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COVID19 and Force Majeure: All You Need To Know

As the performance of commercial contractual obligations becomes increasingly challenging in this scenario, many companies have begun to invoke force majeure clauses under material contracts

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In the context of extensive policy measures being rapidly implemented to combat the COVID-19 outbreak, the Indian automobile industry has found itself faced with a host of unprecedented commercial challenges. Large-scale shutdowns of manufacturing units and dealerships mandated by the 21-day nationwide lockdown, along with global supply and production chain disruptions, have placed this industry in acute distress, with the brunt of the impact being faced by companies that are heavily reliant on China for raw materials and completion of assembly lines.

Invocation of force majeure.

As the performance of commercial contractual obligations becomes increasingly challenging in this scenario, many companies have begun to invoke force majeure clauses under material contracts, in order to avoid or delay performance of onerous obligations, including payment and delivery commitments. Frequently observed in commercial contracts, and especially common in long-term supply and purchase agreements, force majeure clauses serve to excuse the non-performance of contractual obligations, in cases where such non-performance is due to supervening events that are beyond the defaulting party’s control. 

Scope of protection.

For force majeure to be invoked under Indian law, a force majeure clause needs to be explicitly stated in a contract. Further, invocation of a force majeure clause in the context of the COVID-19 outbreak, will depend upon the instances specifically included within the scope of such clause. Even if a force majeure clause does not explicitly refer to pandemics, epidemics or public health emergencies, such clause may still be analyzed to ascertain whether any other instance (for e.g., acts of God, extraordinary events, or circumstance beyond the parties’ control) may be applicable to the actual circumstances affecting the defaulting party.

Consequences of invocation and remedies. 

For invocation of a force majeure clause, most contracts typically require that counterparties be notified promptly. Further, depending upon the construct of a particular force majeure clause, the consequences of its invocation, and the corresponding remedies available, could range from suspension or delay in contractual performance, to termination of the relevant contract. 

Governmental declarations and burden of proof. 

While certain government authorities have issued “force majeure certificates” (such as, the CCPIT in China) or have issued blanket orders declaring the COVID-19 outbreak as a force majeure event, under international law, such governmental declarations may be considered sovereign acts, and if such acts unlawfully interfere with contractual relationships, they could become the subject of claims by foreign investors under bilateral investment treaties.

Further, such governmental declarations may not be sufficient, by themselves, to shield businesses from fulfilling contractual obligations. Ultimately, whether the COVID-19 outbreak qualifies as a force majeure event in relation to a contract, will be a question of contractual construction. The party invoking force majeure would still have to bear the burden of proving the impact of the COVID-19 outbreak, and of demonstrating that it took proactive steps to mitigate the issues resulting due to the outbreak. 

Alternative remedies. 

It is imperative to note that in the absence of a force majeure clause from a contract, or if the force majeure clause in a contract is not attracted to the circumstances that are interfering with contractual performance, the doctrine of frustration under Indian law may still be applicable to such contract. This doctrine renders a contract void, and considers it as discharged by “frustration,” if it becomes impossible or unlawful to perform, provided that the failure in performance is not due to the contract becoming merely more onerous or costly. Additionally, in the absence of a force majeure clause from a given contract, the triggering of certain other contractual clauses, such as those related to material adverse effect, termination and price adjustment, may also be assessed in light of the COVID-19 outbreak.  

Expected impact.

With several Indian automobile giants having reportedly already invoked force majeure clauses to suspend payments to their vendors and suppliers, and given the critical cash-crunch that such companies are experiencing, there is widespread speculation that several others in the automobile sector will follow suit. Such invocations can be expected to reverberate across industry supply chains, as counterparties in such scenarios may be compelled, in turn, to invoke force majeure with respect to their own contractual obligations, in a bid to avoid or delay contractual commitments that they find themselves unable to perform in the current industry landscape. The ultimate domino effect of such invocations may inevitably result in increased payment defaults and a larger number of non-performing assets on the books of several financial institutions.

Disclaimer: This article is only intended for informational purposes, and is not intended to provide, and does not constitute, legal advice. Please seek legal counsel for specific advice on the points discussed above.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

Iqbal Khan

Iqbal Khan is a Partner at Shardul Amarchand Mangaldas & Co. He regularly advises some of the largest global private equity investors and conglomerates and specializes in private equity investments, complex private and public mergers and acquisitions (both domestic and cross-border), joint ventures and foreign investment laws.

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Amrita Rana

Amrita Rana is an Associate at Shardul Amarchand Mangaldas & Co. She advises and represents several global private equity funds, sovereign wealth funds and strategic corporates on their investments in India, specializing in private equity investments, domestic and cross-border acquisitions, and foreign investment laws.

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