Invoking the Force Majeure Clause in light of COVID-19 | Ujjwal Nagaich
Looking into the present situation, the rescue of the Force Majeure clause in a contract for the affected party can be sought through the proper reading of the contract and considering whether the parties to such contract will be able to continue to perform their contractual obligations in consonance with the other clauses to find a positive solution… Read More »
Looking into the present situation, the rescue of the Force Majeure clause in a contract for the affected party can be sought through the proper reading of the contract and considering whether the parties to such contract will be able to continue to perform their contractual obligations in consonance with the other clauses to find a positive solution in the current situation.
Introduction
Nature has always some way or the other proved its dominance and control over mankind through various catastrophic incidents of natural calamities disrupting the normal lifestyle of Humans. One such unprecedented situation faced by the world in the present time is the Corona Virus (COVID-19), which has been declared as a pandemic by the World Health Organisation (“WHO”) on 11.03.2020.
As per the WHO, a pandemic is defined as “an epidemic occurring worldwide, or over a very wide area, crossing international boundaries and usually affecting a large number of people”.
The outbreak of Coronavirus (COVID-19) pandemic is immensely affecting the global markets, trade and commerce. The worldwide lockdowns and quarantine have started affecting global industries including manufacturing, services, etc. and the supply chains supporting them. Due to the worldwide spread of Coronavirus, the performances under many contracts will be delayed, interrupted, or even cancelled.
The parties to such contracts may either seek to delay and/or even avoid the performance of their contractual obligations/liabilities and/or seek to terminate these contracts using the Coronavirus pandemic as a shield in the current situation to shy away from their piling up obligations and liabilities. Thus, in most of the contracts the parties are seeking refuge under the doctrine of frustration through the force Majeure clause incorporated in their respective contracts.
Force Majeure
Force Majeure clauses are commonly included in commercial contracts in case certain defined circumstances prevent or delay performance of any contractual obligation. The term force majeure means “superior force“, and may encompass “acts of god” (such as earthquakes, tsunamis, etc.) and certain acts of man of a disruptive and unforeseeable nature (such as war-like situations, labour unrests or strikes etc.) as contemplated in the Force Majeure clause in the contract between the parties.[1]
The law relating to Force Majeure is present in common law as the ‘doctrine of frustration’ of contract. This doctrine says that a contract will be frustrated if its fundamental purpose is destroyed which in a way upsets the very foundation of the contract. If this happens then the parties to the contract may be discharged from their obligations to further perform the contract.
Force majeure can be termed as the happening of an intervening or supervening event which is unforeseen and unstoppable, after the contract has already been made and which renders the performance of the contract impossible.[2] The parties while entering into a contract incorporate these force majeure clauses to be relieved from performance of all or part of their obligations on the happening of certain specified events beyond the control of the parties.
Though the Force Majeure clauses in any contract act as a shield for the parties in unforeseeable situations like the present scenario, but its applicability depends upon the specific words used to define the term Force Majeure.
For example, in some contracts, the Force Majeure clause is quite exhaustive and it very elaborately and comprehensively contains the exact terms which will constitute a Force Majeure situation. Thus, when in a contract the Force Majeure clause is exhaustive it will be interpreted in a ‘stricto sensu’ manner. In this regard, the exact terms like epidemic, national or regional emergency, government or military actions etc. are used. With the use of such specific and exact terms, invoking the Force Majeure clause becomes subject to the exact situations as mentioned and the parties cannot go beyond the scope of the clause.
However, in circumstances where the Force Majeure clause in a contract is defined in an inclusive manner (which means that the usage of words including, like, such as, etc. are done) and the exact events are not clearly elucidated, the enforcement of the same becomes a matter of interpretation. In these circumstances the applicability of the clause is best determined with the help of judicial precedents and interpretations.
Judicial Interpretation of the Force Majeure Clauses
Time and again it has been seen that the Indian Courts have identified Force Majeure as a relevant ground for non-fulfilment or suspension of the obligations of the parties to a contract.
In the case of Satyabrata Ghose v. Mugneeram Bangur & Co.[3] the Hon’ble Supreme Court had adverted to Section 56 of the Indian Contract and held that the word “impossible” has not been used in the Section in the sense of physical or literal impossibility. To determine whether a force majeure event has occurred, it is not necessary that the performance of an act should literally become impossible, a mere impracticality of performance, from the point of view of the parties, and considering the object of the agreement, will also be covered. Where an untoward event or unanticipated change of circumstance upsets the very foundation upon which the parties entered their agreement, the same may be considered as “impossibility” to do as agreed.
Thus, the Apex Court had categorically identified that a Force Majeure situation would be the advent of an event, which not only makes the performance of the contract impossible but also an unanticipated change of circumstance which upsets the very foundation upon which the parties entered their agreement and the same may be considered as “impossibility” to do as agreed with the parties.
Also, the courts place the burden on the party asserting force majeure defence to demonstrate the existence of force majeure event, basis which the parties may be excused from further performance of the contract. Such clauses are construed strictly by the courts.
In the current situation who can invoke the Force majeure clause?
It is clear that the on-going Coronavirus is having an unprecedented impact on trade and commerce and thus it would become very difficult for most of the parties to fully perform their contractual obligations under the present scenario and in its after-effects.
Hence, it becomes very important to see whether in the on-going circumstances a Force Majeure clause in a contract can actually be invoked and whether such a Force Majeure clause covers a pandemic situation.
For this, it has to be seen whether, in the contract, the Force Majeure clause expressly and comprehensively states a pandemic event to be a Force Majeure event. The express mentioning of an epidemic (which is rare though sometimes used) or pandemic (which is almost never used) under the Force Majeure clause will provide clarity as to whether Coronavirus would be treated as a Force Majeure event or not, and thus basis that the Force Majeure clause can be invoked.
Also, during the drafting of contracts it has to be made sure that the Force Majeure clause contained in a contract is defined in an inclusive manner (the use of words including, like, such as, etc.) so that in case of any extraordinary events and circumstances which are beyond the control of the parties, the parties can contend that even after taking all due care and caution they are unable to perform their obligations. Nevertheless, whether a party can be excused in the present scenario from their contractual obligations is a fact-specific determination and will depend on the nature of obligations of the parties under the contract and will be open to judicial interpretation.
Exceptions to the Force Majeure
Force Majeure clauses cannot be invoked in the following circumstances/ situations:
- When the contract comes into effect after the Coronavirus pandemic is over;
- When the Force Majeure clause is specifically invoked for non-performance of monetary payment obligations;
- When the Force Majeure event occurs after the affected party delays the performance, etc.
The steps that an organisation can take to mitigate risk in the current scenario
Given the current uncertainty and global outbreak of Coronavirus pandemic, measures to mitigate potential negative implications would include:
- Identify which existing contracts are affected by the lockdowns caused due to the spread of corona pandemic, supply chain disruptions, closures or delays etc;
- To assess the mutual rights and obligations of the parties in the identified contracts with respect to force majeure, governing law, unfulfilled dependencies, termination etc.
- If in doubt about whether a force majeure event applies to a specific contract, or what relief may be available in the present scenario, then before acting or sending any communications to the other party to the contract, legal advice should be sought.
- Consider the methods to be adopted for mitigating the risks associated with this outbreak.
- In case of a long list of force majeure events, it is likely to be helpful if exact and specific wordings such as “epidemic”, “crisis”, “outbreak”, “governmental action” “pandemic”, etc. are included in a contract.
- Watch out for words or terms in new contracts that require that the event of force majeure is “uncontrollable” or “unforeseeable”.
Conclusion
Looking into the present situation, the rescue of the Force Majeure clause in a contract for the affected party can be sought through the proper reading of the contract and considering whether the parties to such contract will be able to continue to perform their contractual obligations in consonance with the other clauses to find a positive solution in the current situation.
If performance may be significantly affected, it is crucial to device a way forward accordingly by reviewing the terms of the contracts and understanding the rights and obligations of the parties.
Further, it becomes important for the affected party to duly intimate the counterparty about its inability in the present scenario to fulfil its obligations under the contract and to mitigate the losses. A party, however, taking recourse under the doctrine of frustration under Section 56 of the Contract Act, on the ground of the performance becoming impossible due to certain overturning events like the present scenario, must reasonably show, in all bonafide that the supervening impossibility is such that even after taking all reasonable care and caution its performance has become impossible.
Either party is at the option to terminate the contract if the Force Majeure event continues beyond the agreed/ prescribed time period. Also, the watertight drafting of a contract is to be ensured for securing the equivalent rights of the parties – this becomes important because the courts while interpreting the contract will construe the Force Majeure clause in a ‘stricto sensu’ manner.
By – Ujjwal Nagaich
Associate with Kapil Sapra and Associates, a corporate commercial law firm based in Delhi and an office in Bangalore
[1] herbertsmith.com on 4 April 2012
[2] coveringcredit.com on 4 April 2012
[3] AIR 1954 SC 44
