Issues involved with invoking force majeure in Covid19 era

Emergence of Covid19 is having an unprecedented impact on human race, businesses and nations physically, psychologically and economically. Humans, companies and nations are relentlessly fighting with Covid19 for survival.

Covid19 is also impacting corporate/commercial sector to a great deal as it is tearing apart economic stability of companies/businesses. Governments are taking preventive measures on a massive scale to reduce Covid19 spread.

Despite unrelenting efforts by humankind, companies and governments to contain Covid19, it will be extremely difficult to foresee the duration of Covid19 impact on human life and businesses as it is spreading across the globe and showing almost no signs of slowdown.

In this era dominated by technology most of businesses/companies are thriving on cross border transactions with development of advanced/innovative technologies coupled with flexible transportation facility across globe.

However, economic prediction is that Covid19 will result in momentous fall in gross domestic product (GDP) and majority of sectors will be worst hit in terms of finance and business in decades.

Additionally, the major impact of Covid19 on business is that it is hindering ability of companies/businesses to perform their contractual obligations within stipulated time due to prevalence of certain uncontrollable circumstances which businesses have never witnessed / experienced before.

As a consequence, Force Majeure (FM) clause has hugged lime light like never before as FM clause is highly debated and discussed concept in the contract arena as companies/businesses are thoroughly reviewing/assessing FM clauses in their contracts to seek exemption from contractual performance.

Origin of ‘Force-Majeure’ word is linked to French language which means ‘a superior force’. Force Majeure means occurrence of an event beyond reasonable control of a party which hinders the ability of such party to perform contract.

In such cases, non-performing party may seek relief from contractual performance on pretext of FM event.

To conclude Covid19 as FM event there are certain components to be considered, examined and interpreted. Such Components are:

·    FM clause;

·    FM event;

·    Party contractual performance; and

·    Other aspects

FM Clause:

·       FM clause will excuse a party from a contractual performance upon occurrence of any uncontrolled, unforeseeable or any other event beyond control of parties.

·       FM clause will modify the course of assessing the contractual liability of a party based on occurrence of certain extraordinary events without involvement of parties.

·       Invoking of FM clause to seek immunity from contractual performance will have different implications as components of FM clause may vary from contract to contract.

·       Such implications shall include grant of immunity from contract performance without liability, extension of time period to facilitate contractual performance, condonation of delay in contractual performance, instant termination or conditional termination of contract based on prevalence of FM events beyond certain period of time.

·       All these implications will be purely reliant on definition of force majeure event.

FM Event

·       Typically Force Majeure event can be defined with descriptive terminology which is generic in nature or with defined list of force majeure events.

·       Acceptance of Covid19 as FM event will be highly influenced by description of FM event in FM clause. If word ‘Pandemic’ is inducted into FM event then Covid19 will directly qualify as FM event.

·       There will be certain direct/ancillary consequences of Covid19. Direct consequences will be straight away considered as FM event.

·       However, consideration of ancillary consequences of Covid19 as FM event may require strict assessment of such consequences coupled with interpretation of FM clause wording and relevant laws.

·       The real challenge to determine Covid19 as FM event is with usage of generic description of wording such ‘Uncontrolled, Unforeseeable or other event which is beyond reasonable control of a party’.

·       In such cases determination of Covid19 as FM event will be highly influenced by facts and circumstances of case and interpretation/discretion of court.

·       If FM clause is combination of defined list of FM events along with usage of generic description (beyond reasonable control) and word ‘Pandemic’ is not part of such FM clause then determination of Covid19 as FM event will have to be decided based on relevance of circumstances/interpretation of case specifics facts.

·       In rare cases, no specific description may be used to refer ‘FM’ event except the wording Force Majeure in FM clause – In such cases, interpreting of FM events will be highly challenging task and courts may be forced to interpret FM event in conjunction with associated provisions to determine Covid19 as FM event.

·       In these challenging times, courts may take lenient view in interpreting FM clauses to conclude Covid19 as FM event as companies/business are reeling under immense economic pressure due to economic slump created by Covid19.

Party contractual performance:

·       Another aspect that will influence the conclusion of Covid19 as FM event is FM event effect on contractual performance of a party.

·       Such effect can be described in the form of prevention, hindrance and delay of contractual performance.

·       Prevention reflects the improbability of performance of a contractual obligation due to prevalence of certain uncontrolled contingencies.

·       Hindrance reflects a degree of difficulty to perform contractual obligation as a consequence of substantial variance in performance metrics/circumstances. 

·       Delay in performance of a contract will be result of occurrence of certain performance obstructing events for a considerable period of time.

·       Other vital pointers:

·       A party is unable to perform a contract solely due to prevalence of FM event provided all reasonable efforts are taken by a party to perform contract.

·       Party who intends to invoke FM clause has to comply with certain procedural aspects as agreed in contract and as stipulated by law.

Adoption of certain measures will be vital to invoke FM clause for seeking immunity from contractual performance. Such measures shall include:

·       All reasonable efforts must be made by a party to pursue alternative modes to perform contract prior to invoking FM clause – Despite of such reasonable efforts party is unable to find alternative means to perform contract.

·       Extensive review of contract including FM clause to evaluate the application of FM clause/other allied provisions in conjunction with prevailing circumstances effecting contractual performance of party.

·       Such review will assist non-performing party in composing a comprehensive FM notice to counterparty detailing the reasons for its inability to perform contract.

·       Defined list of FM events will have clear application/implications as only events which are part of such list will be qualified as FM events and will leave no latitude for ambiguity.

·       Absence of defined list of FM events will be challenging task to establish and prove an FM event to the satisfaction of court.

·       In such cases wording of FM clause has to be carefully analyzed to spot out the wording is restrictive in nature or flexible in nature.

·       Depending upon wording (restrictive/flexible nature) it is advisable to list out qualified FM events from the descriptive wording of FM clause in contract is crucial to invoke FM clause as they form ground for non-performing party immunity claim from contractual performance.

·       Further deep introspection of FM clause to identify underperformance of contract due to failure of party to meet conditional criterion as contract performance is contingent on fulfillment of certain conditions is one of vital aspects to determine course of invoking of FM clause.

·       From interpretation perspective, courts will rely heavily on FM events expressly listed in FM clause and circumstances backing up such FM events.

·       Prepare solid documentary evidence backing up your claim to seek relief from contractual performance due to occurrence of uncontrolled events.

·       It is advisable not to be reliant on upsurge in financial/business metrics as reason for non-performance as probability to grant immunity from non-performance on this ground will be slim.

·       Non-performing party (Company/business) who are planning to invoke FM clause has to check the circumstances hindering such party ability to perform contract has the essence of FM event as defined in contract.

Challenge to establish COVID-19 as FM event:

·       The real challenging task at hand for companies/businesses is to establish evidence to satisfaction of court that Covid19 will qualify as FM event as these companies/businesses are unable to honor their contractual obligations due to prevalence of uncontrolled circumstances as a consequence of Covid19.

·       FM clause will be combination of FM events (defined/generic description), implications of invoking FM clause, course of action to be taken by parties due to occurrence of FM event and exemption of non-performing party from contractual performance based on proof of FM event.

·       Certain countries have codified the prospect of FM – In these countries contract may not need to expressly contain FM clause to seek immunity from contractual performance on basis of FM event.

·       Some countries did not codify the aspect of FM as a consequence the courts in these countries will check FM clause in a contract to evaluate the prospects of FM event.

·       In India there is no express law codified to deal with FM claims. Indian courts will rely on FM clause in contract to decide relief claim based on FM clause.

·       However, Section 32 of Contract Act, 1872 covers essence of Force Majeure. Contract performance will be contingent on happening of an event.

·       In interpreting FM clause courts will evaluate circumstances in detail to check veracity of non-performing party claim to seek immunity from contract performance.

·       Courts will not take lenient view of FM clauses so it is vital to prove to satisfaction of court that a specific event/circumstance will cover under ambit of FM clause.

·       Generally, standard FM clause in government contracts will reflect Act of God as FM event. Horizon of ‘Act of God’ is huge as natural occurrence of any act may be treated as Act of God.

·       Such horizon may be extended to induct pandemic or epidemic. Any act which has knack to impact people in large number due its widespread can be termed as pandemic or epidemic.

·       Covid19 is declared as pandemic by World Health Organization and as natural calamity by central government.

·       Covid19 as natural calamity will fall within ambit of ‘Act of God’ and may invoke FM clause to seek immunity for non-performance of contact as per the central government declaration.

·       Central government guidelines may not have universal application but it would definitely influence course of conclusion of Covid19 as FM event.

·       However, the practical acceptance and application of central government guidelines will be evaluated in course of time.

Conclusion:

·       Certain companies/businesses already started shooting notices to other parties via invoking FM clause. It is expected that more companies will invoke FM clause and seek immunity from contract performance.

·       Party who is reliant on FM clause has to prove to court satisfaction certain aspects:

a)   Uncontrolled events are covered under the ambit of FM clause;

b)   Occurrence of FM event has hindered such party ability to perform contract; and

c)    It has made all reasonable efforts to perform contract via alternate mode – However, it efforts are in vain as it is unable to perform the contract.

Research and inputs by Paruchuri Baswanth Mohan

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