1. Home
2. Legal News
3. COVID-19: Does it evoke “Force Majeure” Clause in Agreements?

COVID-19: Does it evoke “Force Majeure” Clause in Agreements?

Dated: April 26, 2020

                                                                                                                                                  Article by Megha Bhatia

“Force Majeure Clause is a common clause in contract to protect the parties in the event that the part of the contract cannot be performed due to causes which are outside the control of the parties and could not be avoided by exercise of diligence and due care.”

                                                                                                                                                  -Black's Law Dictionary

Though seldom invoked, many contracts contain what is known as a “Force Majeure” clause. Based on the wording, a force majeure clause relieves a party of their contractual obligations when performance is unlikely or impracticable, due to an occurrence or consequence that the parties could not have expected or controlled, or at least explains a delayed or compromised performance.

Force Majeure clauses are usually considered boilerplate regulations that refer to time-specific incidents, such as fires, earthquakes, hurricanes, etc., that simply prohibit the ability to conduct business. Some states still provide for the termination of a contract for an unspecified act of God, and it still remains a question as to whether a pandemic is an act of God or not.

A party can only be given relief from the provision if it can be proven that there is a causal relation between the incident and its impact on the performance of the contract. In Gardiner v Agricultural and Rural Finance Pty Ltd [2007] NSWCA 235, Spigelman CJ warned of the risks of relying on economic impracticability as a convenience to claim for a force majeure event:

“… changes in economic conditions, which significantly alter the commercial aspects of an arrangement, even though in one sense they are “beyond the control” of a party to a commercial agreement, may not fall within a phrase in a Force Majeure clause. Mere commercial impracticability may not be sufficient.” 

Importantly, force majeure is not a recognised common law doctrine, which means that if the “event” is not sufficiently defined in scope, content and consequence, the clause may have no legal effect by reason of it being void for uncertainty. For example, a supply of contract of steel with the provision “subject to force majeure conditions that the government restricted the export of the material at the time of the delivery” was held to be “vague and uncertain so as to have [no] precise meaning.

Events Capable of Constituting Force Majeure

The “Force Majeure Test” typically needs the fulfilment of three distinct criteria:

• the event must be beyond the reasonable control of the affected party;
• the affected party’s ability to perform its obligations under the contract must have been prevented, impeded or hindered by the event; and
• the affected party must have taken all reasonable steps to seek to avoid or mitigate the event or its consequences.

Is Covid-19 a Force Majeure?

On 11th March, 2020 WHO declared Novel Coronavirus Disease (COVID-19) outbreak as a pandemic and call for countries to take immediate actions. Government of India Ministry of Finance also issued an Office Memorandum on ‘Force Majeure Clause’ clarifying that COVID-19 should be considered as Natural Calamity and Force Majeure may be invoked, wherever considered appropriate, after following the due process. 

Force Majeure is regulated by Sections 32 and 56 of the Indian Contract Act, 1872. Section 56 of the Indian Contract Act, 1872 states that an agreement to do an act impossible in itself is void. A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful. The Indian courts objectively apply Section 56 to the determination of whether a particular situation has made the contract impossible and dissatisfied, without delving into party intent, fairness and reasonableness, etc.

In view of the lockdown announced by our Honourable Prime Minister, almost all parties, either person or company, or businesses, have encountered commercial or financial or operational distress as a result of COVID-19. It has either made performance difficult or impossible as it has created hardships for the parties in the execution of their contractual obligations.

In short, whether COVID-19 constitutes a force majeure event depends upon the interpretation of the relevant clauses, which are:

• Pandemic – Perhaps the most obvious and cleanest force majeure event, given the WHO’s classification of COVID-19 as “pandemic”;
• Act of God – Act of God is known to be an occurrence induced “because of natural causes, directly and exclusively, and without human interference, it cannot be avoided by any degree of foresight and care reasonably anticipated”.
• Acts of government – With the Federal Government imposing an arbitrary quarantine period for individuals traveling to Australia and wider travel bans, it could be argued that the “act of government” has caused performance issues, especially in the tourism sector.
• Hinder, delay or prevent – these words are relatively common and have various definitions. For example, “hinder” implies a reduced ability to function, while “prevent” suggests impossibility. Such words must be carefully considered, as they can also have a conjunctive and less clear meaning when reading the contract.

Next Move for Companies

In order to be prepared for different scenarios as the situation continues to unfold, it is recommended that those having an agreement shall consider taking the following proactive steps:

Reviewing the contract to determine whether the contract includes a force majeure provision and, if so:

• Carefully evaluating the definition of force majeure in that contract to decide if there is an express occurrence involving incidents such as COVID-19 and, if not, if the general language is adequate to cover COVID-19 and its consequences. If in doubt, it may be helpful to obtain legal advice early in the process.
• Considering those aspects of the relevant contract that are not capable of performing and reassuring yourself that the inability to perform is attributable to the effects (direct or indirect) of COVID-19 and not to any other cause.
• Discussing and reviewing what steps you are taking as a company to prevent or at least minimize as much as possible the effect of COVID-19 on your employees and the ability to continue to execute contracts. It would be necessary to be able to prove that all the appropriate steps have been taken while following all the official guidelines.
• Considering what the consequences of a successful claim for force majeure are.
• Reviewing the finance or other relevant documentation to decide if there are any notification requirements to be complied with in relation to the anticipated or real force majeure claims.
• Determining if insurances, such as business interruption insurance or force majeure insurance, will cover all of the potential losses.

Are we prepared for potential dispute? 

Although currently it would be impossible to ascertain the quantum and extent of damage caused due to the outbreak of COVID-19, it would be prudent for any commercial organization to be adequately prepared to protect their respective businesses from the prospective disputes. 

Even if the parties have not yet encountered any disturbance to contractual performance as a result of COVID-19, it would be in the best interests of all parties to be warn and recognise any possible problems that may arise. This will also encourage them to take any measures that might be necessary to mitigate the impact of potential disruption.