Force Majeure Clause and its impact on contract

Introduction

The global COVID-19 outbreak has disrupted all industries and has put a significant population of the world under lockdown. This prevents the efficient working of the business and has impacted existing operations and contracts. On the issue of contracts, this outbreak has brought many new aspects to the force. One of which includes the Force Majeure clause that impact formal contracts. Given the disruption of the supply chain caused by the COVID-19 pandemic, many contracts will be delayed or even canceled.

What is Force Majeure?

As per the manual for Procurement of Goods, 2017:

A Force Majeure (FM) means an extraordinary event or circumstances beyond the human control; such an event described as an Act of God (like natural calamity) or events such as war, strike, riots, crimes (but not including negligence or wrong-doing, predictable/seasonal rain and any other event specially excluded in the clause). It is a clause that is included in the contract to remove the liability for natural and unavoidable catastrophes. Force Majeure has been defined and especially dealt with some references. As is discussed in section 32 of the Indian Contract Act,1872. That tells that if a contract is contingent on the happening of the event becomes impossible, then the contract becomes void. It is a reprieve to the party from performing its obligation.

A Force Majeure clause depends upon some circumstances and condition such as:

• The occurrence of such an event should be beyond the control of the parties.
• The parties have attempted to mitigate the impact of such Force Majeure clause

By fulfilling these above mention condition, the parties would get relieved from performing their respective obligation

For further liabilities, the parties can issue a notice by proclaiming the occurrence of the Force Majeure clause. If this Force Majeure continues for a long period (exceeding 90 days) then some provision of the contract tells that the parties can be permitted to terminate the contract

Is COVID-19 considered under the Force Majeure clause in India?

The ministry of Finance notification dated 19^th Feb 2020, addresses this doubt. It clarifies that the disruption of supply chain due to the spread of coronavirus is a considerable case of natural calamity. Consequently, force majeure clause may be invoked, wherever considered appropriate, following due procedure

Invocation of Force Majeure clause in Indian Contracts

Many contracts may not contain the Force Majeure clause explicitly. This is to define a clear execution /procedure to be conducted, to claim the benefit under the clause. Because of the COVID-19 outbreak.

According to Bloomberg Quint, whether a party can be excused from a contract on account of COVID-19 being declared a pandemic is an effective determination; It depends upon the nature of the parties’ obligations and the specific terms of the contract. If the contract doesn’t include a Force Majeure clause, the affected party claims relief under the ‘Doctrine of Frustration’ ; as is defined under section 56 of the Indian Contract Act, 1872.

EXAMPLE OF FORCE MAJEURE CLAUSE:

Force Majeure clause can be explained with a hypothetical example relating to the current scenario.

Suppose there is a company named X who has entered into a supply contract with company Y for supplying nonessential goods; and supply contract doesn’t take place as it comes within the ambit of orders of the government upon the occurrence of a force majeure event (COVID-19). So in that case, either of the company may give notice to other within the 30 days from the occurrence of such event; and the obligation of company Y to supply the goods to company X; and the obligation of company X to make payments to company Y for such goods is deferred for seven weeks.

As in present, due to spread of novel coronavirus the government has imposed lockdown. In that case the company Y will be required to issue a notice to company X telling that such event has occurred. Subsequently the lockdown is beyond the company Y and therefore the provisions of force majeure clause will trigger. Deferring of all obligations of company X and company Y for a period during the order for lockdown continues in effect.