by Anuroop Geetha Asokan
This article was originally published in MoneyOnLive portal on 26 June, 2020.
Photo by Cytonn Photography on Unsplash
The COVID-19 epidemic has affected many countries and the World Health Organization on March 11, 2020, declared it as a ‘Pandemic’. The emergence of Covid 19 is having an unprecedented impact on the human race, businesses, and nations physically, psychologically, and economically. Humans, companies, and nations are relentlessly fighting with COVID 19 for survival.
COVID19 is also impacting the corporate/commercial sector to a great deal as it is tearing apart the economic stability of companies/businesses. Government of India (GOI) has taken several proactive preventive and mitigating measures to reduce the spread of this Pandemic and support the drowning economy. On 24.03.2020 Prime Minister of India declared a nationwide lockdown to curb the outbreak of the epidemic, but due to the uncontrollable spread of the pandemic, the lockdown has got extended for the fourth time.
Despite unrelenting efforts by humankind, companies, and governments to contain COVID 19, it will be extremely difficult to foresee the duration of COVID 19 impact on human life and businesses as it is spreading across the globe and showing almost no signs of a slowdown. COVID 19 has resulted in the downfall of businesses in almost all the verticals and business sectors across the globe. This chain reaction will lead to the momentous fall in the gross domestic product (GDP) and most sectors will be the worst hit in terms of finance and liquidity. Due to this lack of business and trade, most companies will face cash flow issues and a lack of resources. There will be uncertainty for a certain period until a permanent solution emerges.
One of the major impacts of COVID 19 on business is that it is hindering the ability of companies/businesses to perform their contractual obligations within stipulated time due to certain uncontrollable circumstances that businesses have never witnessed /experienced before. As a result of the same, Force Majeure (FM) clause has been in the limelight like never before as FM clause is highly debated and discussed concept in the contract arena as companies/businesses are thoroughly reviewing/assessing FM clauses in their contracts to seek exemption from the contractual performance. Origin of the ‘Force-Majeure’ word is linked to the French language which means ‘a superior force’. Force Majeure means the occurrence of an event beyond the reasonable control of a party which hinders the ability of such party to perform the contract. The term ‘force majeure’ has been defined in Black’s Law Dictionary, as ‘an event or effect that can be neither anticipated nor controlled. It is a contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially because of an event that the parties could not have anticipated or controlled.’ In such cases, non-performing parties may seek relief from a contractual performance by invoking the FM Clause.
A hypothetical example to explain the concept of force majeure in a contract. Company A had entered into a supply contract for a good with Company B and such a supply contract makes specific reference to the occurrence of a force majeure event and consequences of the same. The force majeure provision in the supply contract includes within its ambit any acts/orders of government and upon the occurrence of a force majeure event, a notice of the happening of such event shall be given by either party to the other within 30 days from the date of occurrence of such event, and consequently, obligations of Company B to supply the goods to Company A and obligation of Company A to make payments to Company B for such goods shall be deferred for a period of three months. Since in present times, due to the Corona Virus, the lockdown imposed by the government can be construed as an act/order of the government, Company B will be required to issue a notice to Company A indicating that such an event has occurred and the lockdown is beyond the control of Company B and they considered various options to continue with their obligations as before, but the unforeseen and serious natural conditions of the pandemic have depleted the options and therefore provisions of force majeure clause will be invoked and all obligations of Company A and Company B shall be deferred for a period during which the order for lockdown continues to be in effect.
“Force majeure” is governed by the Indian Contract Act, 1872. It is an express or implied clause in a contract, and it is governed by Chapter III dealing with the contingent contracts, and more particularly, Section 32 thereof. In so far as a force majeure event occurs outside the scope of the contract, it is dealt with by a rule of positive law under Section 56 of the Contract. Sections 32 and 56 are set out herein:
“Section 32: Enforcement of Contracts contingent on an event happening – Contingent contracts to do or not to do anything if an uncertain future event happens, cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contracts become void.”
“Section 56: Agreement to do impossible act – An agreement to do an act impossible in itself is void. Contract to do the act afterwards becomes impossible or unlawful. A contract to do an act which, after the contract 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.”
Most of the agreements will by default have an FM clause, which will excuse a party from a contractual performance upon the occurrence of any uncontrolled, unforeseeable, or any other event beyond the control of parties. FM clause will modify the course of assessing the contractual liability of a party based on the occurrence of certain extraordinary events without the involvement of parties. Invoking of the FM clause to seek immunity from the contractual performance will have different implications as components of the FM clause may vary from contract to contract. Such implications shall include a grant of immunity from contract performance without liability, an extension of the time period to facilitate contractual performance, condonation of delay in contractual performance, instant termination, or conditional termination of contract based on the prevalence of FM events beyond a certain period of time.
Force Majeure events can be defined with descriptive terminology which is generic in nature or with a defined list of force majeure events in the agreement. Acceptance of Covid 19 as an FM event will be highly influenced by the description of the FM event in the FM clause. If the word ‘Pandemic’ is inducted into FM events, then Covid 19 will directly qualify as an FM event. There will be certain direct/ancillary consequences of Covid 19. Direct consequences will be straight away considered as FM events. However, consideration of ancillary consequences of Covid 19 as FM event may require a strict assessment of such consequences coupled with interpretation of FM clause wording and relevant laws. The real challenge to determine Covid 19 as an FM event is with the usage of a generic description of wordings such as ‘Uncontrolled, Unforeseeable, or another event which is beyond the reasonable control of a party’. In such cases, the determination of Covid 19 as an FM event will be highly influenced by facts and circumstances of the case and interpretation/discretion of the court. If FM clause is a combination of a defined list of FM events along with usage of generic description (beyond reasonable control) and word ‘Pandemic’ is not part of such FM clause then the determination of Covid 19 as FM event will have to be decided based on the relevance of circumstances/interpretation of case specifics facts. In these challenging times, courts may take a lenient view in interpreting FM clauses to conclude Covid 19 as FM event as companies/businesses are reeling under immense economic pressure due to the economic slump created by Covid 19.
Another aspect that will influence the conclusion of Covid19 as an FM event is its effect on the contractual performance of a party. Such effects can be described in the form of prevention, hindrance, and delay of contractual performance. Prevention reflects the improbability of performance of a contractual obligation due to certain uncontrolled contingencies. Hindrance reflects a degree of difficulty to perform contractual obligations because of substantial variance in performance metrics/circumstances. Delay in the performance of a contract will result in the occurrence of certain performance obstructing events for a considerable period. A party is unable to Perform a contract solely due to the prevalence of FM events provided all reasonable efforts are taken by a party to perform the contract. A party who intends to invoke the FM clause must comply with certain procedural aspects as agreed in the contract and as stipulated by law. Adoption of certain measures will be vital to invoke FM clauses for seeking immunity from the contractual performance. Such measures shall include:
- All reasonable efforts must be made by a party to pursue alternative modes to perform contract prior to invoking FM clause – Despite such reasonable efforts, the party is unable to find alternative means to perform the contract.
- An extensive review of contract including FM clause to evaluate the application of FM clause/other allied provisions in conjunction with prevailing circumstances affecting the contractual performance of the party.
- Such a review will assist non-performing parties in composing a comprehensive FM notice to counterparty detailing the reasons for its inability to perform the contract.
- A defined list of FM events will have clear application/implications as only events that are part of such a list will be qualified as FM events and will leave no latitude for ambiguity.
- The absence of a defined list of FM events will be a challenging task to establish and prove an FM event to the satisfaction of the court.
- In such cases the wording of FM clauses must be carefully analyzed to spot out the wording is restrictive in nature or flexible in nature.
- Depending upon wording, it is advisable to list out qualified FM events from the descriptive wording of the FM clause in a contract is crucial to invoke FM clause as they form the ground for non-performing party immunity claims from the contractual performance.
- Further deep introspection of FM clause to identify underperformance of contract due to failure of a party to meet the conditional criterion as contract performance is contingent on fulfillment of certain conditions is one of the vital aspects to determine the course of invoking FM clause.
- From an interpretation perspective, courts will rely heavily on FM events expressly listed in FM clauses and circumstances backing up such FM events.
- Prepare solid documentary evidence backing up your claim to seek relief from contractual performance due to the occurrence of uncontrolled events.
- It is advisable not to be reliant on the upsurge in financial/business metrics as a reason for non-performance as the probability to grant immunity from non-performance on this ground will be slim.
- Non-performing parties who are planning to invoke the FM clause must check the circumstances hindering such party ability to perform contract has the essence of FM event as defined in the contract.
Certain companies/businesses already started forwarding notices to other parties invoking FM clauses. It is expected that more companies will invoke FM clauses and seek immunity from contract performance. A party who issuing FM clause must prove to court satisfaction of the following aspects:
- Uncontrolled events are covered under the ambit of the FM clause in the agreement.
- The occurrence of the FM event has hindered such party ability to perform the contract, and
- Company has made all reasonable efforts to perform the contract and tried various alternate modes. However, all its efforts were in vain as it was unable to perform the contract.