Implications of a Force Majeure Clause

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.

1. Always read your Force Majeure clause:  It is important that a force majeure clause must include the event in question in order to excuse the performance of the contract. Many of them include references to government order and actions since these will be a clear excuse that can help them in performance of the same in the event  of  quarantine, travel restriction or some other mandate, a party unfortunately needs to wait until the order comes down. One should also review carefully whether performance is excused or suspended or evaluate what is excused or suspended. Some contracts, for instance, carve out the obligation to pay money, and there may be some take-or-pay commitments that are not covered.

2. Determining if the performance of the contract is actually impossible or merely impractical: The second most important aspect to evaluate a FM clause is that it should actually call for impossibility and not merely extreme difficulty for performance of a contract. The key thing to remember is that there should arise a situation of extreme impossibility to perform under a contract. 

3. Language: Always keep a check on the FM clause language. The language should always be made specific. To make it clear let us have an example here; A comic event was to happen on a specific venue, The state authorities of where the venue was situated issued a notice calling its residents not to make any unnecessary travels to large gathering and public places. As a result, the market for tickets dry up, and the band is only able to sell 10% of the seats available. Now this current situation will not be covered under force majeure if the clause does not specifically talk about any economic impracticability that happened in the above mentioned example and due to such the performance became actually impossible.

4. Determination of mitigation and/or substitution: It is important as a part of a FM clause to evaluate if the performance is such that it cannot be mitigated or performed even after reasonable and diligent efforts, if there are obligations that remain possible to perform under the agreement, the party invoking force majeure likely still needs to fulfill them.

5. Notice of Force Majeure: It is always advisable for the companies’ to give notice seeking force majeure clause and to add to it that they shall also inform the other party as to why they have not been able to perform or what is stopping them from performing these obligation adding to it the fact that they have not been able to come out with any solution to perform the same.

6. Alternate doctrines: Even if force majeure does not apply, a party may be excused from performing under other legal doctrines, depending on the governing law of the contract. These include frustration of purpose or commercial impracticability, and in civil law jurisdictions, doctrines like hardship and changed circumstances.

The Indian Government issued a notification declaring the current situation of COVID-19 as a force majeure event.

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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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The content of this article is for information purpose only and does not constitute advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer to relevant provisions of the statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up. The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that the Author / Treelife is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof.