The COVID-19 epidemic has shattered worldwide economic connections, causing misery on employees, consumers, and businesses. As supply chains, manufacturing, and other economic activity have been disrupted, businesses have rushed to renegotiate contracts; as a result, the term “force majeure” has become increasingly relevant in contractual contexts for businesses today, and it is unclear how this term would be construed in a contract in the context of COVID-19.
Force majeure clauses are contractual provisions that allow one or both parties to stop or terminate performance in the case of a “force majeure event,” and these clauses have impacted and will continue to influence renegotiations in a variety of circumstances. Contracts and contract responsibilities are being reviewed to analyse the implications of the current COVID-19 scenario, since businesses and activities have been affected on a wide scale as a result of the same.
On February 19, 2020, the central government issued an office memorandum saying that supply chain interruptions caused by COVID-19 should be considered a natural disaster, and that force majeure provisions may be used in situations where it is judged appropriate.
We must first define what is meant by “force majeure”
According to Black’s Law Dictionary, a force majeure is an occurrence or consequence that cannot be predicted or controlled. It is a contractual provision that distributes the risk of loss if performance becomes impossible or impractical, particularly as a consequence of an unexpected or uncontrolled event.
While force majeure is not defined or explicitly addressed in Indian laws, it is referenced in Section 32 of the Indian Contract Act, 1872 (the “Contract Act”), which says that if a contract is contingent on the occurrence of an event that becomes impossible, the contract is null and invalid.
When a force majeure event happens, a force majeure clause provides a party with temporary respite from fulfilling its contractual duties. A force majeure clause often defines specific situations or occurrences that qualify as force majeure events, as well as the criteria that must be fulfilled for the force majeure clause to apply to the contract and the consequences of such occurrence. As a consequence, in order for a force majeure provision to apply (should a force majeure event occur), the occurrence of such events must be beyond the parties’ control, and the parties must show that reasonable measures were taken to mitigate the effect of the force majeure event.
If an occurrence or situation comes within the scope of a force majeure event and satisfies the clause’s application requirements, the parties shall be exempted from fulfilling their respective contractual obligations for the period of the force majeure event.
Depending on the wording of the provision, the parties may be obliged to give a written notice to the other party notifying them of the occurrence of such an event and the invocation of the force majeure clause. Some contracts also specify that if a force majeure event lasts a long time, the parties may be entitled to cancel the contract.
As a result, force majeure events include war, natural disasters such as hurricanes and earthquakes, and other unforeseen situations that are beyond the parties’ control and prohibit or negate the economic value of performance.
While the COVID-19 pandemic was undoubtedly beyond the control of contract parties, whether it excuses performance of any particular contractual obligation depends on how the relevant contract’s force majeure clause is drafted, the nature of the pandemic’s impact on a party’s ability to perform, and related fact-specific contractual relationship conditions.
Parties claiming that a pandemic excuses them from performance may be able to rely on a force majeure clause that explicitly includes pandemics as a list of force majeure occurrences. In other cases, parties will depend on catchall wording such as other comparable reasons (as stated above) or including but not limited to, which are intended to guarantee that courts properly understand force majeure.
The list of force majeure occurrences in a force majeure clause demonstrates, but does not exhaust, the meaning of force majeure in these and similar terms. The COVID-19 pandemic is comparable to the kinds of disasters often mentioned in force majeure agreements. Pandemics, like wars and natural disasters, are rare events that create significant disruptions to everyday life and regular economic activity. Even if a force majeure provision does not expressly include pandemics (which most do), a party claiming force majeure as a result of the COVID-19 pandemic will be able to argue that pandemics are implicitly covered.
The concept of force majeure has become a contentious matter as a result of the COVID-19 pandemic, as there have been delays in payments, completion of conditions precedent, and other requirements agreed upon by the parties to contracts, the pandemic has resulted in the breaking of many contracts, and further due to numerous lockdowns and restrictions, force majeure has become a vital ground on which p
As a result, once judgments are given in this respect, a comprehensive understanding of the use of force majeure during the COVID-19 pandemic will emerge. Until then, the court will use force majeure on a case-by-case basis.
Written by Somesh Vaidya