To be or not be ? Inclusion of Force Majeure: A straightforward breakdown
Confused or puzzled if Force Majeure clause is to be set in motion?
In case you are considering a claim, anxious about receiving one or busy chalking out resulting the outbreak, here's our 10-point, easy to understand point by point on what to do:
Force – Majeure clause can be defined as a contract clause/provision assigning the risk if the performance become impossible as a result of an event/effect that the parties could not have seen it coming.
An entity may inset a force majeure clause into a contract to excuse itself from liability in an event it fails to fulfil with regards to the terms of contract – for reasons beyond its control.
Force majeure aims at relieving a party from a contract which has become impossible for performance, due to intervention of forces beyond its control. This concept of force majeure has gained importance in the present circumstances. In general, the judicial response to the doctrine of force majeure has been rigid or flexible depending upon the issue.
1. Contract Law 101
Force Majeure as a term has not been mentioned in the Indian contractual law. That being submitted, people have confused the same with doctrine of frustration. However, looking closely, we can see that the legislators left a small window open through the idea of contingent contracts prescribed under section 32.
2. Finding your Force Majeure clause in the contract
It could be hidden somewhere unforeseen or carefully woven into to "exceptions", "unforeseen events" or "acts of God" rather than force majeure.
3. Establishing the events/occasions it protects
One party will evidently fancy a non-exhaustive list and the other an exhaustive one. Whatever side you are on, carefully look as to how force majeure events are drafted and see if Covid -19 fits the bill.
As a thumb rule - Epidemics and pandemics generally won't be described or state their location or who decides whether an outbreak has reached this threshold. Now that it has attained the status of global pandemic, the governments of different jurisdiction have added this clause in their jurisdiction. India however, is assessing the issue and then deciding whether the event will be covered under Force Majeure or not.
Example would be the recent judgement delivered by the Delhi High Court regarding the applicability of this clause in the rent laws.
Another thing to note is that this clause could still be activated if there are labour and supply shortages (which are caused due to the advent of Covid) or largely defines events as extraordinary that are beyond one party's control, inescapable and not due to the other party (checking off all these conditions is important ).
Unfortunately if there are no Force Majeure-type clause or the occasion is not covered by the contract language, consider depending on provisions such as those dealing with material adverse change, price adjustment, liability limitations and exclusions, extensions of time, variations or changes in law (for example, government order prohibiting workers from working that has led to slow down/delay the supply chain).
4. Mapping out how your clause connects Covid -19 with non-performance
A Force Majeure clause typically necessitates performance of contractual obligations to be "stopped", "obstructed", "stalled" or "postponed". "Stopped" requires that the obstacle to be performed is impossible, for instance it is no longer physically possible or legally permitted for the performance of the contract. "Obstructed ", "stalled" and "postponed” can be interpreted more broadly and does not requires the affected party to prove impossibility to perform.
To depend on the clause, the event must be the only one affecting contractual performance (unless clearly stated otherwise). In other words, "but for" covid-19/coronavirus, a party must have been willing and able to perform.
5. Realizing the after effects of notifying a force majeure event
Depending upon how long the performance is affected, the contract may allow the right to suspend, seek an extension of time or for either party to terminate. Take a moment to access your options - Are you prepared for one or more of these consequences? Is there an opportunity to leave or renegotiate a difficult commercial situation?
6. Comply strictly with contractual notice requirements
Is your contract fulfilling all the conditions of Force Majeure?
Have you backed all your supporting details and evidence of the event and its effects?
By when and in what form should notices (initial and subsequent) and supporting documents be served?
Isolating when covid-19 starts to affect your contract might be difficult. If hesitant, consider notifying force majeure at the earliest opportunity, followed by further periodic notices or updates regarding the continuing disruption so your claim is not time-barred.
7. Documenting evidence that back your claim
Properly recording and storing evidence of all communications with your counterparties about the disruption and its effects, including order or service cancellations is pertinent.
8. Responding quickly to Force Majeure notices
Failure to respond to a notice within stipulated time limits may constitute acceptance of the counterparty's force majeure claim.
Review subcontracts and supply contracts in case you too need to claim force majeure. If this will require force majeure event notices from counterparties, engage them early to manage the risk of late or premature notices.
9. Preparation for the Force Majeure event wind-up
Settle with your counterparty a date when commitments will resume after the event and its effects have ended, especially if the contract is ambiguously worded.
The supply chain will need time and resources to resume operations or clear backlogs and the party claiming force majeure won't want to be in breach once the event is over. There may be limited cases to explore (or a contractual right to request) a further extension of time for performance. However, you are more likely to get relief during the remobilisation period by emphasizing to your counterparty that the event is over but the effects are still being felt.
10. Learn lessons for future disruptions
Evaluate your contracts so you know which counterparties are likely to be affected by covid-19 (if they haven't already) and future force majeure events. Engaging or having a dialogue with them early to assess how to manage these situations.
Do add Force Majeure clauses in your existing and future contracts clearly and expressly allocate force majeure risk. Conditional to your relationships with counterparties, think about amendments to prepare for future outbreaks.
Having thoughts about Force – Majeure and its after effect on your business? Connect with us for a legal dialogue and let us guide you.