Coronavirus and the ripple effects of force majeure on contracts globally

Topics Coronavirus | business

In India, jurisprudence on what period can be considered appropriate to apply FM is awaited, say experts | Imaging: Ajay Mohanty
As businesses across countries struggle to mitigate the economic after-effects of the pandemic-induced lockdowns, not much-used force majeure (FM) clause in contracts is being widely relied upon for relief. In India, the legal fraternity has already been flooded with queries regarding the use — and abuse — of the clause. “Since the past few weeks, clients have gotten a sense of how their customers and vendors are reacting. They know courts will be overburdened once the lockdown is over and they do not want to be stuck in long-drawn litigation,” says Dhruv Suri, partner, PSA Legal.

The law on FM and the Doctrine of Frustration — often used interchangeably — seems settled, but not much tested in troubled times.

Legal experts say there is a need for clarity on under what circumstances the clause can be invoked in a pandemic that necessitated a lockdown of business activities. So far, clarifications have been issued only in a specific context, says Rudra Kumar Pandey, partner, Shardul Amarchand Mangaldas.

Many experts feel in India, the onus lies with the government to bring clarity in the use of FM for the lockdown period. “Any over-arching relief will have to follow from new laws,” says Justin Bharucha, partner, Bharucha & Partners.
In India, jurisprudence on what period can be considered appropriate to apply FM is awaited, say experts. “A lot will depend on specific circumstances,” says Suri.

 
For instance, if a manufacturer suspended a contract citing FM, and takes longer than the actual lockdown period to restart the factory, one is unsure if the additional days will be counted towards the FM event, lawyers say.

As business and governments in India come to grips with issues around FM, it may be useful to look at how others are managing the clause.

China

Reeling from the lockdown, China issued detailed guidelines called “Guiding Opinions” on several issues concerning the proper trial of civil cases related to Covid-19. The Opinions cover suggestions (widely covering FM), which are a summary of recommendations relating to China’s experience with litigation after the lockdown.

The Supreme People’s Court (SPC) has placed emphasis on using alternative dispute resolution mechanisms between parties to reduce overburdening of courts. The country has already declared Covid-19 as an FM event and stated all the cases with FM claims must be examined individually. This approach is similar to how the law is applied in India. The Opinions require a party to give notice to the other party in due time. The SPC encourages renegotiating contracts in cases where the pandemic merely caused difficulty in the performance of a contract. This is in line with settled provisions of the Doctrine of Frustration in common law.

The court has opined that it would take into account any relief a party has received from the government, such as in the form of taxation, subsidies, or financial support, before giving further relief. The SPC also envisages extended limitation periods for any party adversely affected, and extension of other kinds of time limits.


Singapore

Several countries, including Singapore, have also followed suit with laws tailor-made to deal with the situation. Singapore enacted the Covid-19 (Temporary Measures) Act in the first week of April. The Act has given temporary relief to businesses from enforcement of contracts (for 6 to 12 months) in case they have been affected by the pandemic. It has also made changes to bankruptcy and insolvency laws to increase debt thresholds for winding up firms. The Act states the Frustrated Contracts Act or any FM clause will prevail over the Covid Act.

Other countries

In China and Russia, commercial chambers are issuing FM certificates to firms for them to seek exemption from their contractual obligations. “The Centre can explore such avenues. Although, enforceability and recognition of such certificates in international contracts is yet to be tested,” says Amit Jajoo, partner, IndusLaw.

For several countries, it is still a wait-and-watch game. In the United States, laws pertaining to FM are different in different states — narrow in New York and Texas, and open to liberal interpretation in California. While FM provisions are codified under laws for goods, they are not present for others.

In France, the Netherlands and Germany, FM provisions are codified under civil laws.

Under the British law, the application of FM will depend on the contents of the contract. Where words such as “hinder” or “delay” are used, the court may be more liberal in its application.


In the case of international contracts, parties subject to the UN Convention on Contracts for the International Sale of Goods may find themselves eligible for availing the FM provision under Article 79.

Legal experts say the pandemic clearly exposes that there is a lot of room for a considerable amount of evolution of jurisprudence in this regard.



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