**Article by Madhavan Srivatsan and Khizer Qureshi -- Law Office of Madhavan Srivatsan**
During these lockdown days on account of Covid-19, majority of businesses are facing turbulent times and may continue to face the same even after the lockdown, something, which is a common knowledge even to a common man.
In order to prevent the losses and damages caused to these business houses, various companies are invoking or intending to invoke the “Force Majeure” clauses in their contracts or if there is no specific “force majeure” clause in their contract, then applying the “Doctrine of Frustration” to their benefit. Suddenly, there is a surge in the legal community in providing advisory services for “force majeure” issues and several webinars are being conducted, articles being written by lawyers to give advice and information on “Force Majeure”, “Act of God”, “Doctrine of Frustration” etc. It seems that, many business houses are trying to find comfort in these principles of law to reduce their losses by suspending their obligations, on account of shutdown in the country.
At this point, it is important to note that clauses for “Force Majeure”, “Act of God” and/or “Doctrine of Frustration” may facilitate the ‘suspension’ of obligations for the affected party under a contract for certain limited time period, however the parties may not be absolved from performing their respective obligations altogether, unless the Contract provides for an exit beyond a certain period of continued force majeure.
Whilst it is no rocket science to figure out that, the current lockdown is surely a “force majeure” event as the same has been recognized by some departments of the Government of India as well, but what is required to be seen is, whether, “force majeure” or “Act of God” or “doctrine of frustration” are sufficient legal weapons to protect these business houses from losses and damages or can there be an alternative remedy?
We are not delving into the detailed mechanism of “force Majeure” and related topics as there seems to be sufficient information available on internet, in current times. However, it is important to note that, any of these mechanisms can be claimed only by those entities which had certain obligations to perform and were prevented from performing those obligations directly on account of Lock-Down. It is important to note that, there is a difference between “Impact of Covid-19” and “Impact of Lockdown”. It is not necessary, that an impact of Covid-19 may be treated as force majeure unlike impact of “lockdown”. Even under the “lockdown”, the test will be, whether the affected party took any mitigating measures to dilute the effects and losses.
In light of above, let us analyse, if these principles of law will actually prove to be useful tools for the business houses or will they amount to complicated litigation which may lead to more expenses being incurred on legal proceedings. Please note, many contracts will have arbitration clauses and thus, an affected party will have to initiate arbitration proceedings which can be a costly affair on the already financially burdened company. Let us analyse the same in brief:
Tricky Area of Law
“Force Majeure”, “Act of God” and “Doctrine of Frustration” are complex legal issues which involves considerable amount of subjectivity. It will all depend upon each facts of a case, which would differ for each case. It may not be possible for the courts to reach an outcome in a short span of time as the affected party will have to produce sufficient documents to support the effect and consequences of “lock-down”. If the outcome is not expected soon, then, the time which should have been utilized by the corporate entity in re-structuring its business model on account of losses post Covid-19, would be spent in courtrooms.
These Clauses were not drafted for a situation like Covid-19
Please bear in mind that, a situation like Covid-19 has never arisen before since World War II in 1945 and thus, all the contracts which have force majeure clauses have not been drafted keeping in mind such a unique situation which has bought the entire world at halt. Moreover, many of these clauses are either loosely drafted or copied from some other contract, as boiler plate clauses. Accordingly, some of these clauses may not be able to provide the actual remedy sought by the affected party.
As mentioned above, many of the contracts are likely to have arbitration clauses. Thus, in order to claim force majeure remedy (which is denied or disputed by the other Party), the affected party will have to invoke the arbitration proceedings which can prove to be costly affair.
Multiple Litigation- As its applicable to Both Parties
Covid-19 being a unique situation which has had an impact on the entire World, it can be easily inferred that, each party to the contract is an affected party and not just one single party except in some exceptional cases which have been exempted under lockdown notification.
Thus, it may be possible that both the parties may be intending to send force majeure notices against each other in order to defend the breach of performance of obligations and breach of payment such as “landlord-tenant”, or “supplier and distributor” etc.
Only performance can be Excused- It is not a damage recovery Tool
It is important to be kept in mind that, force majeure mechanism can be used only as a tool to be excused from performance of obligations. It cannot be used as a recovery tool to claim damages suffered on account of lock down.
More Practical Approach
Now, despite all of the above shortcomings, it is anticipated that, most of the corporates affected by the lock-down would be invoking “force majeure”/ “act of god”/ “doctrine of frustration”.
Some of them may be accepted by the other sides and some of them may be rejected/disputed by the other side. Accordingly, it is pertinent to address the following questions:
What happens if the contention is rejected?
Is it worth fighting the legal battle before the arbitrator or court and incur huge expenses and time?
Is there any alternative to this?
It is to be noted that, once the lockdown is over and courts start functioning as per its ordinary course , which might take some time, it is anticipated that there would be substantial amount of pending and backlog cases to be cleared, before any fresh matters are taken up which would mean lengthy trials and little-to-no outcome in the shorter run.
In such circumstances, it is advisable, that the Companies which are intending to invoke Force Majeure and related provisions, should firstly do their homework properly and take enough comfort that they have a good case which is not likely to be rejected by the opposite party. It is not advisable to send a force majeure notice without enough application of mind, because, once the notice is issued, then, any chances of settlement may be diluted and look grim. Further, in case the issue is to be resolved through courts, then these notices would effectively play a crucial role as documentary evidences.
Accordingly, if there is not enough comfort in the force majeure provisions, then, the better approach would be to go for settlement/negotiation. For such step, legal correspondence becomes very important. A ‘pre-force majeure notice’ may be sent to the opposite party to test the waters. If there is any inclination to settle the matter and arrive at a compromise, then, it is advisable to follow up towards such compromise, rather than taking chances and going for a legal battle. However, if the response is negative, then, subject to the timelines mentioned in the contract, the option to send the force majeure notice will always be open. Thus, the language of the pre-force majeure notice is pivotal. It should be drafted in a manner which indicates some kind of settlement but is without prejudice to the rights and is also provides the necessary language which suggests that, if there is no settlement at the table, then, the force majeure notice will be issued.
The settlement can be in any form based upon case to case, such as (a) amendment of contract, (b) extension of timelines for performance, (c) re-structure of payment mechanism, (d) changes in scope of work etc.
Once the settlement is arrived at, then, it is advisable to record the same in the form of amendment agreement/MoU/addendum as the case may be.