12 February 2021
The Force Majeure (FM) clause explicitly sets out the terms under which a party that is unable to perform its contractual obligations as a result of such events may be excused and avoid contractual remedies that would otherwise be considered as a breach of a contract.
Majority of startups have never given the force majeure clause a second look. A layman terminology would translate this clause into meaning any Act of God i.e. something that is beyond human control.
The last pandemic was over 100 years ago and most of the force majeure clauses we see now do not provide for a pandemic as a force-majeure event. However, the recent global pandemic (COVID-19) has forced organisations to revisit their force majeure clauses - standard or otherwise.
The force majeure clause is a universal clause in all agreements, anything from the Transaction Documents to a simple vendor contract.
The Indian Government issued a notification declaring the current situation of COVID-19 as a force majeure event.
COVID-19 very well suffices to be considered as a part of Force Majeure. COVID-19 can be largely covered under regional emergencies, embargoes, governmental orders, restrictions etc. With this outbreak accelerating it has now been considered as a natural calamity by the governmental authorities.
A Force Majeure clause is essential to have in a contract, although the time taken in negotiating the same is minimal to none. A Force Majeure clause excuses a party’s obligations to perform under a contract Force majeure clauses explicitly sets out the terms under which a party who is unable to perform its contractual obligations as a result of such events may be excused and avoid contractual remedies that would otherwise be considered as a breach of a contract. Basically, when the operative clause becomes inoperative due to certain circumstances is when FM comes into action.
To give an example, suppose a contractor has been hired for reconstruction of a building and suddenly a situation arises where the movement within or outside the territory has been stopped by the governmental authorities, then in that case if the agreement signed between the parties had Force Majeure clause in it, saves the contractors from the harm that is caused due to non performance which would have been otherwise covered as breach of contract.
Act of god; Flood, typhoon, war, riots, lockouts, earthquake, fires, hurricane; invasion, governmental laws, orders, restrictions, actions, embargoes or blockages, national or regional emergency, strikes, labor trouble or other such disturbances.
How are these affecting contractual obligations being completed today?
It is understood from the above that COVID-19 is affecting the physical activities of the day to day life, as the measures taken by the government to curb the current situation all over the country. It is concluded that due to such an outbreak the employees, labors etc, are not available to provide the services to their respective employers. Labor trouble is one of the most important and major points affecting the operations of a contract. All the services have been declared shut by the authorities in India. The parties that are unable to perform or are taking Force Majeure clauses in the transaction shall however show that the performance of its obligations have been made physically or legally impossible due to the outbreak of COVID-19 or due to governmental orders meaning they shall be able to show that no reasonable steps could have been taken to complete the obligation under a particular contract.
Hence the Force Majeure clause is put into action.
Why is it important to draft a good force majeure clause?
Some FM clauses don't have pandemics in it and may not be activated and any omission of obligation will lead to breach of contract.
Hence, it is very essential to have a well drafted Force Majeure clause as it will make both parties aware of which events are force majeure events and which are not. Clearly defining force majeure events makes the operation of the contract and, in particular the working of the contract for dealing with force majeure events simpler and more effective. Some FM clauses don't have pandemics in it and may not be activated and any omission of obligation will lead to breach of contract for which the government has made it clear from the recent notification passed. Thus, it shall be of utmost necessity that the parties take up good counsels and have a well drafted FM clause to avoid any discrepancies in understanding what would constitute a breach and what would be covered under a Force Majeure event.
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