Covid-19’s Impact on Force Majeure clauses

April 21, 2020

With the pandemic setting its foot in dismantling the living law. The repercussion is seemingly greater than its observable. The supply chain disruption caused by the Covid-19 pandemic, it is likely that performances under many contracts will be deferred, interrupted, or even cancelled.

Force Majeure is derived from a French etymology meaning ‘Superior force’. It is embodied under Sections 32 and 56 of the Indian Contract Act, 1872. The occurrence of a force majeure event protects a party from liability for its failure to perform a contractual obligation. Force majeure events include an Act of God or natural disasters, war but protects situations prevailed due to human interference- war-like situations, labour unrest or strikes, epidemics, pandemics, etc. The intention of a force majeure clause is to save the performing party from consequences because the occurrence impairs the party to neither control the situation nor take an account of its performativity.

The real test is to determine if Covid-19 would render the contractual obligation on the parties to be covered under force majeure. The law in India has been laid down in the seminal decision of the Supreme Court in the case of Satyabrata Ghose vs Mugneeram Bangur & Co.[1] The entire jurisprudence on the subject has been well summarised by Justice R.F. Nariman of the Supreme Court in a recent decision in the case of Energy Watchdog vs CERC[2]

[1] AIR 1954 SC 44
[2] (2017) 14 SCC 80.

A Covid-19 pandemic could make it more difficult for parties to perform their contractual obligations. There are two possible instances, which may suggest that a force majeure clause covers a pandemic:

(a) If the contractual definition of a force majeure event expressly includes a pandemic. Inclusion of pandemic to the list of force majeure events will provide clarity as to whether Covid-19 will render the agreement to be covered under the force majeure clause.

(b) If the force majeure clause covers extraordinary events or circumstances beyond the reasonable control of the parties. Such general, catch-all wording may be invoked if it is determined that the factual circumstances caused by the pandemic are beyond reasonable control of the affected party. Having said that, whether a party can be excused from a contract on account of Covid-19 being declared.

(c) It would further rest on the party’s specific obligation and nature of contract they are dealing with to resolve the application.

It is important to understand that the event must necessarily be unforeseeable or not reasonably foreseeable at the time of execution of a contract.

Remedies that maybe available would be-
Some contracts may provide for instant termination of the contract upon the happening of the force majeure event. Others may provide that the contract will be put on hold until we are out from the clutches of force majeure event. Some contracts may provide for limitations in time after which either party may terminate the agreement with written notice to the other. Others may require the contract to remain in effect until the force majeure event is resolved. Some contracts will only allow for certain obligations to be suspended.

These maybe a few deliberations as to how the contractual obligations would look at from the perspective of Force Majeure. Contract law being a private law is left for the parties to agree on the performance and obligations involved into it, the courts are approached only in terms of default and seeking damages and enforcing the contract. Further if Force majeure doesn’t cover the current crisis and avert the parties inability to perform, the Courts would see a surge of cases once they open and start functioning.

Author:
Arunima Shastri, Assistant Professor, Unitedworld School of Law (UWSL)

Disclaimer: The opinions / views expressed in this article are solely of the author in his / her individual capacity. They do not purport to reflect the opinions and/or views of the College and/or University or its members.