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Force Majeure: Will the Pre- Litigation Mediation helps the Companies?

By 10/05/2021June 7th, 2021No Comments

 In a contract, a clause in which there is a reference of Force Majeure which removes the liability of the participants for not fulfilling its obligation caused by the natural and unavoidable catastrophes that interrupt the expected course of events.

History:

This notion is defined and handled differently depending on the jurisdiction. It is also based on French civil law and is recognized by the Napoleonic Code. The English invented the concept of the Force Majeure clause. An English court determined in Taylor v. Caldwell that circumstances beyond the control or fault of two contractual parties excused performance under their agreement. In the case of The Tornado, the Supreme Court of the United States established the same rule of law 20 years later. And in this case, the US SC very clearly said that if the contract doesn’t include this clause then the court will apply and go with the principles first laid down in the case of Tyler v Caldwell. (1863).

The Indian Contract Act of 1872 incorporates a Force Majeure provision. Section 32 is dedicated to contingent interaction. The frustration of the Contract is dealt with in Section 56. It is crucial to note that even though Covid-19 comes within the scope of the force majeure provision, this does not automatically provide relief to the parties. The force majeure event must have a direct impact on the non- performance. 

Current scenario:

As previously stated, this idea is applied when the parties are unable to complete the contract owing to circumstances beyond their control. The question that now emerges is what specifically is covered by this concept. Although Indian Courts have not directly ruled on whether an epidemic/ pandemic like Covid-19 is an ‘Act of God’, the decision of the Supreme Court in The Divisional Controller, KSRTC v. Mahadeva Shetty, which holds that the expression ‘Act of God’ signifies the operation of natural forces which is beyond the human control with the caveat that every unexpected natural event does not operate as an excuse from liability if there is a reasonable possibility of anticipating their happening.

Pros – 

  ‘Force Majeure’ clause to protect your business interests and the contract.

▪  With legal help, you can retain the contract.

  With the help of this clause, parties can obtain temporary relief from performing their obligation.  

Cons-  

  The Force Majeure clause not only excuses a party from performing but sometimes eliminates damage for breach of contract. 

  It is difficult to find out what event is considered under the ambit of Force Majeure. 

Industry impact:

COVID-19 has wreaked havoc on the economy in a variety of industries, including hotels, aviation, automotive, construction, logistics, and more, and many contractual performance duties have been rendered impossible. Many others, though more difficult, demanding, or expensive, are nevertheless physically or legally viable. COVID-19, on the other hand, will continue to have a destructive effect on world health and economics.

The worldwide COVID-19 epidemic has wreaked havoc on all industries and put a large portion of the world’s population under lockdown. This has caused firms to cease operating efficiently, as well as affecting other operations and contracts. On the issue of contracts, this outbreak has brought many new aspects like, one of which includes the Force Majeure clause that impacts formal contracts. The COVID-19 pandemic has made many contracts delayed, interrupted, or even canceled.

Companies are facing disruptions to their supply chains, whether it’s due to vendors that are no longer providing services or customers who seemingly vanish. Then who’s to blame if the supply chain breaks down in the event of a pandemic? What should a corporation do if its vendors refuse to work or are unable to work because its staff is at home? And, when a company’s revenue stream has abruptly dried up, how can it avoid paying payments under its contracts?

Conclusion:

While various contractual parties may attempt to rescind their commitments in the wake of the Covid-19 epidemic, relying on the force majeure provision in the applicable contract or Section 56 of the Act to do so is not guaranteed.  The onus of demonstrating whether Covid19 affected the performance of the specific contractual obligations in a particular case lies heavily on the party seeking to have its non-performance is excused. 

Although determining whether the Covid-19 epidemic is within the scope of the appropriate force majeure clause is a good place to start, other factors such as causality and the duty to mitigate must also be considered in order to analyze the relative strengths and weaknesses of each party’s position. Relevant letters and correspondence (including force majeure notices) should also meticulously document not just the fact that a force majeure event has occurred, but also the specific effects of the same on the contractual obligation which the party seeks to be excused from performing. 

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