Many domestic companies facing financial penalties due to their inability to fulfil contractual obligations as agreed upon with their business partners because of disruption in the supply chain due to coronavirus outbreak may take shelter under 'Force Majeure' clause. Force Majeure clause protects a party from any financial liability for its failure to perform a contractual obligation.
Finance Ministry in February clarified that disruption in supply chain due to spread of coronavirus in China or other parts of the world qualifies as a force majeure event, and companies and businesses can invoke force majeure clause, wherever considered appropriate. Though the Finance Ministry statement serves as a guideline for companies which make supplies to government departments, it essentially means that the government treats the coronavirus outbreak as a force majeure event.
With 75 districts where confirmed cases of coronavirus were detected announcing lockdown till 31 March, most establishments and companies will have to shut their businesses during this period, forcing many of them to delay or not fulfil contractual obligations. Usually, such delays or non-fulfilment of contractual obligations result in financial repercussions on the party failing to do so.
Coronavirus outbreak has disrupted the supply chains not just in India but also across the globe, meaning many domestic companies may be at the risk of defaulting on their obligations with their business partner resulting in penalties in monetary term. In such times, the force majeure clause can come to rescue of businesses.
Force Majeure events
Force Majeure events are those which are beyond the control of a person or an enterprise. These events include an 'Act of God' or natural disasters, war or war-like situations, labour unrest or strikes, epidemics etc.
The Force Majeure clause finds mention in the Indian Contract Act, and therefore, Indian companies find legal protection under this law against any such unforeseen events.
However, it does not give a blanket protection against any non-fulfillment of contractual terms. It depends on the mutually agreed upon events and obligations to be covered by this clause.
"Parties to the contract mutually decide over the list of events to be categorised under this clause which includes acts of war, riots, fire, flood, hurricane, earthquake, explosion, strikes, lockouts, slowdowns, prolonged shortage of supplies, governmental action prohibiting or impeding any party from performing its respective obligations under the contract," says Anandadey Mishra, founder and managing partner, AMlegals, a law firm.
The language of the contract, therefore, is important.
According to a note by law firm Cyril Amarchand Mangaldas, some of the conditions within the contract like 'duty to mitigate' obligation and 'reasonable diligence' can be subjective and interpreted on a case-to-case basis.
Therefore, experts say that invocation of Force Majeure clause in itself won't guarantee an escape from the obligation. The onus actually lies with the party, which wants to invoke the force majeure clause to establish an existence of such events, circumstances or conditions which result in force majeure.
Some experts also see a flurry of disputes and litigations once companies start invoking the clause.