Importance of the ‘Force Majeure’ Clause in Business Contracts During COVID-19

Business enterprises in India and across the world are unable to fulfil their contracts due to the uncertainty caused by the spread of COVID-19. In India, oil refining companies and airports in Delhi and Mumbai have invoked the ‘Force Majeure’ clause and are seeking a waiver of their payments to the Airport Authority of India on account of this clause. Similarly, the apex body of real estate developers CREDAI seeks to invoke it to avoid penalty on delay in completion of projects. The Indian customs ports too invoked the clause to enable clearances of goods at ports.

‘Force Majeure’ Clause

‘Force Majeure’ refers to the impossibility of performance resulting from the happening of unforeseen events. The ‘Force Majeure’ clause is framed to deal with risks arising from non-performance of a contract in unforeseen circumstances such as an act of war, terrorism, epidemics among others. The list can be inclusive too by mentioning acts and events which are not in control of the parties to a contract. In cases where the clause of ‘Force Majeure’ is invoked, the parties cannot sue each other or claim damages for non-performance of the contract.

When Can You Invoke and What Are Its Effects?

The clause is invoked as per the terms of the contract on the happening of an unforeseen event. The parties to a contract may issue a notice to the other informing about the occurrence of an event, inability to perform their obligations and invoking the clause. The clause enables temporary relief to parties in performing their obligations in such unforeseen circumstances. In certain cases, if the unforeseen event continues for a long period, the parties may terminate the contract. The parties to a contract should seek legal advice while invoking the ‘Force Majeure’ clause, ascertaining its impact on the business and the mode of discharge of their obligations under a contract.

Importance of the ‘Force Majeure’ Clause

A ‘Force Majeure’ clause is generally found in supply contracts, distribution contracts, real estate contracts, financing agreements, and among others. In an unforeseen event such as the spread of COVID-19 and a lockdown of business, you may not be able to deliver on your obligations or commitments. Neither can you afford to pay the damages for the non-performance of the contract. In such cases, you can invoke the ‘Force Majeure’ clause to protect your business interests and the contract. With legal help, you can retain the contract and obtain temporary relief from performing your obligations. Some tips to assist you:

• In case you have entered into long-term contracts, you can seek to renegotiate the terms of the contract for the impacted period of say 6 months. This will help protect your contract and business interests.
• In case of a contract for supply or distribution, you can provide an increased supply of your goods (or services) as demand picks up and makes up for any non-performance.
• Make sure that none of you is looking for alternate business arrangements in a crisis while being locked up in legal challenges which can further impact the business.

The COVID-19 crisis is wide and deep, impairing normal business conditions. The government is likely to take more wide-ranging measures to cover up for this massive economic crisis, so hang in there!