Force Majeure: Why Coronavirus-hit Firms Won’t be Sued to Death
Businesses that can’t fulfill orders because of the coronavirus and lockdown have a lifeline in their contracts.
The coronavirus crisis has well and truly arrived in India now, with daily increases in cases and now a nationwide lockdown.
Prime Minister Narendra Modi’s announcement of a 21-day lockdown, on the basis of an order under the Disaster Management Act, means nobody can move out of their homes unless they’re going to provide some essential services or buy essential goods.
But the effects of the pandemic could go well beyond whether you can go and enjoy a meal at your favourite restaurant, or go to the gym, or play a game of cricket in the local park.
Because at the end of the day, this crisis is also going to have a huge impact on regular commercial activity across the board – and not just for big businesses.
Disruptions in the ability to move across state borders, between countries, and even within a city or town means disruptions for all kinds of businesses – and their customers.
So whether you’re
- a small-business owner who needs to get supplies of non-essential items like cloth;
- or a big tech platform that needs its drivers and deliverypersons to be able to move freely;
- or someone who ordered a toaster off Amazon,
the coronavirus crisis is going to create a lot of problems for you.
Now what happens when a crisis like this means goods and services can’t be provided according to a previously agreed deal?
When Big Basket cancels all grocery deliveries for the week, can its customers sue them for breach of contract? When a clothing factory’s employees can’t come in to work, can the shops they were supposed to supply claim foul and ask the factory to pay them damages?
Logically speaking, this wouldn’t seem fair, because, well, the world has been turned upside down by this crisis, so it’s understandable that it’s not exactly business as usual. Besides, the party failing to fulfill its end of the deal is also suffering because of the crisis, and may just have no choice in the matter.
Yet it’s not hard to see why people could be put in a difficult position because of the failures of these contracts, and so may want to take the person who breached the contract to court.
- Think about a disabled person who is relying on Big Basket for their groceries, for whom physically going to the shop is tough.
- Think about the small clothes shop that is going to go out of business if they can’t get the clothes needed to fulfill an order which might just save them.
- Think about the person who really wants to have some toast but can’t because their toaster order got cancelled. (Okay fine, they’re not in the same situation as the others, but maybe they’re just one of those spoilt, entitled brats/uncles with no sense of proportion.)
Luckily – or unluckily, depending on which side of the problem you’re on – centuries of human experience with Murphy’s Law means contract law has evolved to deal with such a situation.
Say Hello to the Force Majeure Clause
Force Majeure is French for ‘superior force,’ and the idea of a force majeure clause is to give you a get out of jail free card for things which are beyond your control.
So, let’s suppose you were to supply a bunch of TVs to someone, but there’s an earthquake which destroys yours and all the other nearby TV-making factories, you can use the force majeure clause to say you haven’t breached the contract, and so are not liable for breach of contract.
This isn’t just about random natural disasters – what can be termed ‘Acts of God’. A force majeure clause can also apply to human actions, which are beyond your reasonable control.
Let’s say you were supposed to send those TVs to someone in Sri Lanka, but Sri Lanka sets up a blockade and says no foreign goods will be allowed into the country. Again, you’re technically failing to fulfill your end of the deal, but it’s not something you can do anything about because Sri Lanka is a sovereign country and you’re just a TV supplier.
And so, you can use that force majeure clause to argue you haven’t breached the contract.
When Can a Force Majeure Clause be Invoked?
It should be made clear that the force majeure clause isn’t something that can be invoked just because you felt lazy. The Supreme Court has clarified the position of law on how these clauses work in the 2017 case of Energy Watchdog vs Central Electricity Regulatory Committee.
We won’t go into all the details, but here are the highlights.
Most force majeure clauses require some sort of mitigation efforts to be made by the person in breach. So you’re looking at either making an effort to find a different supplier or to refund the amounts to the customer where this isn’t impossible.
They also have to notify the other party about the force majeure situation, and if it is possible to just put the contract on hold till the event outside one’s control is over, then they should be willing to do that.
It’s also regular practice for a force majeure clause to require the situation to be unforeseeable.
So, if you entered into that contract to supply the TVs to Sri Lanka knowing that the blockade was in place or knowing they were likely to do so, but still entered into the contract, then you can’t hide behind the force majeure clause – you have to find a way to ensure the contract is fulfilled, or you’re in breach.
Whoever is claiming force majeure has to keep all these things in mind and be able to back up their claims, as the burden of proof is on them.
In the Indian context, it is also essential to have a force majeure clause in the contract. There are some foreign jurisdictions where the contract does not need an express force majeure clause, but in India, it needs to be written into the contract.
If that is so, you can then rely on Sections 32 and 56 of the Indian Contract Act to say that the contract becomes void thanks to the force majeure event, and so you are not liable for breach of contract.
Would the Coronavirus Pandemic be Covered Under a Force Majeure Clause?
These days, you actually have contracts that expressly list pandemics as a kind of force majeure event, so something like the coronavirus crisis would be covered for sure. Even if the clause doesn’t mention pandemics, it could fall within the language on natural force majeure events or Acts of God.
Still, you’d have to examine the contract to be sure, and in some cases, it may just not make sense for it to be considered a force majeure event. For instance, if you’re a medical equipment manufacturer who has entered into a contract to supply equipment during a pandemic, then it would be a bit ridiculous to claim the pandemic as a reason you can’t do your job.
Of course, if things have really gone bad, then even a pandemic-equipment-supplier may not be able to honour their contract, despite precautions and advance planning. Instead of a force majeure clause, they’d have to try their luck arguing the doctrine of frustration of contract – where it has become impossible to fulfill your end of the deal.
Force Majeure clauses are likely to become the subject of a lot of litigation because of this pandemic.
If you’re someone looking to rely on it, make sure you’ve done everything possible to not have to rely on it, or you’ll be in trouble. If you’re someone who’s hard done by because someone’s failed to send you something you made a deal for, then check the contract to make sure there is a force majeure clause, and they’ve made reasonable efforts to get the job done.
And if your toaster delivery has been delayed, please don’t make a big deal about it.
Subscribe To Our Daily Newsletter And Get News Delivered Straight To Your Inbox.