Updated: Apr 18, 2020
The rapid outbreak of COVID-19 coupled with subsequent government orders to tackle the spread of the same have raised severe concerns about parties’ ability to comply with contractual terms across industries. Owing to the havoc wrought by this outbreak, the most common question being posed by businesses is:
Whether the non-performance of contractual obligations is excusable, due to the COVID-19 outbreak?
At the outset, parties to the contract must understand that there is no universal response to the above question. The precise answer to this question depends on your answers to some of the questions mentioned in the checklist provided below. Most contracts include a clause known as the force majeure clause intended to address the parties’ obligations under circumstances beyond their reasonable control. One of the parties to the contract may seek to invoke the force majeure clause to excuse non-performance. For a detailed understanding of the interpretation of the force majeure clause by Indian courts, please refer to our previous post here. Having said that, a thoroughly fact-specific analysis is required to understand the applicability and enforceability of such a clause, therefore depending on the exact wording of the contract in question and the specific circumstances of the situation.
[Note: The following lists/ flowchart come with a few caveats. This note is premised on Indian Law applying. Various jurisdictions will have different laws and approaches. The following checklist and flowchart have been prepared for general informational purposes only and are not to be construed as legal advice. Force majeure related language used in most contracts vary widely, therefore when in doubt, it may be helpful to seek legal advice early in the process]
A Quick Checklist
What are the initial steps to be taken to understand whether COVID-19 triggers a force majeure event?
(i) Identify the governing law of the contract.
The governing law clause of the contract must be identified to primarily check the legal system applies to the contract. This is an important step, since some legal systems does not recognise the general concept of force majeure, while other legal do. The Indian Contract Act, 1872 incorporates the concept pertaining to Force Majeure under Sections 32 and 56.
(ii)Identify and review the force majeure clause.
It is not always a very simple task to identify the force majeure clause because of diversity of the language used in drafting of the force majeure clause of various contracts causes. Certain contracts might also have a Material Adverse Change clause (“MAC”) that must be looked out for in corporate or financial contracts.
(iii) Analyse the standard of performance according to the contract.
Force majeure clauses vary in terms of the how they codify the standard of impossibility of performance. While some clauses may provide for the termination of an agreement right away, other clauses might excuse hindered performance because of the triggering event. Therefore, it becomes necessary to understand how rigorous the standard of performance is in the force majeure clause in your contract.
(iv) How are you being prevented from performing the contract?
In order to invoke the force majeure clause, it must be established that the reason due to which the party was unable to perform the obligations under contract were beyond his reasonable control.
For instance, if we consider the example of a business that engages in the export of lubricants and has a force majeure clause in contract with its clients. The stringent government rules of lockdown to curb the spread of COVID-19 denies the business its access to the regular workforce, therefore establishing a scenario which is beyond its reasonable control.
However, in the same example, if the production of the lubricant is already done and the hindrance in supply was owing to increased cost due to reduced availability of transportation system, it would be difficult to invoke the clause since this is a commercial hindrance and hence will not be looked at more stringently than the first scenario.
(v) According to the Contract, when must a Notice be given? Are there requirements for the form of notice?
Depending on the language of the Force majeure clauses in your contract, you may be required to serve a notice in any of the following cases:
(i) A minimum notice ahead of an event contemplated by the contract, or
(ii) Notice within a reasonable time once of the triggering event.
It is always better to send the notice at an early stage, since a delayed notice might disentitle the party from obtaining the benefit of a force majeure clause despite the occurrence of the triggering event or might make the opposite party entitled to compensation. It is always advisable to seek legal advice before sending a notice, since a faulty declaration of force majeure may result in a breach or anticipatory breach of the contract.
Most force majeure clauses specify the detailed provisions of the manner, form, recipient, reasons for trigger of the event and terms to be used in the notice. In the absence of such specific instructions, you may seek legal advice to ensure that proper notice, curated specifically around the issues pertaining to your matter.
Flowchart: Considerations for the analysis and review of commercial contracts
In the following flowcharts, we provide some elements that may be used for reviewing commercial contracts during this pandemic through a logical step by step process involving operational and other factors that can serve as a pragmatic checklist.