A quick guide to force majeure and why it is critical in your contracts

QUICK GUIDE TO FORCE MAJEURE AND WHY IT IS CRITICAL IN YOUR CONTRACTS

Outbreak of the novel coronavirus (COVID-19) in India forced multiple states and territories of the Union to impose full curfew to enforce Section 144 of the Cr. P.C. Imposing extreme restrictions on commercial activities, etc. Soon the entire country is in a locked-down position. Movements of people and materials by road, rail, ship or air have been made impossible.

The question isn’t limited to India alone. Similar limits have been implemented by countries such as China, the US, Italy, Germany, Spain, France, the United Kingdom and many others. Global trade and industry have come to a standstill. Such an incident has never occurred in the recent past affecting so many individuals and countries directly on contract performance on such a wide scale. Disruptions are enough to minimise the delays or to justify contract performance entirely. Therefore force majeure incidents in the contracts manage cases in which the execution of the contract is postponed indefinitely or cannot be carried out due to circumstances beyond the control of the party concerned.

Despite the instability of the supply chain caused by the Covid-19 pandemic, performance under multiple contracts is likely to be delayed, compromised or even cancelled. Parties to these contracts that may seek to delay or potentially cancel their contractual commitments, either on the grounds that Covid-19 has legitimately prevented them from fulfilling their obligations, or on the grounds that they are attempting to use it as an excuse to withdraw from a problematic relationship.

In this context, it is imperative to determine if Covid-19 should be regarded as a case of ‘force majeure’ for which we have replied to some frequently asked questions as set out below:

What is Force Majeure and what does it cover?

Force majeure clause is a provision in a contract that prevents a party from refusing to satisfy its contractual obligations which, due to an occurrence or consequence that the parties could not have expected or managed, becomes impossible or impractical. Such events include natural disasters such as flooding, earthquakes and other acts of Nature, and uncontrollable incidents such as war or terrorist attacks. The Force Majeure clauses are intended to excuse a faction, given that the practice of due diligence and care does not prevent failure to perform.

Can a Force Majeure clause be implied under the contract, even in a scenario where it has not been explicitly provided?

Under Indian law a Force Majeure clause cannot be inferred. It must be inserted expressly into the contract and the protection given will depend on the language and interpretation of such clause. In the case of a disagreement over the meaning of the provision, the courts would undoubtedly follow the normal rules of statutory interpretation.

Can a Force Majeure clause be invoked in a situation where Covid-19 has been declared as a pandemic by World Health Organisation?

A pandemic of the Covid-19 could make it increasingly impossible for parties to meet their obligations under a contract.

There are two potential possibilities which might require that a Force Majeure clause cover a pandemic: (a) whether a pandemic is expressly included in the statutory concept of a force majeure case. Incorporating the pandemic into the list of force majeure events would explain whether a Covid-19 outbreak will cause a proviso on force majeure in a contract; or (b) where the state of force majeure encompasses extraordinary incidents or situations outside the Parties ‘reasonable control. This specific language may be used in case it is decided that the factual circumstances created by the pandemic are beyond the control of the group under influence.

Accordingly, the occurrence of Covid-19 obviously will not turn into a force majeure situation, and its classification is primarily dependent on a specific contract’s language and understanding.

Any notification or written notice requirements prior to invoking a Force Majeure clause/event?

Force Majeure provisions typically include a provision for prompt and time-bound notice, which may or may not serve as a legally binding condition precedent to relief. These requirements are usually enforceable and it would be important for parties attempting to invoke force majeure to fully comply with all notice prerequisites.

What if the contract does not have a Force Majeure clause and events like Covid-19 make the performance of the contract more difficult?

In the off chance that a force majeure clause is not included in the contract, the injured party can demand relief under the doctrine of frustration or otherwise agree to some other agreement as per the contract. Nonetheless, in order to ensure that the contract is violated, it must be provided that the fulfilment of the legally binding obligations has become impossible due to any circumstance that could not be avoided by the claiming party and that the failure is not self-initiated by the claiming party or due to its carelessness.

Unlike force majeure, however, breach of a contract makes it void with immediate effect, and the law does not allow provision for suspension of such a contract.

In addition to the doctrine of frustration, there are other advantages that the parties can accrue when a client who made a payment before the contract is discharged will usually recover the payment if the commitments have not been completed or subsequent payments do not have to be made depending on the pleasant arrangement between parties.

Risk management measures to be considered in the context of non-performance/breach of contract.

Organisations may find the following curative measures in respect of their business contracts:

  1. Key contracts should be reviewed to determine the rights and responsibilities of the parties, including termination, force majeure, governing law and dispute resolution.
  2. Copies of critical correspondence and various interchanges should be maintained if there is any conflict later. This can be especially important in ensuring that the organisation has done everything reasonably necessary to minimise the losses
  3. Legal opinion should be sought as to whether the force majeure clause in the main contracts is open-ended or comprehensive in relation to the scope of force majeure incidents and whether the occurrence of Covid-19 is covered or not.


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