Covid-19 Situation- Force Majeure Clause- Impact on Commercial Transactions

INTRODUCTION

The ongoing Covid-19 pandemic is having an unprecedented impact of the trade and commerce in the entire world. The lockdown situation would result in almost businesses coming to a stand still situation with running commercial contracts already entered prior the pandemic situation. The essence of a commercial contract is always the timelines within which they are to be executed. Therefore, the question arises as whether the business entities can enforce the force majeure clause to save its interest and get some relief from the performance of the obligations under the contract due to the impact of the Coronavirus outbreak.

THE ‘FORCE MAJEURE’ CLAUSE

Force Majeure clauses are commonly included in commercial contracts in case certain defined circumstances prevent performance of contractual obligations. The term force majeure means “superior force”, and may encompass “acts of god” and certain acts of man of a disruptive and unforeseeable nature, such as industrial action.

If one of the vents listed in a force majeure clause occurs, the clause will usually prescribe what the parties to the contract must do, e.g. a party claiming force majeure may have to notify its counterparty and take reasonable steps to mitigate the effect of the event impacting performance. Civil law would often provide a doctrine enshrined in such clauses i.e. the doctrine of hardship, which would imply suspension of contractual obligations where performance of the obligation becomes more onerous as a happening of unforeseen events outside the control or influence of either party.

WHETHER THE FORCE MAJEURE CLAUSE COVER THE COVID-19 OUTBREAK?

Notwithstanding that a court having jurisdiction may show sympathy for circumstances which have arisen and may cause disruption to the contractual relationships, the task that would be relevant here is the initial analysis of the risks agreed to be shared between the parties as per the contract.

Since the virus is a relatively new phenomenon, it is unlikely that the ‘force majeure’ clauses would include or enlist the Covid-19 outbreak as an event to invoke the clause. As such, in order to rely on the clause presently, the parties would need to consider and give wider interpretation to the other events included such as epidemics, actions of government agencies and work stoppages. Either party to a contract would be required to prove in all probabilities that the Covid-19 outbreak was not “reasonably contemplated” by the parties at the time of entering of the contract, and that the event is “beyond the reasonable control” of the party seeking relief.

HOW TO SEEK OR PREVENT RELIEF FOR FORCE MAJEURE?

The onus is on the party seeking to rely on the force majeure clause that the event has prevented, hindered, delayed or affected the performance of the contract (depending upon the wording of the relevant clause). Generally, if a force majeure event occurs, performance of certain obligations within the contract will be suspended for a particular period. For example, in the present scenario, until the Covid-19 outbreak is contained or its consequences on the contract come to an end. In some cases, the suspension of the obligations may not be viable and the parties may seek to repudiate the contract itself.

The parties to the contracts containing the ‘force majeure’ clause would also entail giving a notice of termination of the contract as would be provided in the terms of the contract. Legal advice should be taken on the question as to whether notification of invoking the force majeure mechanism is a contractual pre-condition or not.

SITUATION WHERE THERE IS NO ‘FORCE MAJEURE’ CLAUSE IN A CONTRACT

If there is no force majeure clause in a particular contract or if the outbreak of Covid-19 even after giving the widest of the interpretation does not fall within the ambit of the force majeure clause of the relevant contract in consideration, then the parties may need to consider whether the contract has been terminated by operation of law on any other basis, such as upon acceptance of a renunciation or frustration of the contract.

The doctrine of frustration would apply to a situation or an event that has resulted in a situation which is fundamentally or radically different from what was contemplated between the parties at the time of entering intro of the contract. However, the reliance on the doctrine of frustration is rarely available in practice and is unlikely to apply where the performance is only delayed. The applicability of the doctrine of frustration would certainly require the party seeking the reliance upon the doctrine to prove or demonstrate before the court of law something akin to “impossibility” of the performance of the contract.

STEPS TO MITIGATE THE RISK

The following steps in our opinion can be taken by a business entity to mitigate the risks involved under a contractual commercial contract:-

1.    Enlist which existing contracts may be impacted by closures or delays, or where a counterparty may seek to terminate or suspend the contract.

2.    Collect information and details from suppliers or customers regarding the impact of the outbreak, to prepare as best you can for potential disruptions.

3.    In case of any doubt, whether a force majeure event applies to specific contracts your organisation is a party to, or what relief may be available, seek legal advice before acting or sending communications.