FORCE MAJEURE CLAUSE AND CONTRACT CHALLENGES IN THE ERA OF COVID-19

Introduction

The era of COVID-19 emerged suddenly which led to an economic crisis in the country. The restriction on movement of people and gathering together at the workplace affected the business very badly. The contracts of the organizations and companies led to non-performance of a contractual obligation which may result in the collapse of the contract. But in such a situation, the World Health Organization declared COVID-19 as a pandemic which can be covered under the concept of Force Majeure. The Force Majeure Clause came as a blessing to the people which provides them with a defence against the non-performance of contractual obligations during COVID-19.

What is Force Majeure?

According to Black’s Law Dictionary, Force Majeure is defined as ‘irresistible force’ which is caused by a natural phenomenon and cannot be avoided by the human even after applying their utmost skill, care and concern. Force Majeure can arise due to any situation like war, natural calamities, breakdown of machinery etc.

  • Force Majeure Clause in a Contract
  • The term ‘Force Majeure’ is not defined under the Indian Contract Act, 1872. But Section 32 and 56 of the Indian Contract Act, 1872 deals with the performance of contracts in an impossible situation or situation beyond the control of the parties.

    The Force Majeure Clause is one of the clauses to protect the rights and liabilities of the parties in the agreement caused upon any factors within the definition of Force Majeure. The non-performance of contractual obligation in an unforeseen situation will not lead to any liability if the contract has the Force Majeure clause in it.

Importance of Force Majeure Clause

The Force Majeure Clause has a major impact on the contracts during the present situation like COVID-19. The benefits that arise from the Force Majeure Clause for the parties are listed down.

  • During the force majeure situation, the responsibility to perform the duty is postponed until the condition becomes normal. In such a case, the obligation to perform the duty regains after the situation becomes normal.
  • The time for performing certain obligation gets extended unless the event is rearranged.
  • If the unforeseen situation continues for a long period of time, the parties have the right to terminate the contract entirely without any liability, either immediately or after completion of the prescribed procedure, or upon the expiry of a certain period of time.
Challenges regarding contract during COVID-19
  • The contracts which are bounded by time like the Event Management Agreements faced a huge loss. Even the party failed to work due to the COVID-19 guidelines that were led down by the Government of India.
  • The supply chain broke down due to restrictions on the movement during the lockdown which leads to delay in delivery of goods and services resulting in the extension of date in the time of payment.
  • Many parties faced the breach of contracts due to the non-performance of contractual obligations.
  • The organization dealing with building projects has to stop the work due to the sudden lockdown and restriction on movements.
  • The financial condition of people leads to non-payment of loan and EMIs.
Overcome contract challenges during COVID

The situation of COVID-19 falls within the ambit of the force majeure clause and is directly affecting the life of the individuals. Hence, it provides relief to the party against the non-performance of contractual obligations.

Here are some case laws to justify the statement that the Force Majeure Clause has helped to overcome contract related challenges during COVID-19.

In M/s Halliburton Offshore Services Inc. v. Vedanta Limited [O.M.P. (I) (COMM) 88/2020 & I.A. 3697/2020], the High Court of Delhi observed that the lockdown declared by the Government in the account of COVID-19 comes under the ambit of the force majeure. Hence, the Hon'ble Court ordered a temporary stay on the invocation of bank guarantees by Vedanta Ltd.

In the case of Ashwani Mehra vs. Indian Oil Corporation Limited & Ors.[W.P. (C) 2971 of 2020], the Hon’ble High Court granted stay against the Indian Oil Corporation Limited from invoking the bank guarantee till one week of the lifting of the lockdown in the light of COVID-19.

In the landmark case of Satyabrata Ghose v. Mugneeram [1954 AIR 44], the Supreme Court held that the performance of an act may not be impossible but is impractical and useless at that point of time. The change of circumstances was beyond the control of the parties, therefore, the scope of Section 56 of the Indian Contract Act stands effective.

Conclusion

Since, the outbreak of COVID-19 and restriction imposed by the Government as a preventive measure to stop the spreading of the disease, the people are facing financial as well as mental challenges due to non-performance of contractual obligations. While several parties were seeking relief from contractual obligations in the period of COVID-19, the Force Majeure Clause came as a relevant defence for them. The shield of the clause protected the people from facing financial loss by the various method mentioned above. The era of COVID-19 has pointed out the lacuna in the contract and has made people cautious regarding contract and challenges that can be faced in an unpredictable situation.

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