The Impact of COVID-19 on Commercial Contracts Including Force Majeure Clauses

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The novel coronavirus pandemic has shaken up the world. It has also had a tremendous impact on the global economy. The virus has affected close to every continent. Governments of the world have had no option but to impose lockdowns and close businesses. This article responds to the question if COVID-19 is a force majeure event. It also tries to show if the pandemic is an excuse for a party to not perform a contract.

Force Majeure and its Types

So, what is a force majeure event? It is a situation that occurs on its own and is beyond the reasonable control of the contracting parties. The situation does not allow the party to perform its obligation under a contract. Force majeure events may include natural calamities. They may further include government action, riots, amendments to the existing laws, etc. Most force majeure clauses are dependent on what the parties have agreed upon.

Force majeure clauses are usually of two kinds:

  1. Specific Force Majeure Clauses: Most force majeure clauses are of a specific type. These types of clauses contain specific and detailed circumstances. There are clear thresholds in the clause that needs to occur for the application of the clause. Hence, only these events may stop the party from performing its obligations.
  2. Broad Force Majeure Clauses: In these types of clauses, the conditions for a force majeure event are not laid out. Instead, the two parties decide upon a broad set of circumstances. However, the said circumstances must make it completely impossible to perform the obligation.

In India, the Indian Contract Act covers the application of the force majeure doctrine. Section 56 of the Act states that when parties sign a contract to do an impossible act, such a contract is void. Also, if the act becomes impossible to perform, the parties may be freed from their obligation. This also applies when the contract becomes unlawful. This Section usually applies when there is no force majeure clause in the contract.

COVID-19 and Force Majeure

As is clear, the present pandemic has caused great pains to the business community. Due to the lockdown, many people may have to delay their contractual performance. They may even have to cancel performing their obligations. Thus, it is pertinent to answer one question. Can the pandemic and lockdown be regarded as a force majeure event?

This is contingent on the language and wordings of the clause in the contract. If the clause expressly provides for a situation such as a government lockdown. However, if the provision does not cover a pandemic or lockdown, then the party will have to perform the contract. Alternatively, they will have to face the consequences of a breach of contract.

Judicial Precedents

There have been various precedents passed by the Indian Courts regarding force majeure clauses. There have also been precedents about the doctrine of frustration. For instance, the Energy Watchdog v. Central Electricity Regulatory Commission is an important judgment about force majeure. It stated that if there was a clause in the contract that specifically laid down the circumstances leading to frustration of contract, then such a clause must be given extreme importance.

Furthermore, if a contract contains a force majeure clause, it can be invoked for any event. This is provided the wordings of the clause allow it. Words like ‘Government lockdown’ or ‘pandemic’ in the clause can be used to rescind the contract. Further, the government has also made two announcements on force majeure. The first is the announcement by the Finance Ministry. If a company is unable to fulfill its obligations with a Chinese party, then it can use force majeure.

The second is the permission given by the Ministry of New and Renewable Energy. It has allowed companies to use the force majeure clause if they cannot fulfill their obligations.

Conclusion

The coronavirus pandemic is one of the worst problems faced by Indian businesses. Mainly, what should businesses do to save themselves? Since June 2020, the Government has already taken steps to reopen businesses. But there are a lot of businesses that have been unable to recover due to the lockdown. This has caused a lot of people to invoke the force majeure clause. Having said that, it is important to remember that all contracts are different. Each contract has its own version of the clause. Force majeure is only going to be applicable to contracts that fit the current situation. Therefore, it is all dependent on the language of the clause.

Since there has been no recent judgment by the Courts regarding this issue, there is a lot of confusion. There are no clear guidelines laid down yet. It may be in the best interest of the companies to reach a middle point, and not go to Court. Going to Court for breach of contract is a long and expensive process. Hence, companies may avoid it altogether. In such a situation, it is best to find a solution that works for both parties. But, in reality, no one knows the steps companies will actually take.


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