Force majeure may stem contractual lapses2 min read . Updated: 22 Mar 2020, 11:00 PM IST
The provision is invoked when unforeseeable circumstances prevent the fulfilment of a contract
NEW DELHI : Disruption in supply-chain due to the Covid-19 pandemic is prompting a plethora of Indian companies to explore invoking a force majeure clause — unforeseeable circumstances that prevents fulfilling a contract — across diverse sectors, according to lawyers.
While companies are invoking the clause, several of them continue to evaluate the emerging situation as they still have inventory and are trying to resolve the scenario through discussions with all parties involved.
Typically, force majeure events include natural disasters, war or war-like situations, labour unrest or strikes and epidemics. Indian courts have generally recognised this concept and have enforced it where appropriate, according to a note prepared by law firm Cyril Amarchand Mangaldas.
“Given the pandemic nature of the virus outbreak and its impact on products and supply chains globally, contracting parties have even waived off temporary lapses in supply schedules due to overall strain on the infrastructure," said Yogesh Singh, partner at law firm Trilegal.
“However, if the present circumstances persist for a longer period of time (for example; six weeks or more), then we might see several corporates experiencing a break-down of their daily supply-chain functioning and invoking force majeure to excuse themselves from defaulting on their obligations," he said.
The provision of force majeure finds a place in most commercial contracts. Sectors such as oil and gas, energy, automobiles, electronics have been impacted since the outbreak in late December in China, the world’s second-largest economy.
“Some of these sectors are labour-intensive and hence suffered from the twin effects of supply-chain disruption as well as labour shortage as the virus outbreak has required governments and corporations to put in isolation, quarantine and social-distancing policies," Singh added.
Other sectors that have been severely impacted by the Covid-19 outbreak are tourism, air travel, and food and beverage industry.
As per Indian law, a contract needs to be impossible to perform in order for it to be termed avoidable.
“Economic hardship would not amount to impossibility. Therefore, the real yardstick would be whether the contract itself has a force majeure clause or not, and if so, how is it worded. Does it cover situations of partial production stoppage? Does it treat unavailability of raw material as a force majeure?." said Sameer Sah, partner at Khaitan & Co.
He said legal options and recourse should be the matter of last resort. Sah suggested that parties to a contract should consider “whether future forecasts or purchase orders can be tempered down through discussions with customers."
Most supply contracts have a cushion to take into account supply-chain disruptions, which is a pre-agreed period that could vary from one week to 15 days, said Trilegal’s Singh.