Force Majeure Clauses amid a Pandemic – A New Normal
Blog wpadmin January 27, 2021
The conditions created by the coronavirus (COVID-19) pandemic and resulting government shutdown orders have raised questions across various industries regarding contractual rights and obligations during any crisis.
One contract provision in particular is gathering significant attention: The Force majeure clause.
Recently, these clauses have evolved from boilerplate provisions at the end of a contract to now being front and center in many contract negotiations.
Inthis blog post, we will review considerations for drafting force majeure clauses within the current environment.
Across the globe, businesses are experiencing issues with productivity due to employees being self-quarantined to prevent risk of exposure to the coronavirus (COVID-19), and due to facilities being shut down in an attempt to slow the virus’ spread. In light of this, many businesses are now seeking to determine whether they are obligated to perform under their contracts, or whether they can invoke a force majeure clause to excuse performance temporarily or even permanently.
A “force majeure” clause (French for “superior force”) is a contract provision that relieves the parties from performing their contractual obligations when certain circumstances beyond their control arise, making performance inadvisable, commercially impracticable, illegal, or impossible.
In the absence of a force majeure clause, parties to a contract are left to the mercy of the narrow common law contract doctrines of “impracticability” and “frustration of purpose,” which rarely result in excuse of performance. Instead of relying on the common law, meeting planners can better achieve flexibility during times of crisis through a carefully negotiated force majeure clause.
Indian Jurisprudence on the concept of Force Majeure:
A force majeure clause may excuse a party’s performance based upon the occurrence of an unforeseen event – a trigger. Determining which type of circumstances will be covered by the force majeure clause is essential. Provisions often cover
– natural disasters like hurricanes, floods, earthquakes, and weather disturbances sometimes referred to as “acts of God”;
– manmade or other disruptive events, may include war, terrorism or threats of terrorism, civil disorder, labor strikes or disruptions, fire, disease or medical pandemic / epidemics outbreak;or
– curtailment of transportation facilities preventing or delaying attendance by at least twenty-five percent of meeting participants.
The essential ingredients of force majeure clauses are as follows:
1. An unexpected/unforeseen intervening event occurred;
2. The parties to the agreement assumed that such an event will not occur;
3. Such an event has made the performance of the obligations under the contract impossible or impracticable;
4. The parties have taken all such measures to perform the obligations under the agreement or at least to mitigate the damage; and
5. The affected party claiming relief under force majeure, will have the burden of proof to show that the force majeure event has affected such party’s performance of the contract.
Parties cannot rely on force majeure, if there is no such clause in the contract. If such a provision exists, the effect of the clause depends on how the clause is drafted, and courts generally review the plain language of the contract to determine, if it is applicable.
Awareness related to Restrictive Language:
Force majeure clauses can be drafted in specific or general terms, and they can excuse a party from partially or wholly performing its obligations in a contract, permit termination of contracts, or permit its suspension. It’s meaning may depend on which law governs the contract and the contract’s specific language. These clauses are risk shifting, meaning that Party A and Party B can agree that
– one of them will bear the economic damages of the disaster in question; or
– permit rescheduling or other delays until the force majeure event has passed within a reasonable period.
Some practical considerations while drafting Force majeure clauses:
1) Check the contract to identify if it includes a force majeure clause. If it does, one should consider whether the event in question may qualify as a force majeure, i.e., an unforeseeable circumstance that prevents one party from fulfilling the contract under its terms;
2) Check whether the risk of nonperformance was foreseeable and able to be mitigated or whether the performance was truly impossible, and
3) If the performance is affected or would be affected as a result of theunforeseeable circumstances, communicate with the counterparty as early as possible to manage their expectations and, where possible, negotiate an amicable solution.
Suggestive Safeguards under current pandemic:
In the light of the current pandemic, few safeguards are to be observed in commercial engagements:
i) Re-assess and review the contract in which the force majeure clause exists and analyse the relevant factor and incidents mentioned to initiate the “rule to excuse”.
ii) Ensure issuance of requisite “Notice” to respective parties citing events and specific clauses in the Agreement leading to force majeure or doctrine of frustration, as the case may be.
iii) Analyze mutually (along with the other parties to contract) the impact of the outbreak of COVID – 19 on the contract and its performance.
iv) Initiate a change to perform the contract in possible alternative way, failing which may rule out a future defense with respect to an alternative method of performance.
v) Collect evidence to accord non-performance of the obligation to the sole force majeure event, in the current scenario, the pandemic.
vi) Keep a record of various notifications and orders passed by the Central / State Government and Administrative Bodies.
vii) Understand the potential consequences of a breach and/or default of the contract
viii) Maintain all records with respect to unavoidable additional expenditure incurred.
ix) Implement new process for execution of contract digitally in accordance with the provisions of the Information Technology Act, 2000.
A party which successfully establishes the force majeure clause is relieved of its obligations to perform its obligations under the contract during the time the supervening force majeure event subsists, the performance of the obligations under the contract are suspended and is relieved of its liability to pay damages for breach of contract. Invoking a force majeure clause could result in the right to the other party to terminate a contract if the force majeure event lasts longer than a particular period as stipulated in the contract. At the same time, one should understand that, mere difficulty or inconvenience of a party is not force majeure.