Nitya Jain, 4th year law student, Nirma University
The world position at a standstill, for an unforeseeable force disrupts lives across boundaries. Covid – 19 has emerged as a pandemic whose expiration is still a blurry vision. As a retort to the deadly virus, the governments of various nations have put strict travel restrictions with almost nil movements of goods and people, leading to severe disruptions in the supply chains all over the world. Consequently, various contracts are being assailed or tend to be violated because of late or no delivery. This article assembles and then, analyses the answers of various governments to the question – Whether Covid -19 pandemic can amount to a force majeure event, excusing parties of their contractual obligations for time being?
Force Majeure and Global Responses
Force majeure is an extraordinary and unforeseeable situation that banishes all possibilities of putting up the promise of performance of the contractual obligations. Till date, various nations’ governments have announced Covid 19 to be a Force majeure event which means that irrespective of an explicit mention in the contract, parties may excuse themselves from performing their obligations.
Starting from where it all started– China, through its Council for the Promotion of International Trade (CCPIT) has resorted to issuing Force majeure Certificates to exempt parties from fulfilling the contractual obligations. The Chinese government is allowing exemptions selectively on the basis of need. Notably, these certificates hold value only in the Chinese jurisdiction and not on the foreign contracts. Similarly, Mongolian Chamber of Commerce has also decided to issue certificates on force majeure and hardship to provide exemptions.
Russia, also started issuing certificates declaring Covid 19 as a force majeure event but for both international contracts and domestic contracts. It is important to understand that a “certificate of force majeure” can be relied on as evidence, but does not guarantee release from liability. The CCI has also opened a hotline for advising business entities on issues of force majeure.
Unlike the Certificate strategy, various nations have declared blanket exemptions because of Covid- 19. For instance, Iraqi government has Covid 19 as a force majeure event for all contracts and projects. Similarly in France, the government has announced that Covid 19 Pandemic should be treated as a force majeure for all public procurement contracts.
There are also certain countries that have provided this exemption, only sector wise. For instance, India has announced that Force Majeure clause may be invoked only for disruptions of supply chains, wherever considered appropriate. Further, the Shipping ministry suggests that for all stakeholders of the all the major ports COVID 19 pandemic is a valid ground for invoking FMC on port activities and operations. Further, India has suspended the operation of IBC against any default within next year.
At the same time the Cook Islands have announced that they will be applying the concept of force majeure where statutory work, docking or servicing cannot be carried out in circumstances arising due to Covid 19.
A novel method has been upheld by Singapore wherein Singapore has introduced a (Temporary Measures) Act, 2020. The party unable to perform its obligations and is qualified to relief under the act will be entitled to a moratorium on commencement of legal proceedings including Singapore seated domestic arbitration. Force majeure clauses and the Frustrated Contracts Acts as per the Singaporean Law will prevail over the Act if the default has been materially cause by Covid 19 event.
In countries where there is no direct declaration from the government, Covid 19 is being derived Force Majeure exemption from the enforced local regulations. For instance in the USA, numerous restrictions have been put forth, including on travel, business, entertainment etc. The inability to perform obligations because on the ongoing State orders is being used as one way to get exempted. Wherein countries like Sri Lanka has been providing assistance and advice to local business, but haven’t declared Covid 19 as a FME.
Given the varied response across the globe, it is quintessential that contracts to be renegotiated between the parties rather than imbuing a prolong legal battle, which would be detrimental to the interest of both the parties. However, any non-compliances not due to Covid 19 need to have a stricter outlook and can be enforced against party.
The fate of International Agreements
One common phenomenon that all the nations will face is the tussle between foreign contracting parties. Mostly where government has declared Covid 19 as a force majeure event, it is applicable only to domestic contracts. International contracting parties will have to face lengthy legal disputes sans inclusion of pandemic, epidemic in their contracts. The better approach to include hardship clause as to renegotiate the position if something arises which wasn’t unforeseeable. In absence of hardship clause, the disputes should take recourse of arbitration.
Further, mostly “unpredictability” of the event qualifying as force majeure is evaluated on the day of the conclusion of the contract. For Covid 19, if the question does not arise for old contracts, it will be necessary to consider when the intervention of Covid 19 on the contract could have been foreseen and on the actions taken as a result. Also, the role of precautionary principle comes into play while quantifying risk. There might be areas that are hotspots for Covid 19 but some are still considered safer than others. Will the blanket exemption apply in the name of precautions?
Countries that have declared Covid 19 as a force majeure event have been reporting huge losses because of unfulfilled contracts and the countries where the declaration hasn’t been made, parties will face extraordinary legal expenditure in proving (or disproving) Covid 19 to be a force majeure event. Some of the general measures that parties can resort to are – All transactions and contracts must be reviewed and assessed pre hand to foresee breaches and impossibility of performance. Contracts without force majeure clause can be renegotiated. Parties should properly record all transactions and communications. The parties and legal teams should discuss and demarcate as to understand the impact to force majeure and self-induced frustrations. It is expected that in the coming time more and more companies globally may invoke ‘force majeure’ clauses in their contracts resulting in a of litigations should parties not come to a practical understanding.