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Lighthouse - September, 2020.

CORONA VIRUS: INVOCATION OF FORCE MAJEURE CLAUSE

TO AVOID LIABILITY FOR NON PERFORMANCE OF OBLIGATIONS UNDER THE CONTRACT

The outbreak of Corona Virus in China, for the last few months, has affected the lives of numerous people which also resulted in the loss of their life, that the World Health Organisation (WHO), on January 2020, declared that the outbreak of this Corona Virus constituted a “Public Health Emergency of International Concern.” The term “Public Health Emergency of International Concern” (otherwise termed as PHEIC) is defined under the International Health Regulations, 2005 as an “extraordinary event which is determined, as provided in these regulations – (1) to constitute a public health risk to other States through the International spread of disease; (2) to potentially require a coordinated international response.

As the said virus continues to spread across China and under the PHEIC declaration by WHO, many International Companies, including the governments, have started to impose business/travel restrictions on their citizens to travel until the current situation stabilizes. Many Governments have also announced the suspension of new visas to those who hold PRC Passports and have also banned entry to those citizens who have visited China in the last couple of weeks. These restrictions have put all the business entities both in China as well as other Countries in a problematic state since China is the second largest economic power and this unexpected outbreak of Corona Virus and its consequences have largely restricted the Individuals to stay at home to avoid spreading of the virus

that has directly / indirectly affected the performance of obligations by the Companies who are bound by various contracts with National /International entities. As the outbreak of the Corona Virus continues, it is likely that the trading business to and from China will continue to be affected, not only because the unavailability of the International / Domestic transport facilities but also because the factory workers have been asked to stay at home to avoid the widespread of the virus. Many companies who had been engaged in business with the Chinese Companies are forced to stop production because they struggle to obtain the required raw materials from China.

In fear of failure to perform contractual obligations that might make them accountable towards the other Party to the Contract, many Companies in and outside China have already commenced looking into the possibility to invoke the Force Majeure Clause in their Contracts / Agreements.

Most of the business contracts include the Force Majeure Clause so that the Parties can either suspend, limit or even terminate their performance of obligations imposed on them under the Contract if any Force Majeure events like any natural Disaster, War, Strike, Act of God occurs unexpectedly, which lawfully excuses their non-performance and/or delay in performance of their obligation under the Contract. However, this Clause is often included with insufficient thought being given as to whether they are appropriate for the Contract or not.

Usually, to invoke the Force Majeure Clause, the Party to the Contract must consider:
a. The performance obligation of the Party invoking the Force Majeure Clause under the Contract;
b. The impact of the Force Majeure Event on their ability to perform the obligations;
c. Whether there are any steps the Parties can take to mitigate or minimize the impact of the Force Majeure event on their obligations, including considering alternative methods performing their obligations under the Contract;
d. Whether the Force Majeure event falls within the scope of the Force Majeure clause of the Contract and whether it can and should be invoked and;
e. If so, what are the requirements, in particular the notice requirement that must be complied with.

In short, the Force Majeure Clause should hold all the Parties safe from any liability for Non-performance, following the Force Majeure Event. Further, the Party invoking the Force Majeure Clause in its Contract must be able to convince that there are no alternative means for performing its obligations or that the Party has taken all reasonable steps to avoid the Clause’s operation. As such whether the Force Majeure Clause in the Contract includes the outbreak of Corona virus and the hindrances due to its outbreak shall depend on the wording of the Clause, steps were taken by the Party who wish to invoke the force majeure Clause to avoid the maximum hindrances, and whether the outbreak constitutes a foreseeable incident.

Many criticizers have suggested that if the parties have entered into a contract with a Force Majeure Clause after the SARS outbreak, it may have been foreseeable that a similar virus could occur again. Then the parties may not be entitled to any relief.

Also, a problem arises when a Contract does not mention a Force Majeure Clause. It is also to be noted that the English Common Law does not imply the Principle of Force Majeure, unless it is specifically mentioned in the Contract itself. However, even where there is no Force Majeure Clause in the Contract, it does not mean that there are no grounds to excuse the performance. The parties whose Contracts do not explicitly contain a Force Majeure Clause, but is governed by the English Law, may opt to invoke the Doctrine of Frustration, which means that if a contract becomes impossible to perform through no fault of either Party, the Contract may be automatically terminated. However, the conditions to prove the existence of Doctrine of Frustration is severe than that included in the Principle of Force Majeure and these conditions shall include –
a. The terms and Condition of the Contract;
b. The factual background to the Contract;
c. The Parties’ knowledge and expectation about the risk when entering into the Contract;
d. The Parties’ calculations as to the ability to perform the Contract in the circumstances which are said to have frustrated the Contract.

In addition to the above-mentioned points of differentiation, the Principle of Force Majeure allows the Parties to suspend the performance of the obligation instead of the complete termination; the Doctrine of Frustration permanently put an end to the obligations between the Parties except for those obligations that had been earned before such termination.

In any case, whether the Party’s obligation under a Contract is hindered due to the widespread of Corona Virus or for any other unforeseen reason, the Party invoking the Force Majeure Clause shall rely on such facts which would help them to prove that they have been prevented or hindered from performing the Contract as a result of such unforeseen Force Majeure Event. In other words, there must be a causal connection between the Force Majeure event and the inability to perform the obligation under the Contract. Further, the companies may, in the future, also opt to include the term “Epidemic” and “Pandemic” in the Force Majeure Clause.

Furthermore, since the World Health Organisation has also declared this outbreak of Corona Virus as the “Public Health Emergency,” the Courts shall also take into consideration WHO’s declaration while deciding on any case against any Company that has invoked the Force Majeure Clause in this scenario.

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