EFFECT OF COVID-19 AND FORCE MAJEURE ON COMMERCIAL CONTRACTS BY NEELAKSHI JOSHI

INTRODUCTION

The flare-up of novel coronavirus, the infectious agent causing coronavirus has been widely announced and the impact is still on and can be noted in every sector and in every corner of the world. Every other country in the world has imposed a ban on travelling, every work is limited to people’s houses. Restrictions are imposed on human moments. Covid-19, linked with the notorious Coronavirus, has become a word that has created havoc in the world and has been declared to be the biggest ever pandemic by WHO. Because the virus affects life, it affects whatever comes out of life. Be it democracy, rule of law, society, economy, polity, culture, foreign policy, globalization, social order, interdependence, religious tolerance, trust, empathy and whatnot. It is a tough choice between lives and livelihood. The figure rapidly nearing to the total infected case of 2 million and the restless world is now watching steep share market crash seems to me like a Hollywood movie scene, choosing life and 21day lockdown amounts to an unbearable loss of 2-3% (of GDP) to Indian economy which was already ailing from poor consumer demand. The accommodative policy stance by RBI also doesn’t offer a comprehensive gateway out of it.

With the foreign investors packing their bags and the domestic market already at the halt, the misery of people cannot be reduced to mere economic figures. This effect the effective working of contracts, this also laid to supply chain disordering, there is a delay in the performance of contractual obligation whether it is unintentional or motive based.  Whether it is manufacturing contracts or selling once, every kind of contract affected due to this deadly virus. Further, the companies may not be able to perform their obligations under their customer agreements because of their suppliers’ non-performance and may, in turn, seek to delay and/or avoid performance (or liability for non-performance) of their contractual obligations and/or terminate contracts. Parties may also cite Covid-19 as a basis for renegotiation of price or other key contractual provisions
(e.g. volume of materials exported from or imported into affected areas due to shifts in supply and demand).[1]

At this hapless state of occurrence, parties and however are connected to commercial contracts whether is in inside the nation or outside are continuously evaluating their contractual provisions for searching suitable rights and commitment, mainly on possible areas for performing commercial contracts, particularly Force Majeure.

FORCE MAJEURE

Although the term force majeure is not given under in Indian law. The law regarding force majeure means “superior force” can be traced under section 32 and 56 of the Indian Contract Act, 1872. It is a contractual obligation in which the performances by the parties will be delayed or excused temporarily. Happening of the Force Majeure event protect a party from non performance or failure in performance of a party. Mostly Force Majeure events include Act of God, or natural calamity, wars, pandemics, strikes etc, which can’t be controlled.

Force Majeure is a concept brought to save the parties the consequences of non performance of control due to some situation on which they have no control over. As the result of invocation of Force Majeure the contract is not solely stooped but the effected party is expected to carry out his duties to the extent not averted by happening of force majeure event. The parry who is claiming the force majeure needs to prove that despite of all the reasonable care taken them, they could not  avoid the mitigate of Force Majeure of event. In current scenario it is coronavirus. Whether the contractual duties of parties could be avoided or not is based on specific term of contract. The courts would examine that in the case the Covid-19 prevented the parties to perform their contractual obligations.

PANDEMIC AND FORCE MAJEURE

The Force Majeure clause is way wider than just “Act of God”. Whether the pandemic such a Covid-19 can come under “Act of God”? Whether the effects on contracts due to Covid-19 trigger the force Majeure clause in contracts? Let’s answer them. The scope and range of a Force Majeure clause in pandemic events such as Covid-19 has to be evaluated on the basis of definition of force majeure clause under the jurisprudence pertaining to the title ‘extraordinary events’ and ‘ state of affairs beyond the reasonable power and control of the parties’. However the thing that we need to know is that the force majeure clause does not specify the term ‘epidemics’ and ‘pandemics’. All this things will depend upon the legal interpretation of the clause.

There are two possible occurrences, which may help us to interpret that force majeure clause covers a pandemic like Covid-19.

1) as the force majeure clause consist of the term ‘extraordinary events’ or the ‘ circumstances beyond the control of the parties’ and in present scenario if we see all the non-performances would invoked, if it is proven the all the circumstances caused the pandemic are beyond the control of any normal person.

2)  if the clause defining  force majeure plainly include a pandemic incorporation of pandemic in the list containing force majeure events will provide more clarity as to whether the Covid-19 pandemic should be included in force majeure event or not.

But mainly whether the party can be excused to perform the contractual obligations or not on the account of covid-19 being declared as a pandemic that will depend upon the terms and conditions mentioned in the contract and the nature of party’s obligation.

The government of India has taken some major steps to safeguard the parties in commercial contract during this outbreak of covid-19. The Ministry of Finances, Government of India considered an office memorandum recently proclaims that event of any disturbances in the supply chain due the outbreak of covid-19 in any country, such situation shall be covered under force majeure , wherever considered appropriate.

Similar one of the major initiative was taken by the Ministry of New and Renewable with respect to ‘solar project developers’. The ministry issued an memorandum, added that if any party misses the deadline of contractual obligation due to the spread of coronavirus can invoke the clause including force majeure events to avoid any financial penalties.

Such relief given by government is big help in this rough time for the parties indulge in commercial contracts.

REMEDIES

The remedies available to parties will be determined to the basis of language of force majeure clause.

Some contracts help by putting hold on the contract until the force majeure event is put to an end.

Other contracts might provide relief by immediate termination of the contract on the happening of force majeure event.

Some contracts can provide restriction in time after that time period either party may terminate the agreement provided with the written notice.( i.e., if non performance of the event is happened due to an event that appears to be permanent.

Some might require the contract to remain in force until the force majeure event is put to an end.

 
SAFEGURADES UNDER COMMERCIAL CONTRACTS

In this time of global pandemic here are some safeguard given under commercial contracts.

Re-evaluate and review the contract consisting of force majeure clause and examine the relevant factors and incidents mentioned to start off the ‘rule of excuse’.

  • Making sure ‘all’ and ‘any’ notification procedure as directed in the given condition of any of the contract.
  • Collectively (along with if there is any other parties) evaluate the impact of outbreak of global pandemic that is covid-19 on the performance of the contract.
  • Commence the chance to fulfill the condition of the contract in alternate possible way. Any failure will safely rule out any upcoming ‘defense’ with respect to any other method of fulfilling obligations.
  • Keep the record of evidence to accord non-performance of the contract to the lone force majeure event, in this outbreak of covid-19.
  • Keep stern record of all the notices and orders by the government and administrative bodies.
  • All records must be maintained with the unavoidable expenditure.

CONCLUSION

Since it all depend on the what has been written in a contract under force majeure clause; it becomes an important issue at this point of global pandemic evaluate the key contract and clauses within. Moving forward further, it would be best suitable to invoke the clauses consisting of, price escalation, liquidated damages so as to lower burden of the amount that is being suffered. Most importantly are consumer and supplier should be aware of their rights given by law before entering into a contract so they will be aware what to do in the situation like Covid-19.

FOOTNOTES

[1] https://www.bloombergquint.com/coronavirus-outbreak/covid-19-coronavirus-force-majeure-and-impact-on-commercial-contracts

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