COVID-19: The Force Majeure clause and its impact on contracts
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 businesses and has impacted existing operations and contracts. On the issue of contracts, this outbreak has brought many new aspects to the fore, one of which includes the Force Majeure clause that impacts formal contracts. Given the disruption of supply chains caused by the COVID-19 pandemic, many contracts will be delayed, interrupted, or even cancelled.
What is Force Majeure?
As per the Manual for Procurement of Goods 2017, a Force Majeure (FM) means extraordinary events or circumstances beyond human control such as an event described as an act of God (like a natural calamity) or events such as a war, strikes, riots, crimes (but not including negligence or wrong-doing, predictable/seasonal rain and any other events specifically excluded in the clause).
An FM clause in the contract frees both parties from contractual liability or obligation when prevented by such events from fulfilling their obligations under the contract. This clause does not excuse a party’s non-performance entirely, but only suspends it for the duration of the FM. The firm has to give notice of FM as soon as it occurs and it cannot be claimed ex-post facto.
There may be a FM situation affecting the purchasing organisation only. In such a situation, the purchasing organisation is to communicate with the supplier along similar lines as above for further necessary action. If the performance in whole or in part or any obligation under this contract is prevented or delayed by any reason of FM for a period exceeding 90 (ninety) days, either party may, at its option, terminate the contract without any financial repercussion on either sides.
Notwithstanding the punitive provisions contained in the contract for delay or breach of contract, the supplier would not be liable for imposition of any such sanction so long as the delay and/ or failure of the supplier in fulfilling its obligations under the contract is the result of an event covered in the FM clause.
Is COVID-19 considered under the Force Majeure clause in India?
The Ministry of Finance notification dated 19th Feb 2020, addresses this doubt and clarifies that the disruption of supply chains due to the spread of corona virus should be considered as a case of natural calamity and Force Majeure clause may be invoked, wherever considered appropriate, following due procedures.
Invocation of Force Majeure clause in Indian contracts
Many contracts may not contain the Force Majeure clause explicitly to define clear execution/procedures to be conducted to claim benefits under the clause due to the COVID-19 outbreak.
According to BloombergQuint, whether a party can be excused from a contract on account of COVID-19 being declared a pandemic is a fact-specific determination that will depend on the nature of the party’s obligations and the specific terms of the contract. If the contract does not include a Force Majeure clause, the affected party could claim relief under the ‘Doctrine of Frustration’ under Section 56 of the Indian Contract Act, 1872.