1. Introduction
  • As coronavirus (Covid-19), spreads across the world, many companies are looking to suspend or terminate their contractual commitments. A particularly frequent question is whether a ‘Force Majeure’ clause in a contract excuses parties from performing their obligations or from doing so on time? Funnily, hardly anybody would have anticipated that a Force Majeure clause which forms a boilerplate clause in most of the commercial agreements would suddenly become the most important provision in the contract under the present circumstances.
  • Force majeure provisions are express terms and will not ordinarily be implied into contracts. Each force majeure provision must necessarily be considered on its precise terms and in its specific context. There are nonetheless some features common to each Force Majeure provision. The same as under:
  • 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 / hindered / delayed by the event; and
  • the affected party must have taken all reasonable steps to seek to avoid or mitigate the event or its consequences.
  • Based on the traditional narrow scope of force majeure and the presumption that contracting parties do not intend to exempt performance unless clearly provided for, Force Majeure language will tend to be construed narrowly. Given the almost unprecedented nature of the Covid-19 outbreak and/or the actions of governments around the world in response, it is likely that Covid-19 would constitute a “Force Majeure However, just because a Force Majeure event has occurred does not necessarily mean that the parties will be protected from liability for failing to perform or delay in performance. The refusal by a party to perform a contract during the COVID-19 crisis without a valid legal reason risks substantial liability in damages and potentially termination for breach of contract.
  • Most force majeure clauses will suspend a party’s performance of a contractual obligation for the duration of the force majeure event, but not permit termination. Other clauses will permit termination later, but only if the force majeure event persists for a specified period of time. Some force majeure clauses may partially excuse performance or permit the counterparty to procure products or services elsewhere during the force majeure event. In all cases, the contract as evidence of party intentions will be key.
  • Some contracts include even broader catch-all language such as “other events beyond the reasonable control of the parties,” which would almost certainly include the current COVID-19 outbreak. However, such assessments must be conducted on a case-by-case basis and will depend on the language of the contract and the factual circumstances. For example, if due to Covid-19, where a government body has imposed lock downs, travel restrictions, quarantines, or trade embargoes, or has closed buildings or borders, an act of government can be considered to have occurred. However, the position is less clear where the Government makes recommendations or issues non-binding advisories rather than makes orders using legal powers. Similarly, whether the disruption of the supply of goods constitutes a force majeure will depend on whether supply of those goods could have been secured from another source.
  • In this Research Update, we broadly discuss the extent to which COVID-19 may be invoked as an excuse for non-performance of contractual obligations. While there is no standard answer to this question which can be applied universally to all cases, given below is some general guidance and principles on how such clauses in general commercial contracts might be interpreted and applied in the current circumstances vis-à-vis a Force Majeure provision.
  1. What is Force Majeure?
  • Force Majeure’ means extraordinary events, situations or circumstances beyond human control such as an event described as an act of God or superior force. They obstruct the continuation or lawful existence of a contract amidst the parties. A force majeureclause in a contract is an expressed provision to identify those circumstances or situations in which performance under the contract by either one or both the parties become impossible to be carried out. In other words, a force majeure clause in the contract frees both parties from contractual liability or obligation when prevented by stipulated or specified events from fulfilling their obligations under the contract. It is an exception to what would – otherwise amount to a breach of contract and relieves the party (who / which is affected by Force Majeure) from liability which might otherwise arise as a result of that party’s failure to perform those affected obligations.
  1. Key factors to be considered while invoking right under contract vis-à-vis a Force Majeure Event
  • Whether a contractual obligation can be avoided on the grounds of force majeure is a factual determination based on the specific terms of the contract. An event that qualifies as a force majeure will not provide parties with freedom to be excused from contractual performance.
  • Many contractual provisions set out a specific list of force majeure events which are deemed to be events of force majeure beyond the control of the parties, such as “pandemics,” “epidemics” or “diseases.” A specific reference to a “pandemic” will make it easier to bring a force majeure claim but will still require the other criteria for a ‘Force Majeure’ test to be satisfied. However, if the provision does not include language to that effect, then it will be necessary to consider whether COVID-19, or its impact on a business or a project, is captured by a different concept, such as an “Act of God,” “action by government” or a catch-all provision. Most force majeure provisions contain “catch-all” language in respect of events which are “outside the reasonable control of the party affected”.
Consequences of the Event and not the Event itself:-
  • It is important to bear in mind however that the relevant force majeure event need not be COVID-19 itself. It is the consequences of COVID-19 and its impact upon the ability of the affected party to fulfil its contractual obligations that will be relevant. There must also be a substantial causal tie between the force majeure event and the party’s failure to perform its contractual obligations.
  • The party invoking force majeure must also establish that the event sufficiently impacted its performance. Most force majeure clauses set out the degree of requisite impact, ranging from the more onerous standard of performance being “prevented,” to lower standards such as being “hindered” or “delayed.” The burden to demonstrate force majeure and compliance with obligations of mitigation will be on the party claiming force majeure.
Usage of the terms “prevented”, “hindered” or “delayed”
  • “Prevented” – means that it must be physically or legally impossible to perform. This is a high bar. It is not enough that performance is more difficult, more expensive, or less profitable.
  • Hindered – “Hindered” – or “impeded”, “impaired” or “interfered with” is a lesser standard and may in appropriate circumstances be triggered by performance being made substantially more difficult.
  • Delayed – Proving that performance has been “delayed” should be less onerous than proving it is legally or physically impossible: it is not necessary to show that obligations have been “impossible” to perform or “prevented” for a period of time, just that complying as quickly as required under the contract is substantially more difficult.
  • Duty to Mitigate:- A party seeking to rely upon a force majeure provision will usually have to show that it has taken reasonable steps to avoid or mitigate the event and its consequence, and that there are no alternate means for performing under the contract. What constitutes a reasonable mitigation measure is fact-specific and depends upon the nature and subject matter of the contract in question.“Reasonable efforts” to mitigate may include incurring financial losses, though the extent or quantum of loss that a party may be required to incur may be finite and dependent on circumstances
  • Notice Requirements: Typically, the affected party’s right to relief for force majeure under the contract will be conditional upon the issuance of a notice by it to the other party, supported by the required evidence. The contract may additionally require the notice to state the anticipated consequences and duration of the force majeure event. Some contracts, especially construction contracts, include a “time-bar” clause that requires notice to be provided within a specified period from when the affected party first became aware of the force majeure event, failure of which will result in a loss of entitlement to claim.
  1. Aspects to be considered vis-à-vis Investment Agreements (Material Adverse Change / Effect, Representations and Warranties, Fair Disclosures, Fulfilment of Conditions Precedent, Closing Actions)
  • The impact of COVID-19 is not limited to human lives but also to operation of businesses where due to supply chain disruption, performances under many contracts are in question. Even M&A transactions and financing agreements may be affected as the question now arises that whether COVID-19 would trigger Material Adverse Change / Effect (‘MAC’ / ‘MAE’). Generally, in an M&A transaction, the time between the signing of the agreement and closure of the transaction is very crucial. It is when a MAC / MAE clause comes to operation. MAC / MAE clause confers the parties to a contract with a right to terminate the contract upon occurrence of any event which affects materially on the viability of the transaction.
  • Generally, invoking a MAC / MAE clause is difficult. Materiality will need to be demonstrated clearly and objectively. Given that MAC clauses tend to lack language that identify a particular event or loss as a MAC, determination of a claim for MAC / MAE relief often requires a detailed factual inquiry with an uncertain outcome. At this point in time, invoking a MAC / MAE clause due to COVID-19 issues may be difficult in most circumstances. The long-term effects of COVID-19 on financial and operational aspects are unknown. Further, there is always a variety of factors affecting market performance, such that proving a MAC or MAE attributable to COVID-19 alone, as opposed to general market or business conditions may be difficult.
  • The disruption brought by the COVID-19 outbreak may also result in certain representations and warranties given by a seller and target no longer being true when repeated at Closing. Fulfilment of conditions precedent may be delayed on account of various emergency measures, which have been put in place. Parties may consider negotiating waivers and extending the long-stop date. Sellers should carefully evaluate the need for COVID-19-related disclosures (for example against material contracts warranties)
  1. The Doctrine of Frustration – Where there is no Force Majeure Clause
  • Force majeure is a contractual tool; it does not exist at common law independently of being written into a contract. Courts are typically unwilling to imply a force majeure provision into the contract where no express language exists. In such circumstances, parties may rely on the common law doctrine of frustration instead.
  • Frustration occurs where a situation has arisen for which the parties made no provision in the contract and performance of the contract becomes “a thing radically different from that which was undertaken by the contract.” Much like in the force majeure context, performance of the contract must become impossible; it is not enough that the contract become more onerous, or even significantly more difficult, but still possible to perform. Rather, a party must show that the original purpose of the contract has been frustrated, and it would be unjust for them to be bound to the contract under the existing circumstances.
  • In the absence of an applicable force majeure clause and in very limited circumstances, a party may be relieved from its obligations by claiming that the contract is “frustrated.” from what the parties had bargained for. Unlike the flexibility of force majeure, which can be determined by the parties as expressed in their contractual terms, frustration automatically results in both parties being discharged from their obligations.
  • Given its significant impact, the threshold for frustration is a very high bar. Even dramatic price changes and market fluctuations are not likely to result in a contract being frustrated. However, if the impact of COVID-19 drastically changes the character of contractual obligations, for example, in the event of government-imposed restrictions preventing travel or trade, it is possible that the contract would be considered frustrated.

Conclusion (Specific focus on Situation in India)

  • The World Health Organisation (WHO) declared COVID-19 as a “pandemic” on March 11, 2020.A pandemic is defined by WHO as “an epidemic occurring worldwide, or over a very wide area, crossing international boundaries and usually affecting a large number of people.” A disease outbreak will be labelled as a pandemic when it is widespread, over several countries or continents, usually affecting a large number of people. WHO had declared a pandemic last in 2009 for the H1N1 influenza outbreak.
  • As per the information available on the website of WHO:
  • people can catch COVID-19 from others who have the virus. The disease can spread from person to person through small droplets from the nose or mouth which are spread when a person with COVID-19 coughs or exhales. These droplets land on objects and surfaces around the person. Other people then catch COVID-19 by touching these objects or surfaces, then touching their eyes, nose or mouth. People can also catch COVID-19 if they breathe in droplets from a person with COVID-19 who coughs out or exhales droplets. This is why it is important to stay more than 1 meter (3 feet) away from a person who is sick.
  • Studies suggest that coronaviruses (including preliminary information on the COVID-19 virus) may persist on surfaces for a few hours or up to several days. This may vary under different conditions (e.g. type of surface, temperature or humidity of the environment).
  • To date, there is no vaccine and no specific antiviral medicine to prevent or treat COVID-2019.
  • Covid-19 has disrupted supply chains, leading to the closure of several manufacturing facilities globally. Several manufacturing sectors, particularly those relying heavily on China for raw materials, such as pharmaceutical firms for their active pharmaceutical ingredients, conventional and renewable energy equipment manufacturers and suppliers, electronics and chemical companies, are witnessing unprecedented delay or uncertainty in the supply chain.
  • Unlike a one-off event such as natural disaster, which is usually limited in time and confined to a particular geographical locale, the COVID-19 outbreak has been dynamic and has been characterized by its ability to proliferate rapidly and unexpectedly across multiple countries and geographical regions. Covid-19 pandemic an extraordinary event which is beyond the ‘reasonable control’ of the parties and can be regarded as an ‘Act of God’ or a ‘natural calamity’. On February 17, 2020, the China Council for the Promotion of International Trade (CCPIT), revealed that it had already issued over 1,600 ‘Force Majeure certificates’ to firms in 30 sectors, covering contracts worth over USD 15 billion.
  • In India, the Department of Expenditure, Procurement Policy Division, Ministry of Finance issued an Office Memorandum on February 19, 2020, in relation to the Government’s ‘Manual for Procurement of Goods, 2017’, which serves as a guideline for procurement by the Government. The Office Memorandum effectively states that the COVID-19 outbreak could be covered by a force majeure clause on the basis that it is a ‘natural calamity’, caveating that ‘due procedure’ should be followed by any Government department seeking to invoke it.
  • The Government of India has issued several advisories pertaining to travel restrictions on account of COVID-19 which include the following:
  • all existing visas (except diplomatic, official, UN/International Organizations, employment, project visas) stand suspended till April 15, 2020. This came into effect from March 13, 2020, at the port of departure.
  • All incoming travellers, including Indian nationals, arriving from or having visited China, Italy, Iran, Republic of Korea, France, Spain and Germany after February 15, 2020, shall be quarantined for a minimum period of 14 days. This came into effect on March 13, 2020, at the port of departure.
  • Incoming travellers, including Indian nationals, are advised to avoid non-essential travel and are informed that they can be quarantined for a minimum of 14 days on their arrival in India.
  • All train services suspended till 31st March 2020 including suburban rail services. All metro rail services suspended till 31st March 2020.
  • In India, under the Epidemic Diseases Act, 1897, which was enacted to provide for the better prevention of the spread of dangerous epidemic diseases, the Central and State Governments are empowered to undertake certain actions when they are satisfied that the State, country or any part thereof is visited by, or threatened with an outbreak of any dangerous epidemic disease and the ordinary provisions of law for the time being in force are insufficient for the purpose. The Centre has ordered a complete Lockdown in entire India till 14th April, 2020.
  • In some states such as Maharashtra there is a curfew till 31st March, 2020. If any person, institution or organisation is found violating any provisions of the State specific COVID-19 Regulations, it would be deemed as an offence under Section 188 of the Indian Penal Code, 1860, which penalises disobedience of an order duly promulgated by a public servant. Certain State specific regulations empower the officers to isolate and/or admit a person who develops symptoms simulating that of the COVID-19 infection, and may even initiate action under Section 188 of the Indian Penal Code, 1860, against any person who refuses to comply with the same.
  • Some effects of the COVID-19 outbreak are obvious, such as, travel restrictions, lock-downs, quarantines, but their immediate impact on contracts, such as, the ability to pay, deploy resources on time and meet service levels as agreed, and the amount of increased costs may be less so. If there is an Order issued by the concerned local / state Governmental Authorities asking for work places (including private establishments) to shut down till a specific period, then such an event becomes all the more compelling reason to invoke the Force Majeure rights. Therefore, careful consideration should be given to contracts that are most affected by the effects of the COVID-19 outbreak.
  • Whether the impact of COVID-19 on the availability of employees to perform contractual work amounts to a force majeure likewise may depend on whether company policies implemented during the outbreak, such as quarantining or remote work, were necessary, and whether in fact performance was impossible. These are factual questions which will be unique to each individual circumstance.
  • Lastly, given the spread of COVID-19, it is possible that there may be fewer mitigation measures available to parties than in other potential events of force majeure. Parties must therefore consider adopting the approach of issuing “protective” or “rolling” force majeure notices that take into account the developing impact that the COVID-19 outbreak has upon the performance of their obligations under the contract.


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