Triggering of Force Majeure? COVID-19.

Will COVID-19 trigger Force Majeure? I got this question in the last couple of days from a few of my friends, colleagues and ex-colleagues. I would say there cannot be a straight answer in YES or NO. The answer to the triggering or applicability of Force Majeure lies in what manner and/or circumstances the force majeure clause of an agreement has been drafted.

Let’s understand this in detail. Force Majeure and vis-Major (i.e. act of god) are the part of inevitable accidents. Inevitable accidents are defined, as any accidents that could not have been foreseen or prevented by due care and diligence of any human being involved in it, or which could not by any possibility is prevented from happening by the exercise of ordinary care, caution and skill. Force Majeure means “superior force” which include war, riots, explosions or other disasters, energy blackouts, unexpected legislation, lockouts, slowdowns, and strikes, epidemic or pandemic diseases, other specified factors or events may be relevant, such as the inability or incapacity to procure necessary supplies or labour. Government action or market conditions may also be considered as Force Majeure. Vis-major is a Latin maxim that means all causes of an inevitable accident to be occasioned by elementary forces of nature not connected with any agency of man or any other cause directly or indirectly[i]. Typically, circumstances identified in vis-major (i.e. acts of god) include earthquakes, hurricanes, lightning, flood etc. Force Majeure has wider meaning (than vis major) and includes events related to natural forces (an act of god) and also includes other causes that may be related to anthropogenic forces. Inevitable accidents alter parties' obligations under a contract when an extraordinary event or circumstance beyond their control prevents one (or all) of them from fulfilling those obligations, thereby avoiding a breach of the contract.

How do you draft and negotiate the clause may have a wide range of consequences and implications, including but not limited to excusing the affected party from performing the contract in part or whole. Engaging legal counsel in this initial stage may be crucial to have a reasonable and effective force majeure clause to avoid any miss-out.

When an affected party may be exempted from performance of the contract:

(i)       Where the term epidemic, or pandemic, has been enlisted in the force majeure clause of an agreement.

(ii)         Where no relevant words or such event is enlisted in the clause, it is a question of interpretation by courts that whether the clause intended to cover epidemic or pandemic as a force majeure event, if the list of events is non-exhaustive. If it is interpreted by the court that epidemic, or pandemic as a force majeure event. It may exempt affected party from performance of contract.

(iii)         Contracts may have "beyond the parties' reasonable control" verbiage which may save affected party(ies) from performance of the contract. Determining whether this covers issues arising from COVID-19 is a question of fact and interpretation.

When an affected party may not be exempted from performance of the contract:

(i)          Where the term the epidemic, or pandemic, has neither been listed in the force majeure events not it is provided a non-exhaustive list.

(ii)          The non-performance of the contract was due to circumstances not beyond of their control; and there were no reasonable steps taken to avoid or mitigate the event or its consequences.

(iii)       Generalized economic hardship or increase in expenses does not constitute a force majeure event.

What other alternatives are on the plate?

Parties should also consider the following other potential remedies triggered by force majeure event, that is (i) excusing performance only until the end of force majeure period; or (ii) providing a party the option to purchase a lesser quantity of goods.

As the consequences of the COVID-19 pandemic amplifies, parties of contracts are starting looking to their contracts for potential excuses for non-performance. Where the force majeure clause is not provided, companies have begun to assess other alternative legal mechanisms (e.g. section 56 of the Indian Contract Act, 1872) to excuse the nonperformance of the agreement.

In light of the current pandemic outbreak, companies should take extra-ordinary precautions and analysis of the Force Majeure clause before reaching any conclusive decision. Further, businesses should take into account the risk involved with the force majeure clause rather than taking this as a general boilerplate clause. Going forward, it is highly recommended to include clearly epidemic or pandemic in the list of force majeure events in contracts. And, it would not be unreasonable to include COVID-19 as a force majeure event.

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[i] Ratanlal & Dhirajlal, The law of Torts, 25th edition reprint 2009, Inevitable Accidents, Page. 92.