didn’t have before. One of which is conducting business while keeping up with limitations of a lockdown. The World Health Organisation officially declared the COVID-19 virus as a pandemic on March 3rd, 2020. The Indian Government was quick to follow up with a complete nationwide lockdown with effect from March 25th, 2020.
Businesses across the country are considering their ability to fulfil contractual obligations during a lockdown. There seems to be a lack of workforce, supplies and certainty that has caused some businesses to already file lawsuits claiming inability to meet contractual liabilities. One of the defences that are being taken is of Force Majeure. This article discusses the scope of a force majeure clause and the legal recourses that businesses have going forward.
What does force majeure mean?
Having its origin in French language, the term Force-Majeure literally means “a superior force”. According to general principals of contract law, a party can take a defence against performance of contractual obligations where there is “an event or effect that can be neither anticipated nor controlled; especially, an unprecedented event that prevents someone from doing or completing something that he or she had agreed or officially planned to do. The term includes both, acts of nature (e.g. floods and hurricanes) and acts of people (e.g. riots, strikes and wars). In other words, ‘force-majeure’ refers to “events outside the control of the parties and which prevent one or both the parties from performing their contractual obligations”.
The clause does not generally mean that the contract be terminated; rather it generally suspends a party’s obligation to perform the agreement for the duration of the force majeure event.
The logic behind this clause is that there are always going to be instances which cannot be anticipated, for which neither party to a contract can be held fully responsible. In such a scenario, the reasonable solution seems to be suspending the obligation to perform until the event ends. Instead, contracts usually provide for a force majeure clause defining all the terms that can be termed as force majeure event and what is the due action to be taken to obtain relief from required performance.
Some typical examples of force majeure events are – war, riots, fire, flood, hurricane, typhoon, earthquake, lightning, explosion, strikes, lockouts, slowdowns, prolonged shortage of energy supplies, and acts of state or governmental action prohibiting or impeding any party from performing its respective obligations under the contract.
What does a typical Force Majeure clause cover?
Force Majeure clauses vary substantially as to what events will be covered. This is subject to negotiation between the parties before they enter into a contract. Sometimes the contract includes a finite list of events that will be considered as force majeure events. This is done to narrow down the scope of applicability of the clause. Other times, the clause is designed to broaden its scope by including an open ended generalised phrase such as “all other acts beyond the parties’ reasonable control”.
There are mainly two possible instances where you might have a defence–
- If the contract already includes a pandemic as a force majeure event. This will provide a clear answer as the COVID-19 crisis is a WHO declared pandemic.
- If in the contract, extraordinary events or circumstances beyond the reasonable control of the parties qualify as force majeure. This generalised wording can be useful when the effects of the pandemic will be considered as they are beyond reasonable control of the parties concerned.
At the end of the day, whether a party will be allowed the defence of force majeure clause or not during the COVID-19 crisis is strictly dependant on facts of the case along with the nature of the obligations in the contract.
The main aim here is not just to prove that the COVID-19 crisis should be considered a force majeure event, but also that the resultant restrictions and preventive measures imposed by the government caused a hindrance to performance of obligations under the contract. For instance – Companies face a shortage of workforce because the employees cannot work either due to sickness or a government imposed quarantine. This can create a trickledown effect even in the places where the virus has not disrupted daily life. The raw materials or essential items from one place cannot reach the other. This basically creates a situation where it becomes physically or legally impossible to perform obligations for parties to the contract. Keep in mind that there needs to be an impossibility of performance and not delay of performance due to the event.
How does COVID-19 pandemic affect businesses?
The global pandemic has hit the supply chain and has triggered a shortage of raw materials. There has been an International travel ban imposed by the Government as a part of its containment strategy. Domestically, all public places which are not considered as a part of essential services such as schools, restaurants and bars have been closed. The pandemic, therefore, has adversely affected the consumption of products and services and has severely impacted the previously stipulated deadlines and dates for the performance of certain contracts. It has, in fact, become impossible to perform certain promises which were made by the parties when entered into an agreement before the pandemic took over.
There are several large retail chains like Big Bazaar, McDonald’s, Domino’s, Reliance Retail, etc. that have reportedly tried to use the force majeure clause to withdraw from such contracts. The global consulting firm McKinsey & Co recently expressed their opinion on this in a note – “This scenario results in a recession, with global growth in 2020 falling to between –1.5 percent and 0.5 percent.” To understand this better, let’s take an example of a Delhi based renewable energy firm that depends on Chinese solar panels for local contracts. With China under lockdown, the Indian company failed to meet their deadline and is now seeking legal assistance to see if the force majeure clause can be invoked. Such is the case everywhere.
How to invoke the Force Majeure clause?
Although there is no possible way to estimate the damages that will be caused due to the COVID-19 crisis, it would still be wise for the businesses to begin the process of safeguarding their business against any potential risks and liabilities that might end up in disputes.
If the contract has a Force Majeure clause, a business house should take the following steps –
- Immediately notify the opposite party about the occurrence of a force majeure event, in a manner decided under the contract. Such clauses are usually time bound, failing which you can be barred from claiming relief. It is best to mention details such as estimation of the impact and the duration. It is expected that you took all the reasonable steps to mitigate the effects of the event and yet it was unavoidable.
- Make sure you have all the receipts and documents that are related to the event such as –
- National and State Government guidelines ordering restriction of trade
- Related news articles
- Cargo booking and freight agency agreement
- Cancelled travel tickets
- Evaluate your contract, insurance policies and legal remedies available with the help of a legal expert. The remedy you have would largely depend on the language of the Force Majeure clause.
- Counterparties can mitigate their liability for non-performance by including contractual clauses like price adjustment, limitation or exclusion, etc. This can help in avoiding a complete non-performance of the contractual obligations by the opposite party.
What is the remedy available if there is no Force Majeure clause?
This situation has been well protected by the doctrine of frustration as under Section 56 of the Indian Contract Act, 1872 (the Act). The Hon’ble Supreme Court laid down the meaning and scope of the doctrine in Satyabrata Ghose v. Mugneeram Bangur & Co. Recently, in a landmark judgment – Energy watchdog Vs. Central Electricity Regulatory Commission, the Apex Court then proceeded to add that the event that leads to the frustration is governed by Section 32 of the Act, and if it occurs de hors the contract, that is when the rule of positive law under Section 56 of the Act applies. Further, the impossibility of the performance should be subsequent to entering into the contract. The word “impossible” as appearing in Section 56 does not mean physical or literal impossibility of the performance but rather means that it has become impracticable from the point of view of the object and purpose of the contract.
Therefore, when a party is unable to perform a contractual obligation due to an unforeseeable event like COVID-19 crisis, it can also invoke the provisions of Section 56 of the Indian Contract Act when a Force Majeure clause is absent in the contract. But it is apparent that the courts do not hold the power to absolve non-performance of contractual obligations by a party merely on the basis that the performance has become economically inconvenient due to unforeseeable events. The relief is being provided only when the whole purpose or the basis of the contract is frustrated by such events.
What can be improved going forward?
The Indian Government has already made attempts to reduce the impact of COVID-19 crisis on International Trade and Commerce. The Ministry of Finance has declared in an Office Memorandum dated February 19, 2020 that considering COVID-19 to be a “natural calamity”, the defence of force majeure clause can be claimed if the pandemic is adversely affecting the supply chains. The Ministry of New and Renewable Energy (MNRE) has followed with a notice dated March 20, 2020 directing all Renewable Energy implementing agencies to allow for delays that are happening because of disrupted supply chains due to the COVID-19 spread. The MNRE also declared it as a Force Majeure event. There have been further updates regarding this notice allowing for even more flexibility during these dire times.
It is now evident that regardless of the quarantine and a reduced workforce, there is no way that the businesses of the world can come to a halt and wait it out. The show must go on, but with precautionary measures. Accepting this crisis as a part of our reality now, we have to better draft the force majeure clauses in contracts. The clause should now be elaborate so as to include thorough details such as who will bear the risk of non performance during a force majeure event or for how much time and to how much extent can the performance of obligations be delayed. The parties could even further pin point the discrete events that will set off this clause. For instance, it will be considered a force majeure event if the Wold Health Organisation declares it or a certain number of confirmed cases are booked in a state, or something else specific.
The longer the pandemic lasts, the harder it will become to prove that such an event was unforeseeable. Therefore, a force majeure clause in contracts can provide for flexibility and suitable solutions to the default rules. In the end, drafting a well negotiated force majeure clause will ensure that all the parties to the contract enjoy better outcomes through the risk of future events.
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 “Force Majeure Clauses: Is a Viral Pandemic an Act of God For Purposes of Allowing You to Get Out of Your Contractual Obligations.” JD Supra, Apr. 2020, http://www.jdsupra.com/legalnews/force-majeure-clauses-is-a-viral-66092.
 Craven, Matt, et al. “COVID-19: Briefing Note, March 9, 2020.” McKinsey & Company, 9 Apr. 2020, http://www.mckinsey.com/~/media/McKinsey/Business%20Functions/Risk/Our%20Insights/COVID%2019%20Implications%20for%20business/COVID%2019%20March%209/COVID-19-Briefing-note-March-9-2020-v5.ashx.
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