'Force Majeure’ in times of deadly coronavirus

The medical effects of the Covid-19 virus are hitting home hard across the world. The seriousness of the economic impact is yet to be understood in whole and its effect may only be known with time. The economic impact of the Covid-19 crisis may, in no small measure, be dependent on how contracting parties and courts the world over understand and give effect to the ‘Force Majeure’ clause that most commercial contracts have inbuilt in them.

What is ‘Force Majeure’? Simply put, ‘Force Majeure’ translates roughly into ‘a higher force’. In the world of contracts and legal obligations, a ‘Force Majeure Clause’ refers to a clause which partially or fully exempts a contracting party from performing its obligations under a contract, if a greater force which was unforeseeable and which is beyond the control of that party prevents him from performing his obligations.

Typically, a ‘Force Majeure’ condition would include things such as a war, an epidemic etc (but it really is up to the parties to determine what, in fact, would constitute ‘Force Majeure’ by appropriate definitions in the contract itself).

The ‘Force Majeure’ clause has, for many years, been one of the forgotten parts of a contract – a clause that is taken as a formality and finds its place in some corner of the contract and over which there is very little negotiation or dispute.

And why is this? Simply because it was hardly ever used --at least in the manner it arises now. The concept of ‘Force Majeure’ is of ancient origin --of a time when wars and epidemics were common, large scale destruction and calamity were not hard to find.

In the modern world, very few people would have thought that an impediment so grave and long-term would strike, which would be beyond everyone’s control and which would make performance of contracts virtually impossible. More specifically, it would hardly have been in anyone’s contemplation that an epidemic so widespread would break out that virtually the entire world’s economies would come to a standstill.

With the spread of the Covid-19 virus and the consequent shutting down of a large number of human activities, a situation very few would ever have contemplated, has, in fact, arisen. Supply chains have broken, raw materials and other inputs are unavailable to manufacturers, the government itself has ordered several industries to temporarily close down. The consequence: time-sensitive obligations under contracts become extremely difficult if not impossible to perform.

Take for example an order placed on a manufacturer to supply engineering products to set up a power plant in a time-bound manner. With the social impact the world over, it may be simply impossible for him to have the resources to complete the work on time. Similarly, would it be lawful for a corporate employer to deny salaries to its employees on the basis that its business shut down for a few months?

Contractual obligations

There is no doubt that courts would see a large number of parties claiming ‘Force Majeure’ as a reason for non-performance of their contractual obligations. I have no doubt that parties to commercial contracts and lawyers advising them are busy re-studying the terms of the ‘Force Majeure’ clauses that form part of their contracts --but which they never thought they would use.

The difficulty would arise since the term itself is capable of extremely adaptable meanings --what is a force so great as to completely prevent the performance of a contract is very relative. Would very serious economic difficulty of a contracting party as a result of the lockdown excuse it from performing its obligations under a contract? Would the reduction in the availability (as opposed to the complete non-availability) of labour give rise to a claim of ‘Force Majeure’? These are difficult questions --largely because in a world dependent heavily on trade and commerce -- which have hardly arisen in the recent past.

Going forward, the way in which this issue is treated by courts across the world would have a serious bearing on how economies behave and recover. While the first impression is that the kind of impact that the Covid-19 virus has had on economies world over undoubtedly constitutes a serious ‘Force Majeure’ event for most industries, the courts have the difficult task of adjudicating between the two contracting parties.

By its very definition, ‘Force Majeure’ events imply that neither party is at fault. And yet, no matter which way the dispute resolution mechanism decides, one or the other party is likely to suffer serious financial damage.

It would be an interesting phase to see in which way courts lean while interpreting ‘Force Majeure’ clauses. Would they be liberal or would the threshold to qualify as a ‘Force Majeure’ even be set high --as has been done in the past? Would practical considerations weigh in the legal interpretation that would follow? One can only wait and watch. One thing is certain though – the ‘Force Majeure’ clause has made a resurgence and is unlikely to be taken lightly in contracts, trade and commerce.

(The writer is Advocate-on-
Record, Supreme Court of India)