The COVID-19 pandemic and the subsequent Governmental measures such as lockdowns and travel restrictions have wreaked havoc on global economy. As the virus proliferates, there is little doubt that the disruptions caused by the pandemic shall continue to exist. In this economic crisis, it is reasonable to expect that many companies will find it difficult to keep their contractual obligations afloat, particularly those obligations which are directly hit by the pandemic and are hence, unsustainable.
While such concerns beleaguer businesses across the globe, there is also a strong likelihood of invocation of force majeure clauses by distressed companies. With this short note, we attempt to give some practical suggestions, which are critical to preserve or resist, a force majeure claim. Having said that, we also wish to convey that since force majeure is nothing but a contractual right, for each individual case, a detailed fact-based analysis of specific contracts, shall be required for more accurate and effective solution.
Parties must be aware that non-performance of contractual obligations always carries with it a risk of being hauled up for breach of contract and being sued for damages by the other party. The pandemic or the consequent lockdown, does not by itself give a freehand for deliberate inaction towards its contractual obligations or for delaying the performance. It may be noted that in most of the countries, force majeure, is a contractual agreement and not a common law remedy. To invoke a force majeure clause, the party invoking it must ascertain, firstly, that the scope of force majeure clause in the contract covers the situation of pandemic and lockdown by the Government. Secondly, the party, despite its best efforts, was unable or precluded to perform its obligations. Thirdly, and equally important that the non-performance of the obligation was as a consequence of the force majeure event alone. Mere hardship in performance may not be sufficient to invoke a force majeure clause. Thus, parties must act with caution and wherever necessary, must take the benefit of legal advice. Speculative decisions and dependency on unfounded opinions may prove to be highly detrimental.
In order to prepare for any unforeseen outcome in the aftermath of the COVID-19 pandemic and the consequent lockdown, we reckon that the following practical steps may be helpful for businesses facing difficulties:
1. Review your Contract and examine the Force Majeure Clause: It is important that the Companies review all their contracts in order to determine well in advance whether under the force majeure clause, an event of the nature of COVID-19 pandemic or an event such as a Government imposed lockdown is contemplated. In case, the force majeure clause is a wide catch-all provision, it is necessary to carefully examine, if the broad and sweeping language is sufficient to include COVID-19 and its consequences.
2. Keep a track of Governmental Measures: Governments of various countries, including India, have been issuing guidelines and advisories from time to time setting out the exact nature of the restriction and the list of activities which are permissible. There may also be cases where, in a particular sector, the Government may allow only certain activities partially while other activities may be restricted. It would be necessary to maintain a daily record of such instructions issued by the Government from time to time. It is of utmost importance that the parties have a good grip on the timelines of the permissible activities as well as that of the restrictions imposed by the Government. In a particular case, for example, an activity may be in restricted category. However, subsequently, the Government may after reconsideration have allowed the activity either fully or partially. In such an event, invocation of force majeure clause for the period when the restriction on such activity has been lifted may attract greater risk and may be unsustainable.
Additionally, force majeure certificates are being issued by certain government departments in various countries. For instance, the China Council for the Promotion of International Trade (CCPIT) has reportedly already issued over 5600 such certificates, covering a total contract value of over USD 70 billion. Meanwhile, in India, an Office Memorandum was issued on February 19, 2020 by the Department of Expenditure, Procurement Policy Division, Ministry of Finance, classifying the disruption in supply chain due to COVID-19 outbreak as a natural calamity and a force majeure event. The companies engaged in government contracts may, in appropriate cases, consider approaching the authority for such a certificate. However, it must be borne in mind that such certifications and government directives are not blanket defences or an escape mechanism to circumvent contractual obligations, as the ultimate consequence of such a move can only be ascertained after scrutinising the merits of each case. Nevertheless, the companies should be mindful of such measures and state interventions to effectively deal with the situation.3. Identify activities impacted by COVID-19 pandemic: Having reviewed the nature of activities that are affected by the force majeure events, the contracting parties must examine which of their activities have been affected by the force majeure event and are incapable of being performed. Since all the activities so effected may not have a direct causative link with the pandemic, so parties must, for each activity, keep record of what event exactly affected its performance. If there are some obligations in the contract which could still be performed, it must be ensured that the same is continued. Even in relation to the activities that are affected, the parties must minutely examine whether the obligation is completely incapable of being performed or is it merely delayed.
4. Re-negotiate Terms and Conditions: Contractual counterparties must make conscious efforts to realign the contract in terms of the present situations. It is possible that there may be fewer mitigation measures available to parties. However, parties can opt for without prejudice discussions for modifying the timeline, putting certain activities on hold temporarily or even for suspending some contractual obligations.
5. Formal Requests to Counter Party: In case the contractual obligations are impossible to be performed and without prejudice discussions also fail, formal requests must be made. Through such formal requests, parties may seek more time for performance.
6. Mitigating the delays/non-performance: The contracting parties must make every effort to mitigate the delays and minimise the losses as may occasion on account of non-performance, even though the contract does not cast any such duty on the parties. Although, it may not be a specific requirement of the contract, but it is a requirement under the general jurisprudence that a party must act prudently and vigilantly at all times. In order to mitigate the impact of the pandemic, Companies may advert to alternative routes which help them to continue with their contractual activities and obligations. However, if there are no alternate routes available, the same should be communicated to the counter party in clear terms. A party seeking to rely upon the force majeure clause will have to show that it took all reasonable steps to mitigate delay, losses and disruptions.
7. Check for Notice Requirements: In case, despite all best efforts it becomes imminent to invoke a force majeure clause, the contracting party must carefully examine the requirements for invoking the force majeure clause. Wherever the contract provides for Notice to trigger the force majeure event, parties must strictly comply with the same and must also adhere to any additional requirement such as providing updates, giving supporting documents etc. The timeline provided under the contract must also be complied with. Even otherwise where Contract does not explicitly provide for Notice, it is advisable that a notice may be sent to the other party. As discussed earlier, mere existence of a force majeure event is not sufficient for successful invocation of force majeure clause. It is equally essentially required to be shown that the force majeure event alone has led to the non-performance of the contractual obligation and that the party invoking force majeure clause had made all possible efforts. Hence particular care must be taken that all such events and occurrences that has led to the invocation of the force majeure clause are mentioned in the notice.
8. Maintain Records: Parties must also ensure maintenance of complete records of specific activities undertaken by them. Also, for each activity suspended due to the pandemic, parties must keep written records of all the developments pertaining to the same. Parties must make conscious efforts to share regular updates with the counter party to ensure transparency and fairness.
9. Keep track of Insurance Policies: A subsisting insurance policy for the activities hit by the pandemic may prove to be a rescuer for many Companies. Companies must determine if their insurance policies cover the disruptions caused to their activities, which may make up for any future losses.
10. Parties getting Force Majeure Notices: The Party which receives force majeure notice must review the contract and examine whether the activities purported to be stopped by the counter party, are affected by the force majeure event. Particularly, such party must review the force majeure clause of the contract, to find whether COVID-19 is contemplated as the force majeure event in the said clause.
Many activities have been exempted by the authorities in the ongoing lockdowns. Some activities are declared as essential services, while some are generally allowed to continue, owing to special circumstances. Parties must know that under the garb of pandemic, the counterparty cannot stop performing such contractual obligations and activities, which are not affected by the current crisis.
These are only the broad guiding principles which may be followed by a company to safeguard itself in the wake of the worldwide crises. It is highly recommended that expert legal advice is sought specific to each contract and circumstances surrounding the contract.
Performance Of Contractual Obligations During The COVID-19 Pandemic
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
