Let’s lay down some guidelines for Force Majeure Clause!

Covid-19 has forced businesses in India to relook into discretionary spending. Also, these unfortunate turn of events have led to companies adhering to changed way of doing business where working from home is the norm. Yet, only a couple of months back, long term leases for premium spaces in mega cities was a norm, yearly contracts with airlines for discounted rates for travel of the executive was almost never obstructed by the Finance departments, participation in in-person events were go to marketing technique in B2B world.

And suddenly, every penny saved, is every penny earned now. Also, the forecast seems to predict that 2021 could see a domino effect of the current distress and lead to a recession(which we believe is already there) when all the Government subsidies and moratoriums end.

When Companies start relooking into these hefty contracts and ask themselves, how to save that money, Force Majeure is the clause which would determine whether to make or break the liability.

And, It is expected that over a period of time, more and more Indian companies will invoke ‘force majeure’ clauses to get out of their contracts, resulting perhaps in a spew of litigations should parties not come to a workable understanding.

In such events, the courts and arbitrators generally evaluate and decide each dispute on individual merits, which would be based on the terms of the contract, the intent of the parties, steps taken to mitigate.

Also, a point to note is, in cases where a contract does not have an explicit clause on force majeure, there could still be scenarios where parties may try to seek shelter under Section 56 of the Contract Act and seek frustration of a contract.

So, the question to ask is, what is suitable? preventable? and advisable?

We check the definition first.
A Force Majeure (FM) has a French origin and it means extraordinary events or circumstance beyond human control such as an event described as an act of God (like a natural calamity) or events such as a war, strike, riots, crimes(but not including negligence or wrong-doing, predictable/seasonal rain and any other events specifically excluded in the clause).

An FM clause in the contract frees from contractual liability or obligation when prevented by such events from fulfilling their obligations under the contract. An FM clause does not excuse a party’s non-performance entirely, but only suspends it for the duration of the FM. If the performance in whole or in part or any obligation under this contract is prevented or delayed by any reason of FM for a period exceeding 90 days, either party may at its option terminate the contract without any financial repercussion on either side.

In the Energy Watchdog vs CERC, the Honourable Supreme Court had held that the force majeure clause does not exhaust the possibility of unforeseen events occurring outside natural and/or non – natural events. But the thrust of their argument was that so long as their performance is hindered by an unforeseen event, the clause applies.

A pertinent question to look at is, are there any areas wherein the concept of force majeure may not be enforceable in a particular matter?
Force majeure is not intended to excuse negligence or other malfeasance of a party, as where non-performance is caused by the usual and natural consequences of external forces, or where the intervening circumstances are specifically contemplated. It would also be important to note that force majeure cannot be invoked just because the contract has become financially or commercially more difficult to perform.

In commercial establishments, if a tenant cannot use a property, he cannot enjoy the property and also seek suspension of the property. Justice Singh cited a Delhi High Court judgment, where the tenant moved the court stating that owing to the pandemic, he cannot pay rent as he was not using the property. The court observed that rent has to be paid as long as the property has not been given up.

Did you hear? If the property has not been given up and you are still enjoying the property, the Force Majeure Clause may not come to your rescue.

Also, the force majeure clause may not have inherently covered a pandemic or government imposed shutdown as triggering condition at all.

There are other common provisions in a force majeure provision as well that should be carefully reviewed. For example, does the clause:

• require the force majeure event to prevent performance for a specific length of time before protections thereunder can be triggered give rise to other rights over time (e.g., the right to terminate the if the force majeure event continues for specific length of time, and if termination were to occur what financial obligations, if any, are the parties required to fulfil); and/or

• require the unaffected party to continue to perform when the affected party has ceased performance due to a force majeure event (e.g., “a force majeure event will not excuse a party’s payment obligation hereunder”).

It is generally found that when negotiating a force majeure provision, the party bearing most of the principal non-payment obligations of the agreement typically is the main beneficiary of the force majeure clause. In a sale of goods transaction, the seller typically bears most of the principal non-payment obligations under the agreement.

Therefore, it based on the above knowledge, if you are a seller, here is your checklist for the provision. Check closely:

1. Covers a wide range of events that give rise to excused performance.
2. Limits the buyer’s express contractual remedies when performance is excused.
3. Certainly you would prefer the agreement to be suspended until such time as services can be performed

and with no payments being refunded to the client.

However, when a buyer, your focus will be to get an Agreement where:

1. Force majeure provision is as narrow as possible and limit the definition of force majeure events to those events that are genuinely outside the seller’s control.
2. The ability to terminate the contract if a force majeure event continues for only a certain length of time.
3. whether there are conditions that would prevent the client from performing, thus necessitating the clause to be mutual,
4. given that now we know a disease-related disturbance is likely, what other specific events would have to happen in order for the vendor to be deemed not responsible (e.g., a government shutdown, government-imposed quarantines, a city requiring an event to be canceled, airlines refusing to fly);
5. if the vendor fails to perform, whether you would want the entire contract to be terminated, or merely the portion of the services that were impossible to perform
6. whether you would benefit from a suspension of the contract for a limited amount of time.

However, beware about the impact on the rest of the business and the company’s relationship with the other party and any third parties. For example, if you are a sponsor and terminate your sponsorship agreement now, will that company want you as a sponsor in the future? If you are a vendor and refuse to refund compensation to a client now, will the client want to hire you later?

Last words, in light of pandemic, takeaway some guidelines that would prevent you from landing in an unknown territory:

1. See boilerplates closely When entering into new contracts, do not rely on boilerplate language; rather, carefully draft relevant provisions in light of COVID-19 to address your specific situation/point of view.
2. Take business impact into consideration Take a cautious approach to termination due to Force Majeure. Consider the domino effects of any termination, as well as whether a suspension or “make good” would work in place of a termination.
3. Know the backup Review the business continuity plan and disaster recovery (BCP/DR) provisions in your contracts to understand how BCP/DR applies to you. Review key vendors’ current plans to determine whether those plans meet contractual requirements and will be sufficient if their services are disrupted.
4. Prepare for the worst Insist on adequate insurance policies to determine whether they cover disruptions caused by COVID-19. Most insurers are likely to decline “Act of God” loss based Insurance Claims, so check carefully.

In the end, pandemics like Covid-19 could happen anytime, and an oversight of the clauses like Force Majeure would lead you to get blindsided and you will not be rescued due to the language used. Hence, heed the advice, and follow the guidelines.

We are extremely grateful if you have read till here. We enjoyed writing this piece as much as you have enjoyed reading it.

This is an opinion piece and must not be construed as a Legal advice.

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