The impact of COVID-19 is severe on domestic as well as international businesses across countries and sectors. The lockdown implemented by the government has restricted movement and has shut down operations of all the non-essential services resulting in businesses suffering due to supply chain disruptions. As a consequence, the performance of contracts is also being delayed and in some cases being cancelled. It is also possible that parties to these contracts may use this opportunity to delay or avoid their obligations on the grounds that the current lockdown situation has forced them to not perform the same. In light of this, it has become crucial to understand whether the Coronavirus outbreak can be considered as force majeure/Act of God or not, acting as a defence for non-performance of contractual obligations.
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What is Force Majeure?
The law relating to Force Majeure (a French phrase that means a ‘superior force’) is embodied under Sections 32 and 56 of the Indian Contract Act, 1872. It is a contractual provision agreed upon between the parties. The occurrence of a force majeure event protects a party from liability for its failure to perform a contractual obligation.
What does Force Majeure include?
Typically, force majeure events include an Act of God or natural disasters, war or war-like situations, labour unrest or strikes, epidemics, etc. The intention of a force majeure clause is to save the performing party from consequences of something over which it has no control. Force Majeure is an exception to what would otherwise amount to a breach of contract. Whether a particular contractual obligation can be avoided would however depend upon the factual analysis. The courts would examine, whether in a given case, the impact of the COVID-19 epidemic prevented the party from performing its contractual obligation. Indian courts have generally recognised this concept and have enforced it where appropriate.
Can one take defence under Force Majeure for not performing its contractual obligations during lockdown?
Due to the supply chain disruptions caused by the lockdown, it is likely that the performances under many contracts will be delayed, interrupted or even cancelled. Parties to a contract may seek to delay or avoid their responsibilities under the contract, either because the lockdown has legitimately prevented them from performing their contractual obligations, or because they are seeking to use it as an excuse to free themselves from an unfavorable deal. They may also cite COVID-19 as a basis for renegotiation of the cost or other key contractual provisions. This is why it is important to determine whether COVID-19 will be considered as a ‘Force Majeure’ event.
In India, the Department of Expenditure, Procurement Policy Division, Ministry of Finance issued an Office Memorandum on February 19, 2020, in relation to the government’s ‘Manual for Procurement of Goods, 2017’, which serves as a guideline for procurement by the government. In the Memorandum, the ministry has stated that the COVID-19 outbreak could be covered by a force majeure clause on the basis that it is a natural calamity. Therefore, parties to a contract can take defence under force majeure for not performing their contractual obligations during lockdown.
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Whether contractual obligations can be excused during a health crisis such as Coronavirus outbreak?
Some of the contracts contain provisions stating that it can be put on hold until the force majeure event is resolved. Moreover, some contracts also provide for limitations in time after which either party may cancel the agreement with written notice to the other. However, if a contract does not contain provisions especially stating any of these situations, the contract will remain in effect until the force majeure event is resolved.
What if a contract does not have a Force Majeure clause?
Sometimes, the performance of a contract is possible when the contract is made but becomes impossible or unlawful upon happening of an event which could not have been prevented. This phenomenon is referred to as the ‘Doctrine of Frustration’. Therefore, in case the contract does not include a force majeure clause, the parties who are unable to carry out their contractual obligations can ask for relief under the doctrine of frustration under Section 56 of the Indian Contract Act, 1872.
Can individual contract terms affect the defence under Force Majeure?
Force Majeure scenarios are very sensitive and depend highly upon the terms laid down in the contract. It is essential to look into the terms of the contract and the requirements of such a clause when a party is looking to invoke the force majeure clause of the contract or to seek protection under the doctrine of frustration. In order to defer or terminate its obligations parties may also attempt to take shelter under other clauses of the agreement such as price adjustment clause, material adverse change clause, and limitation or exclusion clause, in order to limit or exclude liability for not performing its contractual obligations. However, whether a party can take shelter under these clauses or not, would depend upon the terms as laid down under the contract.
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How can a lawyer help?
Looking at the complexity of the issue, it is highly impossible for a layman to understand the technicalities involved in the issue. Interpretation of terms of a contract in accordance with the law is in itself a very technical task and beyond the scope of expertise of a layman. This is why it is imperative in times like these to have a corporate lawyer by your side who can help you understand the technicalities involved and can formulate the right strategies to ensure the desired result in contract-related litigation.