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COVID-19 AND FORCE MAJEURE COVID-19 AND FORCE MAJEURE

Bronze medal Reporter Jeevesh Mehta, Advocate Posted 17 Apr 2020
COVID-19 AND FORCE MAJEURE

 

COVID-19 AND FORCE MAJEURE

(Impossibilities & Difficulties in Business Operations)

|Brief Analyses|

 

 

 

We all know that COVID-19 is affecting the lives of each and every human being on this earth and all are locked down or they are infected by this deadly disease. Therefore at the micro level or the personal front we are very much concerned and we are finding ways to deal with. But at the macro level or at the market / commercial level, we are at stand still position too. But, in the times to come i.e during the upcoming second spell of lock down and immediately after the lock down will be over, Majority of the business houses , commercial establishments and corporates will be facing tremendous problems, shortage of supplies, funds shortage, scarcity of resources etc.  

 

The Coronavirus (COVID-19) is having a profound impact on business globally. Supply chains, employees, event staging and travel are all already affected and have a significant impact on the operation of businesses. The situation remains unpredictable and businesses need to act promptly to rapidly changing circumstances.

 

 

Contractual Obligations

 

For the businesses, the focus area during this lock down is now shifting towards the contractual obligations conferred on them. As such, reference should be made to the most generic looking clause in most of the contracts i.e FORCE MAJEURE. Often we have not felt this clause too important to be referred to or even negotiated. But as you go through the below write up , you would start contemplating the said clause in your contract. Also you may think to take action accordingly.

 

  • You may be asking the question  “whether a force majeure clause releives you as a party from performing your obligations?
  • The answer depends on the provisions of your contract and particular circumstances.

 

Defining Force Majeure

“Force majeure is a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as a  war, strike, riot, crime, epidemic or an event described by the legal term act of god (hurricane, flood, earthquake, volcanic eruption etc.), prevents one or both parties from fulfilling their obligations under the contract..”

Force Majeure clauses may have a variety of consequences, including:

  • Relieving the party or parties from performing the contract in whole or in part;
  • Relieving the parties or party from delay in performance, entitling them to suspend or claim an extension of time for performance; or
  • giving the parties a right to terminate.

Whether the force majeure clause relieves a party of contractual obligation will, depend on the exact wording used in such clause & most importantly Nature of the goods / services and the situation that has arisen.

Some Examples of the force Majeure clause :

 

 

 

 

 

Force Majeure & COVID -19

While drafting the Force Majeure clause in a contract we have been mentioning the events such as war, terrorism, earthquakes, hurricanes, acts of government, plagues or epidemics.

  • Where the term epidemic, or pandemic, has been used, that will clearly cover Covid-19.

 

  • The current situation of COVID 19 should also merit classification where a government body has imposed travel restrictions, quarantines, or trade embargoes, or has closed buildings or borders.

{Where no relevant event is specifically mentioned in the clause, it would be important to consider whether the list of events included was intended to be exhaustive or non exhaustive along with the intentions of the parties in the contract.}

{Contracts might, for example, refer to events or circumstances "beyond the parties' reasonable control". Determining whether this covers issues arising from Covid-19 is a question of interpretation and is depended on the fact of each case.}

Clauses may give a list of specific criteria, such as fire, flood, war and so on, alongside wider, general wording, such as "or any other causes beyond our control". Every event mentioned shall be given a broader interpretation. One of the example of badly drafted contract is where there is Standalone references to "force majeure, without any definition or other relevant wording by reference to which the term can be interpreted, may be considered  to be void.

Impact on parties to contract due to COVID 19

The lock down in the country do not allow most of the businesses to perform their activities or few of them are allowed to some extent depending upon the nature of the goods or services they are dealing in. Under any case it would be important to observe that, just because a force majeure event has occurred does not necessarily mean that the parties to a contract will be protected from liability for failing to perform or delay in performance.

There may situations wherein the parties will either be prevented in total to perform or their performance becomes difficult or performance will be delayed due to the prevailing lock down situation.

"Prevented" means that it must be physically or legally impossible to perform. It is not enough that performance is more difficult, more expensive, or less profitable.

 "Difficulty" – or "interfered with" may be triggered by performance being made more difficult or not in a routine manner. E.g a shortage of raw materials caused by a force majeure event may make the performance difficult for a manufacturing contract if those materials can be obtained at a higher cost or through longer route or not from usual supplier. However, the fact that performing would simply be less profitable due to higher costs, is not  sufficient to relieve the party in question of liability to perform.

Proving that performance has been "Delayed" should come with an intention to perform the obligation sooner or later according to the circumstances. There has to be a clear intent and effort to perform.

Example: A Medical Supplies distributor having a contract with Super Mart chain, wherein distributor is required to ensure the minimum level of stock at all times. Due to lock down, distributor’s usual transporter is suffering from COVID and thus not able to work for Distributor. Distributor sent a email to the Super mart and informed about the delay in supply. Super Mart suffered loss and reduced customer footfall due to this. The distributor is not entitled to take the excuse of ill ness of transporter because the supplies could have been done through some other transporter.

( Keeping in mind that medical supplies are covered under exempted goods being essential items. )

Onus to prove or invoke Force Majeure vests upon the party invoking it.

A party seeking to rely on a force majeure clause must  show that:

  • the force majeure event was the cause of the inability to perform or delayed performance;
  • their non-performance was due to circumstances beyond their control; and
  • there were no reasonable steps that they could have taken to avoid or mitigate the event or its consequences.

 

Avoiding and mitigating the event and its effects by the parties to the contract constitutes a essential burden on the party invoking the force majeure clause . The party which could have performed the obligation through the alternative mode or channel can not take the plea of non performance or difficulty. It is crucial to explore whether alternatives, such as alternative sources of labour or materials, are reasonably available – including at higher cost. The court would analyse each situation before them on case to case bases.

 

How do a party invoke Force Majeure clause?

A party to the contract seeking to invoke the force majeure clause must comply with procedural requirements under the contract, such as a requirement to give notice of its intention to invoke such clause to the other party within particular timescales. It is advised that every affected party must without fail notify the other party even though in case of obvious and evident circumstances like present where no one is able to fulfil their part. This is required to avoid any technical error in the conduct of the party before the court of law in case of any such dispute in future.

 

Effect of invoking the Force Majeure clause.

Force majeure clauses generally provide for extension of time, suspension of time, or termination in the event of continued delay or non-performance. A right of termination could be commercially important, as it may provide scope to renegotiate contractual terms.

When an obligation is fulfilled by any party by incurring extra cost, in that case it would again be relevant to consider the contract if there is any agreement between the parties for such extra cost. If not, then it is likely that costs will be borne by the party that has incurred them. This would be a probable dispute which would arise between the parties as neither of them would like to incur or bear a cost which other wise would not have been incurred in normal circumstances.

 

 

When there is no Force Majeure Clause in a contract.

If there is no force majeure clause, an affected party will have to look to other provisions of the contract for potential routes out of its difficulties. If the contract does not provide any such routes, it may in certain circumstances be possible to rely on Section  56 of the Indian Contract Act 1872. The extract of the section 56 is reproduced herein below.

Section 56 : An agreement to do an act impossible in itself is void.

Contract to do an act afterwards becoming impossible or unlawful.—A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.

……

As per the provisions laid down by section 56, impossibility /Frustration of contract requires that an unforeseen subsequent event outside the control of the parties has made the contract impossible to perform or has made the obligations of the parties changed to such extent that it becomes no longer feasible to perform.

Under the present circumstances of COVID 19 it is most likely that the courts under the contracts without force majeure clause or under transactions without any contract, would hold that the performance of the act was impossible and the parties are not entitled to claim any compensation or damage from the other.

As has been discussed above with the test for "prevention" of performance under force majeure clauses, the fact that performance has been made more difficult or costly is not enough. These circumstances would come under the transactions or contracts of essential items or services which have been exempted by the government from the lock down orders in the country.

The parties to such contracts must be very careful in invoking force majeure as merely pleading difficulty or expensive performance would not help them. They are in any way allowed by the government to procure, sell and distribute such essential items. Instances of stock holdings and raising the price of the product also can not be ruled out at this time, e.g surging prices of face masks, PPE kits , medicines etc.

 

Conclusion & Way Forward:

It is likely rather undoubtedly, the Indian Government and governments around the world would consider COVID 19 to be considered as a Force Majeure event because of its unprecedented nature.  

In unprecedented circumstances like the present, the courts are likely to be generous in their interpretation of this sort of wording when faced with parties who have encountered genuine difficulties in performing. However, such parties will still need to show that their non-performance, or late performance, was truly outside their control and could not have been prevented or mitigated.

Parties seeking to invoke force majeure clause should follow the following steps:

  • consider the exact wording of the force majeure clause, the contract as a whole in conjunction with the present circumstances that have arisen. Post determination of events, impossibilities and difficulties being faced, early legal advice should be sought.
  • As per the nature of the transactions ( whether essential or non essential item or product/ services ) Consider other routes and remedies, or any effort or act to mitigate the loss or difficulty already taken or not.
  • Serve any notices as required under the contract, as soon as possible and in accordance with the notice provisions. Consider carefully what event or circumstance you allege constitutes the force majeure event, taking into account the wording of the clause and the timescales required for service of notice.
  • Party to keep a documentary record, particularly of, why performance was impossible, hindered or delayed as the case may be; the steps taken to find alternatives and mitigate loss; and the service of any notices.(This would include the record of already manufactured goods, procurements,  just before the lock down, so as to justify the cost  or loss incurred) 
  • In case of no force majeure clause, consider frustration, but do consider the high degree of proof to show impossibility of performance.
  • Not to rely on the excuses like increased costs to relieve non‑performance or delay, where the performance is other wise allowed or open by the government.

 

 

 

It is advisable that the parties to keep all their communications in relation to contractual obligations, understandings etc in writing specifically during this time of lock down. These written communications would play an important role in explaining circumstances under lock down, transparency, diligence and even in demonstrating in a possible subsequent judicial outcome.

 

 

 

 

Jeevesh Mehta |Advocate| Lead Partner|

Maven Legal LLP- Advocates & Consultants

                                    Email: [email protected]

                                             Mob: 9811617186

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