Tuesday, December 1, 2020

Companies to seek refuge under ‘force majeure’ clause as coronavirus damages businesses

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As businesses across the nation grapple with the consequences of the coronavirus outbreak that has led to the lock-down and shutting down businesses, firms are resorting to force majeure clause to seek protection against the inability to fulfill their obligations.

What is a Force Majeure Clause?

A force majeure clause is a provision included in contracts that allows a party to withdraw from an agreement in the wake of an ‘extraordinary event’. The parties to the contract are freed from the obligation if an extraordinary event prevents one or both the parties from performing the contract.

Force Majeure events are those events which are beyond the control of a person or an enterprise. These events include an ‘act of God’ or natural disasters, labor unrest, strikes, war or war-like situations, epidemic, etc.

Due to the shut down imposed to battle coronavirus, many domestic companies facing financial penalties due to not being able to fulfill contractual obligations as agreed upon with their business partners because of the disruption in the supply chain may take protection under force majeure clause.

It was clarified by the Finance Ministry in February that the disruption in the supply chain due to the spread of coronavirus (also known as Covid-19)in China or other parts of the world qualifies as a force mature event and companies can invoke force majeure clause, wherever it is a necessity.

With 75 districts in India coming to a halt due to the lockdown announced till 31st March, most establishments and companies will also not be able to operate their businesses during this period, forcing many of them to delay or inability to fulfill contractual obligations.

Usually, such delays or non-fulfillment of contractual obligations result in financial repercussions on the party that failed to fulfill their contractual obligation.

The force majeure clause is specified under the Indian Contract Act which Indian companies resort to find legal protection under this law against any such unforeseen events.

However, the said clause does not provide a blanket protection against any non-fulfillment of contractual terms. It depends on the mutually agreed upon events and obligations by the parties to the contract to be covered by this clause.

It is the parties to the contract that mutually decide over the list of events to be categorized under the force majeure, therefore the language of the contract is important.

Some of the conditions included in the contract like the duty to mitigate obligation, reasonable diligence can be subjective and interpreted on a case-to-case basis.

Therefore, the mere invoking of force majeure clause in itself does not guarantee any escape from the obligations as the onus actually lies with the parties to the contract that aims to invoke the clause.

 

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