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FORCE MAJEURE AND ITS EFFECT ON BUSINESSES DURING COVID-19

With the rise of COVID-19 cases all around the world, the World Health Organization had declared it as a pandemic leading to lockdown in most parts of the world as a protective measure. This measure has led to the stoppage of work and acted as an obstacle to meet contractual obligations. Thus, the corporates are forced to review their contract in order to enforce the Force Majeure clause.


MEANING OF FORCE MAJEURE


Most commonly used in commercial contracts, the term has been described as an event or effect that can neither be anticipated nor controlled.[1] Section 32 of the Indian Contract Act, 1872 embodies in its spirit and declares such contracts to be void. Such a clause is included in the contract with a vision to allocate the risk of loss if performance becomes impossible or impracticable due to natural calamities. Edmund Bendit and Anr. v. Edgar Raphael Prudhomme[2] is the first Indian case where such a concept was used.


With the current situation at hand, COVID-19 could be considered as a derivate to enforce such clause but the final decision still rests on the judiciary that would take into consideration the conditions, terms of the contract, and intention of parties.


EFFECT OF FORCE MAJEURE ON BUSINESS DURING COVID-19


COVID-19 has influenced cross-border trade, the real estate industry, in particular developers, homebuyers and industrial leases, EPC (engineering, procurement & construction), joint venture arrangements, and M&A deals worldwide. Major companies like Gateway Terminals India Private Limited, Adani Ports, etc. have already declared force majeure wherein the courts and the arbitrators will have to evaluate and decide each dispute. Due to the outbreak, companies have failed to fulfill their contractual obligations which have led them to enforce such a clause, and the contracts which lacked the provision are somehow trying to implement Doctrine of Frustration.


It is further expected that more and more companies from all over the world may enforce the force majeure clause in the coming days. But what would be more interesting to see is how the judiciary would interpret COVID-19 situation in relation to force majeure and react to it once the situation settles. However, on February 19th 2020 the Ministry of Finance by the way of office memorandum has clarified that the disruption of the supply chains due to the spread of coronavirus in China or any other country can be considered as natural calamity and the clause of force majeure may be invoked.[3]


CONCLUSION

Considering the present situation at hand, the force majeure clause may come as a rescue for many business organizations as it has become very difficult to fulfill the contractual obligations due to the worldwide lockdown. Our judiciary will play a crucial role in determining the validity of such clauses during the pandemic once the situation settles.


References:

[1] Black Law Dictionary

[2] Edmund Bendit and Anr. v. Edgar Raphael Prudhomme AIR 1925 Mad 626

[3] Gireesh Chandra Prasad, Government contractors not to penalized for supply delay due to coronavirus threat,https://www.livemint.com/politics/policy/government-contractors-not-to-be-penalised-for-supply-delays-due-to-coronavirus-threat-11582131927871.html, accessed on 20 April 2020 at 11:00 p.m.

ABOUT THE AUTHOR:

Vanshika Gupta is currently studying in Symbiosis Law School Pune. You can contact her at www.linkedin.com/in/vanshika-gupta-06b636193


Editor: Jayant Upadhyay

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