Blog Details

Author - Rashi Suri (Managing Partner) and Pradyun (Associate)

Q. How can force majeure provisions in a PPP contract become applicable to the stakeholders in the present scenario of Covid-19?

Due to the galloping spread of the novel coronavirus (Covid-19) and its ensuing problems of quarantines, travel restrictions and lockdowns, businesses everywhere are facing complications in their labor, logistics, and transportation activities apart from other services.

Owing to the above unprecedented challenges, the business obligations are being difficult to be met and therefore business entities are increasingly beginning to consider exercising the option of citing the covid-19 as a force majeure event under their contact.

What is a Force – Majeure event?

• Force majeure events are categorized as a limited set of circumstances, situations, occurrences and happenings which may arise during the term of the contract through no fault of either party. They are considered more severe than a relief event and typically lasts longer which may lead to the termination of the contract also. By their very definition, they are unusual and rare, therefore the contracting parties should deal with them as exceptions.
• These clauses are normally incorporated in a contract by businesses that require ongoing obligations of the parties to go on without facing any hindrances, breakdowns or hiccups. The intent behind including these clauses are to excuse a party from partially performing or on failure to fully perform its obligations / duties / responsibilities that were undertaken under the contract, in specific cases of emergencies, natural calamities like earthquakes or floods, that may render a party ’s capacity to perform those obligations difficult or impossible to satisfy. 

What is the option available to a business entity facing disruptions, lockdowns, shutdowns etc. due to Covid-19? 

An entity or a party to a contract which has been affected due to the Covid-19 pandemic may choose the following to assert its rights under a force majeure clause:

• The first part would be to evaluate and document Covid-19’s impact on the business’s functions and the business’s ability to perform its obligations under a contract.
• Next part, would be to retain the legal counsels and ask them to carefully review the contracts for:
  • A force majeure provision, if one is present in the contract then for the precise language used in the clause, specifically for words like “disease”, “epidemic”, “pandemic” or “act of God”;
  • Any notice provisions that may be needed to be provided to the opposite parties under the contract; 
  • Any terms governing cancellation, repudiation, or breach of the contract; 
  • Any requirements that a party should submit evidence or information along with a notice of reliance on the force majeure clause; and 
  • Any terms requiring the business to mitigate its damages or delays incurred as a result of the force majeure event.
• Can an entity argue that a general force-majeure drafting covers Covid-19? 
• The first thing to do for an entity is to ascertain whether the force majeure provisions includes an appropriate trigger under which the rights of suspension or termination of the contract could be invoked. Normally, in force-majeure clauses there is a specific reference to epidemics, pandemics, quarantines or government intervention as a result of the outbreak that may be cited as a reason for suspension or termination. In the past, disease outbreaks and epidemics such as the SARS epidemic in 2002 have also been qualified as a force majeure event.
• What if there are no specific references to "Acts of God, diseases, epidemics or quarantines or government intervention" as a triggering event? What are the options available with the business entity then? 
• Many force majeure definitions include a reference to “acts of God” or similar wordings. From a purely legal perspective, there is no one-size-fits-all answer as to whether a particular event falls within this sort of language. The issue depends on an assessment of:
• the nature and context of the businesses particular contract; 
• the wordings in the relevant force majeure provisions; and
• the general terms of the contract, including the law governing.
• However, on February 19, 2020 the Ministry of Finance vide an Office Memorandum has stated that Covid-19 should be considered as a case of natural calamity under force majeure clauses by businesses. Therefore, a business entity should check whether there is a mention of natural calamity as a triggering event in their contracts. 
• It should also be clearly ascertained whether the non-performance of obligations or the termination of the contract is due to the spread of virus itself or the resulting government action to limit the impact of the virus ( for e.g. lockdowns, limitations and curb on transportation, quarantines, closures of establishments and premises etc).

Although there is a severe and a real threat to normal functioning posed by Covid-19, businesses everywhere across India should deliberate carefully about rallying their option to modify their performance under a contract pursuant to such a force-majeure causing event. Further, lawyers and counsels with experience in the field of contracts, company laws and business litigation would be able to help determine whether the particular challenges and complications faced by a business qualifies for protection under the particular force majeure provision of the contract. Further, any notices, letters and/or any internal documentation of the businesses regarding the problems faced from such an event of force majeure can be admitted as evidence in a case of breach of contract that may arise due to the Covid-19 outbreak and the government intervention as a result. Similarly, such letters and supporting documentation should be drafted by a lawyer well versed and having appropriate experience both with force majeure events and associated litigation.