The ‘Force Majeure’ Clause: How One Phrase Saved (Or Sank) Businesses During Covid-19

Introduction

The COVID-19 pandemic caused unparalleled disruptions among all sectors—from manufacturing, to hospitality, to logistics, to entertainment. At the centre of countless contractual disputes created by the disruption of the pandemic was a three-word term: force majeure. Very simply, in general terms, that means "superior force." In short, the term "force majeure" was the issue that whether a company could legally stop perform its obligations under a contract.

Force majeure is often an inconspicuous provision at the back of most contracts. However, after COVID-19, force majeure has been brought front and center and has become the most important part of the agreement for many businesses. In some instances, businesses were able to say that Covid-19 clauses meant that they, legally speaking, had no obligations to their counterparties in a way that provided some level of protection against contractual claims and penalties, but in other situations, poorly drafted force majeure clauses, or terminations of the contracts in a narrow or vague way, resulted in lengthy and expensive litigation, or no relief whatsoever. This blog will illustrate how the interpretation of force majeure clauses changed during COVID-19 to demonstrate how small changes in the terms used in the drafting changed the legal outcomes, and also how careful drafting and avoidance of the pro forma can avoid aggravating factors in business continuity.

Legal Framework Of Force Majeure In India

There is no statutory definition of force majeure in Indian contract law and enforcement occurs through:

• Section 32 of the Indian Contract Act 1872 covers contingent contracts.

• Section 56 deals with the doctrine of frustration when an act becomes impossible or unlawful.¹

Where contracts do not have a force majeure clause, in other words, the parties must rely on Section 56. Having an explicit clause gives certainty in the contract and an explicit detail of what events trigger and the consequences of those triggering events.

Covid-19 Impact on Contractual Duties

Event Management Industry 

Event companies were devastated by stay-at-home orders and gathering restrictions. Event companies with agreements referring to the pandemic or epidemic or government restrictions invoked force majeure clauses successfully. Event companies without any references were sued for breach or to recover deposits.

Rental Agreements

Commercial tenants in malls and IT parks faced difficulties fulfilling their rent obligation during the pandemic. In the case of Ramanand v. Dr. Girish Soni, the Delhi High Court held that lockdown alone is not sufficient to suspend the obligation to pay rent unless the lease provided for the suspension of rent obligations. Leases that did not provide for a suspension of rent obligations did not prevent the tenant from being sued for rents.²

Disruptions Within the Supply Chain

Border closures and workforce shortages disrupted both manufacturing and logistics options. Businesses that expressly referenced force majeure clauses that either suspended the supply of goods or affected government activity were much better positioned to demonstrate a remedy.

Judicial Approach: A Mixed Blessing

The Courts took a fact-specific approach to each case, specifically considering the:

• The specific provisions of the clause.

• A clear, causative link between COVID-19 and a party's non-performance.

• Proof a party took reasonable steps to mitigate. In Standard Retail Pvt. Ltd. v. G.S. Global Corp,3 the Bombay High Court rejected the force majeure plea for a price fluctuation basis (i.e., nonperformance was not due to impossibility of circumstance). In Halliburton Offshore Services Inc. v. Vedanta Ltd,4 the Delhi High Court recognized emergency legislation while the country was locked down and constituted it a qualifying force majeure event, and allowed the parties to temporarily suspend their obligations, emphasizing that COVID-19 applied as the qualifying component in the force majeure clause.

  
  

Force Majeure Vs. Frustration

While both can deal with unexpected events, Force Majeure and Frustration differ in some respects:

• Force Majeure is contractual, based upon express terms in a contract.

• Frustration (section 56) is statutory (because it will apply if there is no identifying clause in the contract defeating the frustration event). The performance becomes objectively impossible (not just difficult or inconvenient) to perform.

• The Supreme Court of India in Satyabrata Ghose v. Mugneeram Bangur & Co.5 summarized its position, and held hardship or inconvenience will not, alone, frustrate a contract unless the contract is totally defeated in purpose(s)

  
  

Wording Matters: Broad Vs. Narrow Clauses

The extent to which a force majeure clause covers an event has an effect on the success of such a clause as follows:

• Broad Clauses - references are made to "epidemic," "pandemic," "government pandemic," or "lockdown." Courts seem to have consistently favoured these types of clauses when resolving disputes regarding the pandemic from mid-March onwards.

• Narrow Clauses - limited restriction to "fire," "flood," and "war." These narrow definitions restricted their applicability to the pandemic. Clauses which included notice provisions with mitigation endeavours or allowance to suspend engagements (rather than an automatic termination) appear to have fared well in the courts

International Perspectives

UNITED KINGDOM

Courts have applied the doctrine of frustration sparingly. In the case of Canary Wharf v. European Medicines Agency,⁸ Brexit did not frustrate a lease.

UNITED STATES

Under the Uniform Commercial Code (UCC § 2-615),⁶ "commercial impracticability" was acknowledged. However, parties had to not only demonstrate that pandemic conditions made performance more expensive and/or difficult but that pandemic conditions made performance objectively impossible.

International Contracts

When the ICC Force Majeure Clause 20207 expressly mentions pandemics, quarantines and health emergencies as force majeure events, it has established a standard for drafting internationally.

Recent Judicial Examples In India

• Halliburton Offshore v. Vedanta Ltd.: Lockdown due to COVID-19 was accepted as force majeure.

• Steel Authority of India v. Hindustan Construction Co.: Economic hardship alone did not constitute force majeure.

• MEP Infra v. CMDA (Madras HC): Lockdown which halted toll collection was eligible as a force majeure event.⁹

Best Practices for Drafting Post-Covid

1. Define Events: include pandemics, lockdowns, quarantines, interruptions to supply chains.

2. Include a catch-all provision: for example, "any other event which is beyond the reasonable control of the parties."

3. Notification requirements: Specify an appropriate time and method of how to notify the other party of the force majeure clause being invoked.

4. Duty to Mitigate: Defined that each of the parties will take reasonable steps to mitigate any delay, or losses that occur.

5. Define Outcome: define whether the Force Majeure event will suspend, extend or terminate the parties contract.

6. Tailor clauses to Sector: for instance, a Force Majeure clause in an events contract will look substantially different than a force majeure clause in relation to contracts relating to manufacturing or information technology.

Conclusion

The pandemic highlighted the crucial importance of the force majeure clause. What was once just boilerplate language became the protective or vulnerable place for a business faced with contract non-performance.

Legal preparedness now demands a more progressive approach to contract negotiation. In all areas, including real estate contracts, supply chains, and/or digital services, a negotiated and customized force majeure clause may be the differentiator for legal and financial stability in any future disruption.

Author: - Irshad Ahmed, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

Endnotes (Bluebook Format)

1. Indian Contract Act, 1872, §§ 32, 56.

2. Ramanand v. Dr. Girish Soni, 2020 SCC OnLine Del 635.

3. Standard Retail Pvt. Ltd. v. G.S. Global Corp., Comm. Arb. Pet. (L) No. 404/2020 (Bom. HC).

4. Halliburton Offshore Services Inc. v. Vedanta Ltd., 2020 SCC OnLine Del 542.

5. Satyabrata Ghose v. Mugneeram Bangur & Co., AIR 1954 SC 44.

6. Uniform Commercial Code, § 2-615 (U.S.).

7. International Chamber of Commerce, Force Majeure Clause 2020.

8. Canary Wharf (BP4) T1 Ltd v. EMA, [2019] EWHC 335 (Ch).

9. MEP Infrastructure v. CMDA, W.P. No. 7591/2021 (Madras HC).