On March 11th 2020, the World Health
Organization officially declared the COVID-19 outbreak as a Pandemic. The
spread and rate of infection has made the people’s daily routine and life turn
upside down. Several countries have imposed mandatory lockdowns in their
jurisdictions while others have come out with strict guidelines for people to
stay and work from home.
Given this upheaval, businesses have slowed down, or
halted and people are finding it difficult to finish pending projects and
contracts. This has caused a sharp increase in the number of contract
violations, delinquencies, non-performance of duties and an inability to
fulfill obligations. Contracts and transactional documents have now come under
the spot light and are being reviewed in order examine their efficacy and
safety-net in the case of a pandemic. Specifically, the Force Majeure clause
has been taken into consideration for contracts. People all over the world are
trying to understand whether the pandemic of COVID-19 would be covered in the
contract; more importantly, people are trying to understand what would the
clause would have to include in order to encompass the pandemic of COVID-19.
What is the
Force Majeure Clause?
A force majeure event refers to an event occurring
which is outside the reasonable control of the parties and prevents either
party from performing their obligations and duties under the contract.A force majeure clause is drafted
in order to protect or relieve a party from any liability arising from the
inability to fulfill their contractual obligations, due to circumstances beyond
their control. There are several forms and formats of a force majeure clause
ranging from all-encompassing to a specific clause referring to particular
events that would be covered by the clause.
In
order to invoke the Force Majeure Clause, it is necessary to fulfill the
following requirements:
i.
The
force majeure event was beyond the control of the parties;
ii.
The
force majeure event has affected either party’s ability to perform their
obligations under the contract. A task becoming more difficult or expensive
does not usually constitute an “inability to perform”. The event must be such
as to make the performance of the contract impossible;
iii.
The
affected party has taken reasonable steps to mitigate the event or its
consequences.
Typically,
a Force Majeure Clause provides for certain steps and requirements for the
party to fulfill before they can avail of the protection under this clause.
This can be a time period of notice (“The affected party shall notify the other
party within a period of 30 days from the …”), the method of notifying the
party, the type of event covered under the clause, etc. If the event is
permanent or prolonged to an unknown period of time, the clause may also allow
either party to terminate the contract.
Is a Pandemic Covered By A Force Majeure Clause?
It
is necessary to understand that the scope of a Force Majeure Clause primarily
depends on how it has been drafted. There are several formats used in a Force
Majeure Clause however, in general practice, the definition of a Force Majeure
Event is provided. This may be an exhaustive or an inexhaustive list and it may
or may not include certain events such as acts of God, floods, epidemics,
pandemics, government acts, property destruction, etc. It can also be an
all-inclusive clause which specifies “any act which makes it impossible for the
parties to fulfill their obligations…”.
Depending
on how the clause has been drafted, the party has certain options in the case
they have incurred liability due to the COVID-19 Pandemic:
If you
would like additional information on the how force majeure is being treated in different
countries, please click on the link below:
What
are the Procedural Requirements toInvoke the Force Majeure Clause?
As specified above, a standard
Force Majeure Clause often has a strict time bound notification period. They
also contain a provision allowing for the termination of the contract by the
party (ies) if the event is prolonged or permanent.
How
Does the Force Majeure Clause Help the Affected Party?
When
the Force Majeure Clause is invoked by the affected party, the usual remedy
available is that the party may be excused from fulfilling its legal
obligations or liabilities as per the contract, without any damages.
This
clause may also provide an extension of time to fulfil your obligations,
suspension of time, or even termination of the contract if the event is
prolonged or permanent.
The
right to terminate the contract can prove to be beneficial as it provides the
opportunity to renegotiate the terms of the contract. Again, the remedy and
help afforded to the party all depends on the drafted clause.
Measures To Consider w.r.t. Breach
of Contract and COVID-19
Individuals, corporations and
other organizations must take certain risk management methods in order to
protect their business and interests. This is important from both the
perspective of a party who is unable to perform their obligations as well as
the other party whose rights are being violated.
i.
All
contracts, especially cross-border transactions, must be reviewed in order to
assess the rights and obligations of the parties as well as to understand the
protection given to the parties in the case of a pandemic or any other such
situation.
ii.
All
contracts without a force majeure agreement should be re-negotiated and amended
in order to insert such provisions.
iii.
Corporations
and other organizations should have their contracts reviewed and checked in
order to ensure that both parties are and have been in compliance with it.
Alternative methods, in case of an event not covered by the force majeure
clause, should be found to protect the parties from liability.
iv.
Matters
relating to the transaction or business should be communicated via e-mail. If
there is verbal communication, the same should be written down and accepted by
both parties (can be in the form of Minutes of Meeting). All such communication
between the parties should be recorded and kept. This will he keep a record of
all transactions and compliances of the contract.
v.
In
order to ensure protection and compliance, detailed research memos or legal
opinion should be acquired on the force majeure provisions present in the
contracts and how such provision can be put into effect.
We hope understand how difficult
and confusing these times are and how important it has become to bring clarity
to certain aspects of law. It is important to take property precautions and
risk management methods to prevent any unnecessary liability or disputes.
Source: https://www.kpalegal.com/covid-19-force-majeure-and-contracts-in-the-face-of-a-pandemic-global-view/
Disclaimer: This note/mail should
not be used as a substitute for obtaining legal advice from any attorney/lawyer/advocate
licensed or authorized to practice in your jurisdiction. Nothing in the above
information is intended to create an attorney-client relationship and nothing
written constitutes legal advice.
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