Coronavirus and Force Majeure Clause in Contracts

March 7, 2020
coronavirus COVID - 19

By Rupin Chopra and Reetika Wadhwa

Enforcement of force majeure amidst Covid- 19

The mighty force of nature has always proved its dominance over mankind through varied instances of natural calamities disrupting mankind. One such instance is faced by the Wuhan district of China which is presently witnessing an existential crisis with the introduction of the incorrigible, novel coronavirus (COVID-19) around the world. The virus had reportedly taken thousands of lives and is spreading like a wildfire in the adjacent countries as well. With the hue and cry arising out of this entire situation, all business sectors are severally affected. Especially for a country like India, where most of the trade target is fulfilled from Chinese vendors, the economic growth is suffering.

In an attempt to safe guard themselves from the liabilities piling up, the vendors are seeking refuge through the force majeure clause of their respective agreements.

What is force majeure?

The concept of force majeure has originated from French civil law and is widely applied over several common law jurisdictions. The said clause is a provision in an agreement which allows both parties for non-performance of their contractual duties due to unavoidable circumstances and situation beyond their control thereby reliving the parties from their respective liabilities arising in the course of non-performance.

Though the above clause allows for rescue in chaotic cases like the present situation, its applicability depends on the specific use of words.

For example, for some contracts/ agreements, the force majeure clause is quite extensive and it elaborately covers the circumstances describing exact state of affairs where the said clause can be invoked. In this regard, general terms like epidemic, government military actions, national or regional emergency are commonly used. With the use of the said terms, invoking the force majeure clause becomes subject to the exact situations as mentioned.

However, in circumstances where the force majeure events are not clearly elucidated or the force majeure clause is present only in the form of a boilerplate clause, the enforcement of the same becomes a matter of varied interpretation. In these circumstances, the applicability of the clause is best determined by judicial interpretation.

Judicial interpretation of force majeure

The courts of India have time and again identified force majeure as a relevant ground for non-fulfillment or frustration of contract.

In Narasu Pictures Circuit Vs. P.S.V. Iyer and Ors.[1], the court had observed that “Where it appears from the nature of the contract and the surrounding circumstances that the parties have contracted on the basis that some specified thing without which the contract cannot be fulfilled will continue to exist or that a future event which forms the foundation of the contract will take Place, the contract, though in terms absolute, is to be construed as being subject to an implied condition that if before breach, performance be-comes impossible without default of either party and owing to circumstances which were not contemplated when the contract was made, the parties are to be excused from further performance.”

The Hon’ble court had clearly identified the point that upon advent of an event, which makes the performance of the contract impossible, the parties are to be excused from further performance.

Invoking Force Majeure Clause in the wake of Coronavirus

Under present situation of coronavirus outbreak in several countries, vendors, airline companies shipment companies and in certain circumstances even consumers are like most likely to invoke the force majeure clause. It is evident that the force majeure clause will result in monetary losses. Considering the example of airline companies in these circumstances, it can be anticipated that pre booked tickets of consumers can be abruptly cancelled and refund may not be processed on account of force majeure. However, it has to be clearly understood that force majeure clause can only be enforced when the specific situation under which the said clause is invoke is specified in the agreement. In this regard, the consumers can also take the refuge of force majeure clause towards cancelling their tickets and can accordingly claim their right to refund under force majeure.

Taking into consideration the outbreak of coronavirus world wide, the force majeure clause can be invoked for numerous instances by parties from different sectors. Nevertheless, the epicenter for its applicability would solely depend on the exact language of the agreement/ contract.

Ministry of Finance: Force Majeure Clause can be Invoked in Coronavirus Outbreak

In the wake of coronavirus outbreak worldwide, the Ministry of Finance, Government of India vide its notification dated February 19, 2020 has clarified that the spread of coronavirus in China or in any other country will be covered in the Force Majeure clause (FMC). The Ministry in this regard states that the spread of coronavirus shall be considered as a case of natural calamity and FMC may be invoked, wherever considered appropriate and after following the due procedure.

The Ministry’s aforesaid clarification was issued pursuant to doubts raised whether the supply chains affected due to coronavirus will be covered in the Force Majeure Clause.

Exemptions to force majeure

Force majeure clause cannot be invoked in the following circumstances:

  • When the contract/ agreement is effective after the force majeure event
  • When the force majeure is invoked for non-performance of monetary payment obligations
  • When the force majeure event occurs after the affected party delays performance.

In the wake of coronavirus outbreak around the world, the rescue of force majeure clause can be a boon for defaulting parties to an agreement, however, for the affected party solution to the same can be sought through reading of the agreement in consonance with the other clauses to find a positive solution. Water tight drafting of the agreements is to be ensured for securing equivalent rights of the parties.

[1] AIR 1953 Mad 300

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