In light of the current global lock-down of unprecedented scale necessitated due to Covid-19, parties have had to revisit their contracts. The clause that has seldom seen such attention is the “force majeure” clause, hiding as a boiler plate provision. Recent publications have widely covered the legal implication and intricacies of how these clauses work.
The past is in the past. We intend to look at the future in this post – by laying out 10 crucial considerations to keep in mind while drafting a force majeure clause. In our opinion, if these considerations are taken into account, a robust contingency clause might just save parties in the face of subsequent events overtaking underlying contractual assumptions beyond their control.
- Governing Law: In case of domestic contracts exclusively between Indian parties with the subject matter within India, this would not be a relevant consideration. If, however, a party or the subject matter of the contract is not from India; governing law of the contract requires attention. It will change the way you look at many clauses in your contract, including force majeure. For instance, most often in a civil law jurisdiction (such as France, Germany, Netherlands, etc.) force majeure is a codified concept, often specifically providing consequences in one or more legislations. In common law jurisdictions (such as India, UK, Singapore, etc.) force majeure is a purely a contractual concept to be agreed between parties. Common law only excuses performance of an impossible obligation or if an obligation subsequently becomes illegal (commonly known as the concept of ‘frustration’) unless contract expressly defines force majeure events. It is imperative, therefore, to carefully select your governing law.
- Define the concept: Whether to have an conceptual definition before providing a list of events qualifying as force majeure is an important consideration? It is almost impossible to identify and list every potential eventuality; therefore, such conceptual definition can be helpful. For instance, providing that “…force majeure means an event beyond the control of either party which prevents them from performing any of their obligations under the contract and includes…” prior to a list would naturally allow a wider interpretation and give parties ability to deal with an unforeseen and probably unimaginable situation. Only if the intention is to restrict the definition to known type of events, a litany of events alone will suffice.
- List them all: Whether or not you decide to include a conceptual definition, you must list out all known and identifiable events (or type of events) intended to qualify as force majeure irrespective of whether or not a broader term in the list of events ostensibly includes such separately identifiable event. Common law courts read force majeure clauses strictly and narrowly, therefore, conceptual definition alone would fall short of expectations. It must also be remembered that there is no restriction on parties to include any particular event in the list. One is not restricted only to what is typically understood as a force majeure event. This is the opportunity to include things which may be sector or industry specific. Pay attention to the words used for similar event as they will be interpreted differently. For instance, in the present situation, one could include both “outbreak of a communicable disease” or “epidemic, if so declared by the government” with the earlier being wider and the latter entirely dependent on an official announcement.
- The Unforseeablity Test: In the definition of force majeure, it is important to consider and specify expressly whether an event would qualify as force majeure only if it is unforeseeable. In common law, the test of foreseeability is usually applied to a force majeure event even when the clause is silent about it. Therefore, if parties intend that a certain type of event is likely and yet want to include the same as a potential force majeure, it ought to be mentioned in the clause by adding words such as “…whether reasonably forseeable or not…”.
- Suspension – complete or partial: Most often, force majeure clauses intend to suspend the contract rather than cancel or void it completely. The idea is to excuse performance without any additional liability for the duration of the force majeure. It is also possible to limit the suspension only to those obligations which are impacted and to insist on performance of others. For instance, in an EPC contract a force majeure event may impact the “procurement” part for a certain period but may not hamper the construction and erection of material already available at site. Therefore, in such contracts it should be carefully set out that only those obligations where an impediment is faced are suspended.
- Termination: It is entirely upto parties to decide if and when force majeure may lead to cancellation or right to terminate the contract. Immediate right to terminate is not recommended as some force majeure events may last for a brief period and termination may be counter-productive. How long should one wait to see if the force majeure justifies termination depends entirely in the context of the contract in question – for instance, 15 days may be a long enough time in trading contracts of a price sensitive commodity and even 6 months may be short in a 30 year concession agreement. In order to avoid misuse of the clause, it could be provided that the termination right would only remain with the non-affected party. However, if the force majeure lasts a few months, it would be inherently unreasonable to indefinitely bind the non-affected party and a termination right that triggers at different times for different party may be considered.
- Local Impact: It is also important to provide the extent to which the consequence of force majeure would apply in a contract involving multiple locations. For instance, in a manufacturing and supply contract where either the manufacturing or supply happens at various places, the impediment in one location would not excuse the contract as a whole ipso facto unless so specified. It is best in such cases to provide expressly the pro-rata reduction in quantity or any other such intended consequence when force majeure impacts some of many locations involved.
- Notice Requirement: Always advisable that an obligation must be put on the party claiming force majeure to notify invocation of the clause within a specified period from the date of happening of such event. It is debatable, particularly under Indian law, whether not issuing a notice within the time period would render the applicability of force majeure nugatory. However, if such an obligation does not exist, it leaves an unintended loophole to be exploited by a party in case of subsequent dispute – by belatedly raising a defence of force majeure. Usually any period between one to two weeks is reasonable.
- Actions prior to force majeure: There may arise a situation where partial obligations are completed, force majeure has lasted long enough to validly terminate the contract, but the payment clause under the contract does not get triggered. To provide for such possibilities, it may become necessary in some contracts to provide that completed part will remain uninfluenced and reasonable compensation for value transferred, consistent with contractual consideration, would be payable.
- Due diligence and good faith renegotiations: It the context of specifics of certain contracts, parties may want to provide for reasonable effort or due diligence to reduce the impact of force majeure. This is usually advisable for long term or complex contracts but may not be so in simpler commodity trading contracts. Also, in long term and complex transactions such as mergers, concession agreements, etc. instead of termination it is best to provide that parties will be obliged to renegotiate and agree on alternate means to perform, if possible.
Taking into account the factors outlined above, we have provided a sample force majeure clause which should work for most trading and simple transactions – with appropriate contextual modifications. We cannot highlight enough the perils of using any model or sample clause without appropriate legal advice and this sample clause should only be seen as an example to be adapted in the context of a particular clause with assistance of legal advisors:
Sample Force Majeure Clause (requires appropriate adaptation):
- Either party would be relieved from its duty to perform its obligations under this contract and such non-performance would not amount to breach of contract, if it is caused by prevention or impediment in performance of obligation by a Force Majeure event.
- “Force Majeure” means a situation or the occurrence of an event that prevents or impedes either party from performing one or more of its obligations under this contract, if such situation or event was beyond the reasonable control of either party and shall include:
- war (whether declared or not), hostilities, invasion, act of foreign enemies, civil unrest, riot, or act of terrorism, sabotage or piracy;
- trade restriction, embargo, sanction having effect of substantially modifying the underlying assumptions of the transaction;
- plague, epidemic, pandemic, or outbreak of a communicable disease leading to extraordinary restrictions including quarantine or movement of people or goods;
- natural disaster or extreme natural event;
- explosion, fire, complete break-down of transport, telecommunication, information system or fuel, electricity or source of energy;
- strike, lockout,
- issuance of advisory, notification, guideline, or legislation by relevant government or legislative authority restricting normal trade and business activities, movement and storage of goods and people for any reason whatsoever which could not have been in reasonable contemplation of parties
- The party claiming to be impacted by force majeure must give written notice to the other party within 15 days of occurrence of the force majeure event or situation.
- Consequence of Force Majeure will only apply from the time of receipt of notice of force majeure by the other party. Rights accrued to either party (including payment obligations) prior to the invocation of Force Majeure shall remain enforceable.
- If the Force Majeure event or situation lasts for 15 days, the non-affected party shall have a right to terminate. If the same continues beyond 30 days, ether party may terminate the contract. Termination under this contract shall be effective only by way of a written notice to the other party.
The unprecedented consequence of Covid-19 has brought to focus this often ignored clause in commercial contracts. Commercial contract drafting and negotiation cannot remain untouched by the global lockdown being witnessed at this moment. It is not sufficient to simply add words such as “communicable disease”, ‘epidemic’ or ‘pandemic’ in future clauses. The idea should be to ensure that such unexpected events are provided for – both in terms of defining force majeure and crafting consequences – ensuring a robust force majeure clause that covers the intended field adequately.
– Sumit Rai (Guest Contributor) with Nitin Jain (Partner)