Coronavirus impact: Seeking safe harbour under 'force majeure' may not help

The force majeure clause, which some in Corporate India could be looking to invoke in case of a breakdown in contracts because of the coronavirus outbreak (COVID-19), might not work in all cases, say experts.
 
“COVID-19 is unlikely to give rise to a valid force majeure defence under every contract and in every circumstance, as different contracts and governing laws stipulate different requirements for different situations,” said a note prepared by law firm Cyril Amarchand Mangaldas for its clients, assessing the legal impact of the outbreak on India Inc.
 
The note highlighted the need for companies to proactively manage the related legal risk, and carefully assess which party would bear the financial losses caused by the breakdown.

 

Legal experts said that unlike many civil law jurisdictions, in India, force majeure is a contractual right, and not a right codified under the law. “Given its inherent limitation as a contractual issue, the interpretation and scope of this concept is subject to its precise wordings in the contract and judicial scrutiny if its interpretation translates into a dispute between the parties,” said Rishi Anand, partner at DSK Legal.
 
In the absence of any codified force majeure law in India, experts fear it is only a matter of time before Indian courts are burdened with contractual disputes because of COVID-19. “It is perhaps time for Indian legislators to rethink the contract law to include specific safeguards to contracting parties on occurrence of force majeure events,” said Anand.

 
Experts say businesses seeking safe harbour under the provision have to carefully analyse the relevant provisions of the contract. It is important to first determine whether force majeure is a contractual right or a legal right, they added. Businesses would also have to analyse if invoking force majeure claim would result in a claim of termination of the contract, said experts.
 
If the contract does not include a force majeure clause, businesses could still claim relief under Section 56 of the Indian Contract Act, 1872. “However, in order to claim that the contract is frustrated, it must be shown that performance of the contract is entirely impossible and that it has become fundamentally different from the arrangement contemplated at the time of executing the contract,” said Cyril Amarchand Mangaldas.

 
Experts say the outbreak could impact ongoing mergers and acquisitions (M&As).
 
“Parties to M&A transactions should carefully examine the terms of their transaction documents and consult with their counterparties to promptly address the challenges brought by COVID-19 outbreak,” the note added.
 
“At the end, common commercial considerations of the parties will have to be at the forefront, which can be achieved only by dialogue, rather than confrontational dispute,” said Anand.

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
• Typically, force majeure events include an Act of God or natural disasters, war or war-like situations, labour unrest or strikes, epidemics, etc

 

What companies need to do
 

• Read clauses in contracts carefully: The language used in most contracts varies widely. It is important to review these clauses carefully

 

• Give notice to invoke the provision: Most contracts require notice to the other party to invoke a force majeure provision. Some also provide deadlines for making such notice to make the claim effective

 

• Provide burden of proof: The party that relies upon the force majeure event generally has the burden of proof

 

• Keep records: Copies of critical correspondence and other communication should be maintained if disputes arise later. It is important to establish that the company has taken steps to mitigate the losses

 

If the contract does not have such a clause
 

• If the contract does not include a force majeure clause, the affected party could resort to the doctrine of frustration under Section 56 of the Indian Contract Act