The lockdown due to COVID-19 has brought business activity to a grinding halt, prompting companies to declare force majeure. But, from a legal standpoint, how important is it to include this clause when you enter into a contract with several parties?
The world has hit the pause button. But contractual obligations must be fulfilled, unless something extraordinary happens. Given the unexpected nature of the pandemic, businesses are asking whether that “something” is COVID-19? The answer lies in the language of contracts.
The concept of force majeure — a ‘superior force’ — was derived from French civil law and later embodied under Sections 32 and 56 of the Indian Contract Act, 1872. This provision provides for relief to parties when a contract becomes impossible or onerous to perform due to circumstances beyond the control of parties. Common force majeure events include floods, fire, an act of God or natural disasters, war, labour strikes, epidemics, pandemics, or simply an event beyond the control of parties. However, the extent to which it saves you from consequences of non-performance is contingent upon the language of the contract. Whether a force majeure clause covers a pandemic depends on the language of contracts, which may be broad or restrictive as agreeable to the parties of a contract. Now, a contract may specify all events that would trigger a force majeure clause, or may loosely define force majeure event as “an event beyond the parties’ control”, leaving room for interpretation. Given the extraordinary circumstances of the emergence of COVID-19, most contracts may not have it listed directly as a force majeure event. In such a scenario, companies must look for relevant language such as ‘disease,’ ‘epidemic,’ ‘pandemic,’ ‘quarantine,’ or ‘acts of government,’ which may be interpreted to include the COVID-19 outbreak. However, the provision does not provide comprehensive, absolute protection against any non-fulfillment of contractual obligations. So, when public health crises or pandemic events such as the COVID-19 are not explicitly included in the agreements — as is most commonly observed — creative arguments and legal advocacy will be critical in creating the best interpretation of the provision to support a force majeure defence.
Other key pointers while invoking the force majeure clause are as follows: Companies also have the ‘duty to mitigate’ effects arising from such events by taking proactive steps and exercising reasonable diligence. The Indian courts have held, time and again, that the burden of proof for a force majeure defence lies with the party asserting it. Furthermore, if other factors lead to the party’s non-performance, then a force majeure clause may not be applicable. Alternate remedies to force majeure In contrast to force majeure clauses, parties may invoke other terms such as limitation or exclusion clauses, material adverse change clauses, escalation or price adjustment clauses and study its implications as stipulated under liquidated damages or predetermined compensation clauses in the event of non-performance of contractual terms. However, a party’s ability to invoke other defences is contingent upon the language of the contract and interpretation of the courts. Further, a party can claim relief under Section 56 of the Indian Contract Act, 1872, commonly referred to as the Doctrine of Frustration. The doctrine is applicable in cases where the occurrence of an event has made the performance of the contract to be impossible and beyond the control of the promisor — typically, death or incapacity of a party, a frustration by virtue of legislation, or material change of circumstances leads to frustration of a contract. In the present scenario, unprecedented government orders arising from the COVID-19 pandemic —like the prohibition on public gatherings, curfews and travel restrictions — may give rise to a valid impossibility defence. However, mere government regulation does not excuse non-performance by a party. Parties seeking an impossibility defence must exhaust all reasonable steps for performance before asserting impossibility under a contract.
Businesses must, in such unprecedented times, collaboratively work with counter-parties to reach a mutually beneficial solution before going down the adversarial route of litigation, arbitration and adjudication. However, if amicable discussions fail companies should assess their rights and liabilities in regards to force majeure, termination and dispute resolution under a fine lens and in due course renegotiate contractual terms to mitigate damages to avoid suffocation of monies involved in these commercial contracts. Further, parties should assemble and retain all correspondences to insulate themselves from disputes arising in near future.
The pandemic has engulfed over 200 countries and restoration of normalcy appears to be a distant dream in India. Therefore, in a jurisdiction where words of a contract are sacrosanct with little to no intervention by the courts, a deep collaboration between parties to a contract with a shared objective of contractual performance, may be the way forward.