As COVID-19 crisis persists, companies consider option to invoke ‘force majeure’

It is a contractual clause which absolves a party from something it promised

JAPAN-ECONOMY-TRADE Representational image | File

With widespread disruption in business, manufacturing and transport, stage seems set for India to see a spate of ‘force majeure’ invocations. It is expected that as the impact of the lockdown unravels, more and more Indian companies may invoke ‘force majeure’ clauses in their contracts to other parties to either avoid paying up or deliver products or services as per agreement.

India’s biggest container terminal, run by Maersk at Mumbai port, as well as Adani Ports in Gujarat, have already declared force majeure, joining oil refiners IndianOil and Mangalore Refineries. Rumours abound that one of India’s biggest corporate houses has begun sending notices to its business associates, threatening to discharge itself of contractual obligations claiming force majeure. However this could not be independently verified.

Force majeure, a French term which means ‘superior force’ is a contractual clause which absolves a party from something it promised in a contract because of reasons beyond its control. Sections 32 and 56 of the Indian Contract Act provides for force majeure, that when a major unforeseeable ‘Act of God’ event—like a natural disaster—occurs, companies can use it to protect itself from liability to perform an obligation. Of course, force majeure has to be part of the original contract between the two parties to begin with.

“Force majeure clause usually requires two additional requirements to be met, that it was not foreseeable, and also alternate means of performance has been explored,” points out Deepto Roy, partner with the law firm Shardul Amarchand Mangaldas & Co. “(Also) Force majeure cannot be invoked just because the contract has become financially more difficult to perform. Commercial difficulty does not amount to force majeure.”

However, with WHO declaring COVID-19 as a pandemic and finance ministry putting the outbreak under ‘natural calamity’ in government procurement contracts (two other ministries, that of renewable energy as well as road transport have done the same), many feel the requirements have been met. Especially, considering the extra-ordinary situation that persists presently due to the nationwide cessation of commercial activities.

However, some differ. Mohan Guruswamy, chairman & founder, Centre for Policy Alternatives and a former adviser to the finance minister recently wrote in a social media post, “One can understand if they seek deferment of their obligations. But this wholesale failure to discharge contractual obligations will have huge downstream effects. It is an encouragement for all to stop discharging their obligations.”

Deepto Roy, however, feels the present situation warrants force majeure. “The unprecedented nature of the present outbreak and the government response to the same, would, in my view, allow justification of force majeure in a large majority of cases.”

That will be an encouragement for more sectors to rally for invoking force majeure. The real estate body CREDAI has already demanded that this be invoked under Section 6 of RERA, so that registrations of projects are extended along with project completion time as well as exemption from penal charges. A few weeks ago, as supply of raw materials and components meant for Indian factories got disrupted due to COVID-19 fears over cargo from China, the Indian government had notified ‘force majeure’ for speedy clearance at Customs. “The auto industry is grateful to the government for issuing (that) notification,” remarked Rajan Wadhera, president of the Society of Indian Automobile Manufacturers (SIAM).

Of course, it cuts both ways. One of the demands of Indian industrialists, in their video conference with Prime Minister Narendra Modi this week was that insurance companies should not invoke ‘force majeure’ to stop payments to companies for their losses over the present situation.

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