Will Covid-19 trigger a
force majeure clause? The World Perspective
The global impact due
to widespread of Novel Coronavirus outbreak has caused an alarming case of
extreme disruptions of commercial activities and day-to-day business
transactions. It is imperative to record that, this unprecedented has been a
consequential lockdown and suspension orders by various governments around the
globe, vide specific ordinances and general government order(s). Therefore, it
is completely fair to state that the consequences of the pandemic have the
effect of a rigid interference. With most of the countries in a lockdown or a
partial lockdown mode the question of performing the obligations of the
contracts entered into have come into a sharp focus. Thus, in amid of the
current international sanitary crisis due to Novel Coronavirus, the most
pertinent question is whether the parties to a contract could be saved by the ‘Force
majeure’ clause.
What
is a force majeure clause?
According to the
definition provided by Oxford Dictionary, ‘force majeure’ means
unexpected circumstances, , which can be used as an excuse from doing something
that is written in a contract. According to the definition, as understood in
the standard contract terms, a force majeure clause is a contract provision
that allows a party to suspend or
terminate the performance of its obligations when certain circumstances beyond
their control arise, making performance inadvisable, commercially
impracticable, illegal, or impossible. The list of events to be included
is a matter of negotiation between the parties. A typical list of force majeure
events might include war, riots, fire, flood, hurricane, typhoon, earthquake,
lightning, explosion, strikes, lockouts, slowdowns, prolonged shortage of
energy supplies, and acts of state or governmental action prohibiting or
impeding any party from performing its respective obligations under the
contract.
Does the coronavirus
pandemic count as ‘Force Majeure’?
While a health crisis
is not typically included expressly in a ‘force majeure’ clause.
Therefore, it may imperative to note the scope and extend of a force
majeure clause in the event of such a pandemic has to be assessed on
the "definition of force majeure" under the parties'
agreement. If the clause expressly includes the words epidemic or pandemic,
then Covid-19 would be clearly covered. Additionally, if the clause inter-alia mention
that suspended operations due to a governmental regulation or order(s), then
lockdown, travel restrictions quarantines, or trade embargoes or has closed
buildings and borders then all these acts imposed by the government would be
covered under the force majeure doctrine. However, there may be a dilemma in
distinguishing whether the government has merely made recommendations or orders
using its legal powers. Where no relevant or specific event is
mentioned, the question of interpretation turns on to what the parties intended
the clause to cover. Thereby these subsequently lead to whether the list of
events included was intended to be exhaustive or inclusive. Therefore, in the
light of above it is pertinent to highlight that unless specific words are used
to suggest that a list is inclusive. Therefore, it can be difficult to argue
that parties who set out a list of specific events but did not include a
particular event, such as an epidemic, nonetheless intended that event to be
covered.
Jurisprudence
In 2015, when the Ebola
virus spread across West Africa, the Moroccan government turned to legal
concept of force majeure to postpone that year’s Africans Nations Cup. Morocco
which was set to host the biennial soccer tournament claimed that the
Ebola outbreak qualified. In this case, the Court of Arbitration for Sport
ruled that Ebola did not constitute “force majeure,” because the deadly virus
had not made hosting the event impossible—just more difficult. Morocco was held
liable, and fined $1 million. If this precedent is given the due weightage, then
court may overwhelmed and swamped by the new series of courtroom battles in
which The only saving grace is that
while Ebola was limited to one particular region, the effect of unprecedented
Covid-19 is being felt vulnerably around the world The European and the Asian
markets and territories have been brutally hit and there are fair chances that
the courts and judicial bodies would be more liberal while interpreting the
doctrine in the current scenario. However, on other another hand it may imperative
to say that the parties to show that their non-performance, or late
performance, was truly outside their control and could not have been prevented
or mitigated.
Force Majeure Clause
and the practical reality
Albert Einstein once
said that” In theory, theory and practice are same, In practice, they are not”.
Similarly, force majeure clauses are just thrown into a contract. It is usually
so bad that it actually ends up in something generic and useless. Further, the
most catastrophic part is that while in present scenarios drafting the Force
Majeure clause in the contracts, the contract makers end up by cut and copy the standard form of Force Majeure clause from one contract to another
wherein inter-alia acts of gods and declaration of wars are mentioned .Prior to the decision in Taylor vs.
Caldwell, ,[1]
the law in England was extremely rigid wherein it was held that a contract had
to be performed after its execution, notwithstanding the fact that owing to an
unforeseen event, the contract becomes impossible of performance, which was not
at the fault of either of the parties to the contract .This rigidity of the
common law was loosened somewhat by the decision in Taylor (supra),
wherein it was this case held that if occurrence of an unforeseen event during
the performance of a contact would make the performance impossible within the
means of the fundamental law of contracts, such performance may be voidable
because it would lead to an unjust outcome.
In Gulf Oil
Corp. v. FERC [2],
the U.S. Court of Appeals for the Third Circuit considered litigation stemming
from the failure of the oil company to deliver contracted daily quantities of
natural gas. The court held that Gulf- as the non- performing party- needed to
demonstrate not only that the force majeure event was unforeseeable but also
that the availability and delivery of the gas were affected by the occurrence
of a force majeure event.
- In the case of Dorn v.
Stanhope Steel, Inc., 534 A.2d 798, 586 (Pa. Super. Ct. 1987)it was
observed as follows:
“Performance may be
impracticable because extreme and unreasonable difficulty, expense, injury, or
loss to one of the parties will be involved. A severe shortage of raw materials
or of supplies due to war, embargo, local crop failure, unforeseen shutdown of
major sources of supply, or the like, which either causes a marked increase in
cost or prevents performance altogether may bring the case within the rule
stated in this Section. Performance may also be impracticable because it will
involve a risk of injury to person or to property, of one of the parties or of
others, that is disproportionate to the ends to be attained by performance.
However, “impracticability” means more than “impracticality.” A mere
change in the degree of difficulty or expense due to such causes as increased
wages, prices of raw materials, or costs of construction, unless well beyond
the normal range, does not amount to impracticability since it is this sort of
risk that a fixed-price contract is intended to cover.”
In OWBR
LLC v. Clear Channel Communications, Inc., 266 F. Supp. 2d 1214, it was
observed- “To excuse a party’s performance under a force majeure clause ad
infinitum when an act of terrorism affects the American populace would render
contracts meaningless in the present age, where terrorism could conceivably
threaten our nation for the foreseeable future”.
Conclusion
The imperative question
arises in the light of above that whether Covid-19 would be considered as a
force majeure. The answer to above mention question is that would be dependent
on case to case basis. It would be dependent on the drafting on the clause of
force majeure and further, how the courts interpret that clause. If the clause
clearly mention the words epidemic or pandemic in the language then in most
likelihood parties would be at liberty to terminate the contract. However, we
have observed in the practical most of the times the clauses are poorly drafted
and it would all boil down to the interpretation of the judges. This would lead
to more litigation in the courts. Further, we have seen the courts in most of
the cases are reluctant to use the concept of force majeure. Therefore, a more
practical approach would be that parties compromise between themselves to avoid
litigation. Compromise is always better than legal actions especially if the
parties involved want to carry out business activities in the future. Brands
have leverage when this is all over, and venues, media owners, actors everyone
will need help from brands to bring the whole economic structure back to life.
It is better not to be penny –wise and pound –wise foolish right now, it is all
about maintaining relationship management.
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AUTHOR: -GURKARAN SINGH.
(Pursuing Law from Faculty of Law, Delhi University,Authored a policy document for ministry of law and justice,Research assistance on book on Mediation )
Mobile No.9582017055
AUTHOR: - JAIDEEP BHALLA
(Company Secretary (Aspirant), LL.B, B.COM Graduate, An Investment Portfolio analysts,
First Runner-up winner Moot Court Competition Organised by ICSI Noida Chapter)
Mobile No. 7838684213
First Runner-up winner Moot Court Competition Organised by ICSI Noida Chapter)
Mobile No. 7838684213
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