- The Covid-19 pandemic and the lockdown imposed across the globe to contain the spread of the virus has resulted in major disruptions in economic activity.
- Businesses are looking towards a legal provision — the force majeure or “Act of God” clause that has its origins in the Napoleonic Code — to cut losses.
- This week, attributing the shortfall in GST collections to disruptions due to Covid-19, Finance Minister said the economy is facing an Act-of-God-like situation.
What is a force majeure clause?
- The law of contracts is built around a fundamental norm that the parties must perform the contract.
- When a party fails to perform its part of the contract, the loss to the other party is made good.
- However, the law carves out exceptions when performance of the contract becomes impossible to the parties.
- A force majeure clause is one such exception that releases the party of its obligations to an extent when events beyond their control take place and leave them unable to perform their part of the contract.
- FMC is a clause that is present in most commercial contracts and is a carefully drafted legal arrangement in the event of a crisis.
- When the clause is triggered, parties can decide to break from their obligations temporarily or permanently without necessarily breaching the contract.
- Companies in such situations use the clause as a safe exit route, sometimes in opportunistic ways, without having to incur the penalty of breaching the contract.
- Generally, an “Act of God” is understood to include only natural unforeseen circumstances, whereas force majeure is wider in its ambit and includes both naturally occurring events and events that occur due to human intervention.
- However, both concepts elicit the same consequences in law.
- The Indian Contract Act, 1872 provides that a contract becomes void if it becomes impossible due to an event after the contract was signed that the party could not prevent.
- The International Chamber of Commerce has developed a Model Code on the force majeure clause reflecting current international practice.
- The Code states that the impediment triggering the operation of the force majeure clause
- must be beyond the party’s reasonable control; and
- that it could not reasonably have been foreseen at the time of the conclusion of the contract; and
- that the effects of the impediment could not reasonably have been avoided or overcome by the affected party.