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COVID-19: The legal perspective for companies

CA Sumat Singhal 
on 30 March 2020

LinkedIn


Force Majeure

  • Force majeure is a French term that literally means "greater force."
  • It is 'an act of God', an event for which no party can be held accountable, such as a hurricane or a tornado or armed conflict.
  • Generally speaking, for events to constitute force majeure, they must be unforeseeable, external to the parties of the contract, and unavoidable.
  • Force Majeure clause protects a party from any financial liability for its failure to perform a contractual obligation

Laws related to Force Majeure in India

  • The term Force Majeure rarely covers an endemic or a pandemic.
  • It is only used for earthquakes and volcanoes.
  • Finance Ministry in February clarified that disruption in supply chain due to spread of coronavirus qualifies as a force majeure event, and companies and businesses can invoke force majeure clause.
COVID-19: The legal perspective for companies

What will happen where contracts have Force Majeure clause?

  • Resolution probability high: For contracts having Force Majeure clause.
  • But Misuse of Force Majeure clause: It is likely that companies may face allegations that it has used the COVID-19 situation to escape out of payment or performance.
  • What will happen where contracts do not have a Force Majeure clause?
  • Section 56 of the Contract Act comes into play.
  • It deals with 'frustration of contract' - a situation where fulfilling a contract becomes impossible or unlawful after the signing of the contract.
  • Traditionally, courts have chosen a narrow interpretation of the law in ruling on disputes where Section 56 had kicked in.
  • According to analyst, proving frustration is more difficult than proving Force Majeure.
 

India Lock Down

  • Close to half a dozen ports including Krishnapatnam, Dhamra, Mundra, Tuna, Gopalpur, Karaikal and Gangavaram have declared force majeure.
  • China invoked ' Force Majeure' to protect business.
  • According to the China Council for the Promotion of International Trade, China has issued 4,811 force majeure certificates as of March 3 rd due to the epidemic.
  • Arcelor Mittal also declared force majeure in Europe on raw materials.
 

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