WHO recognizes COVID-19 as a public health emergency of international concern and so declared under the International Health Regulations 2005. The cases of Covid-19 continue to rise in the world with the resultant effect being the shutting down of schools, offices, airports, and even the courts. But, what happens to the contracts across all sectors of the economy that will be breached as a result of the virus? Can they breach Force Majeure? Who bears the loss and what can parties do while we pan out this pandemic?
This is a difficult time for everyone. Not only has this pandemic been so hard on people’s personal lives but it has posed a huge legal challenge in almost all spheres of the economy. The first major challenge would be the fate of contracts that are affected by this disease. The restrictions on the movement of persons and goods have raised serious doubts on the ability of parties to perform their obligations under contracts when these obligations are classified as ‘non-essential services’. Uncertainty of the performance of contracts has led to parties envisioning breach of contract and evaluating their rights and remedies for the same.
Force Majeure is a contractual clause that alters the parties’ obligations and/or liabilities under a contract when an extraordinary event beyond their control prevents one or all of them from fulfilling those obligations. Force Majeure clause has existed in the contracts for a long time but they have not been actively negotiated. Now, due to the pandemic, Force Majeure clauses have become a central topic among business circles.
Business contracts often contain a Force Majeure clause between parties and specify the events that qualify as one such as Act of God, war, terrorism, riot, labor strikes, acts of government, plagues, earthquakes, quarantines, and boycotts. If any such event has occurred that is alleged to have prevented the performance of either party under the contract, then the affected parties may seek to invoke the Force Majeure clause to claim relief under the law.
Why is Force Majeure clause important:
Force Majeure is essentially a contract clause that provides defense and allows a party to suspend or cancel their performance under certain circumstances and may limit the parties’ liabilities. If any person is unable to perform any contractual duty, they will not be liable for not fulfilling those duties if they have a valid defense under the concept of Force Majeure or the common law doctrine of frustration.
The 148-year old Indian Contracts Act, 1872, controlling the Indian contracts does not specifically refer to the force Majeure Clause. But, Section 32 and Section 56 of the Act has some relevant clauses. Section 32 of the Indian Contract Act which deals with contingent contracts states that if any unforeseen event renders the performance impossible, only during the limited time in which the event is in operation, it provides a window for resuming normal contractual obligations after the event ceases to operate. Section 56 states that any performance of the obligation which is impossible or unlawful to fulfill is in itself void. The concept of Force Majeure comes into play in such situations.
Force Majeure and Covid-19:
The unforeseen COVID pandemic has critically impacted the performance obligations of all transactions across the globe. With all of the lockdowns, closures, shutdowns, and stay-at-home orders, many businesses simply cannot perform their contractual obligations and so they are resorting to Force Majeure as a way to eliminate or limit their liability due to their inability to perform.
Now, the big question is whether the COVID-19 pandemic qualifies for the Force Majeure clause enforcement. This will depend on each particular contract and the way it is worded, i.e. what all contingencies have been explicitly and implicitly captured in the Force Majeure occurrence.
Amidst the Covid-19 crisis, the Ministry of Finance has issued a clarification that coronavirus will be covered in the Force Majeure Clause (FMC) and that COVID-19 should be considered a case of natural calamity. The ministry further stated that this clause can be invoked wherever appropriate. However, the ministry has clarified that the clause does not excuse a party’s non-performance entirely but only suspends it for the duration of a period. One of the conditions put forth for this clause is that the firm should notify the Force Majeure as soon as it occurs. The ministry has further clarified that there may be a Force Majeure situation affecting the purchase organization only. In such a situation, the purchase organization needs to inform the supplier of the necessary action. It also states that if the performance of the contract (in part or whole) is prevented or delayed exceeding 90 days, either party will have the option to terminate the contract without any financial repercussion on either side.
The COVID-19 crisis has affected the performance of almost all the industries and they are most likely to invoke the Force Majeure clause. It is expected that as more and more Indian companies invoke the clause, it may result in a spur in lawsuits if the companies do not come to a mutual understanding. Some Indian companies who have already declared Force Majeure clause are Gateway Terminals India Private Limited, Adani Ports, Indian Oil, Mangalore Refineries, Ashoka Buildcon, and IRB Infrastructure.
Procedure to invoke the Force Majeure clause:
A company seeking to invoke the clause must consider in detail the precise wording of the contract, should comply with any procedural requirements stated under the contract such as serving notice of the same within a particular period, and to fulfill the formalities required for serving such notices. It is, however, prudent to explore alternative means of performing, considering the alternative mode of delivery (even at higher costs), reducing delay, and minimizing loss to the other parties before relying on the Force Majeure clause.
Careful thought should be applied and advise taken before relying upon this clause. If a party invokes the clause but is not contractually entitled to do so, it may result in a repudiatory breach of contract and the other parties may be entitled to claim damages as a result of these consequences.
You might also want to read about how your business can plan for the forthcoming year amidst the current crisis.