With the outbreak of the novel corona virus a large part of the world’s population is under lockdown because of which all the industries have been disrupted. Due to lockdown the businesses are not able to perform their work efficiently and it is affecting their existing operations and contractual obligations. In the context of contracts, this pandemic has brought a number of new characteristics to the contracts which include the Force Majeure clause, which is influencing the formal contracts. The disturbances which is caused in the supply chain because of the COVID-19 pandemic a number of contracts have been delayed, interrupted or even canceled.
According to the Manual for Procurement of Goods 2017, Force Majeure are extraordinary events or situations which are beyond the human control, for instance, events reported as an Act of God (example, a natural calamity) or circumstances of war, strikes, riots, crimes. It does not include any negligence, wrong-doing, predictable or seasonal rain or any other such event.
A contract having Force Majeure clause liberates both the parties from their contractual obligations when they are being prevented from fulfilling their liabilities under certain situations. However, this clause does not fully exempt a party’s non-performance, but suspends it for the period of Force Majeure. As soon as such situation occurs, the party has to give the notice of Force Majeure and it cannot be declared as ex-post facto.
Force Majeure clause during Corona Virus
On February 19, 2020, the Government of India issued an Office Memorandum which stated that the corona virus will be observed as a natural calamity and Force Majeure will be applied wherever it is found necessary. Although in India it is a common exercise to include the clause of Force Majeure in commercial contracts. Hence, it is time for businesses to go through their commercial contracts and take appropriate actions under the Force Majeure clause, if it is proved that the current situation of COVID-19 will stop either of the party of contract to fulfil their contractual obligations in the specified time.
Force Majeure clause in a Contract
In Indian contracts, Force Majeure Clause vary widely and as a result of that it is very important to study these clauses very carefully. Some of the contracts gives a specific list of events that would be covered under the Force Majeure clause. On the other hand, other contracts use certain common list of events which are to be covered under the Force Majeure clause.
In a contract, the Force Majeure clause basically includes a comprehensive list of events which include situations like act of God, terrorism, war, earthquakes. Hurricanes, act of government, explosion , fire, plagues, epidemics or pandemics. Other than this the contracts can have a non-comprehensive list of events where parties basically state certain force majeure events and in the end just add “such other acts or events that are beyond the control of the parties.” Along with the events the force majeure clause would also include the conditions to be satisfied for such force majeure clause to be applied in the contract along with the result of the happening of such force majeure event. The following outcome would include the postponement of the obligation of parties on the happening of the force majeure event.
If the contract does not include a force majeure clause, then the parties of the contract have to find out the nature of the contract along with the nature of the event and that whether section 56 of the Indian Contract Act, which talks about the agreements between the parties to perform any impossible act, is applied to such contracts in order to help such parties to discharge their contractual liabilities.
For example, Company A entered into a supply contract of non-essential goods with Company B and their supply contract sepcifically mentioned the happening of any force majeure event and the consequences of the same.
The force majeure clause in the supply contract included the orders of the government and on happening of any force majeure incident, the either has to give notice regarding the same to the other party within 30 days of happening of such event. As a result of that, the liabilities of Company B to supply goods to Company A and the liability of Company A to to make payment to Company B for those goods shall be postponed for the period of 6 months.
In the present situation, the order of the government to impose lockdown due to the spread of novel corona virus, Company B should issue a notice to Company A stating that such event is taken place by the order of the government and it is beyond the powers of the company. As a result of that the obligations of both Company A and Company B are to be postponed till the period the lockdown continues to be in effect.