Corona Daily 488: Is Pandemic Force Majeure?

Every businessman knows Force Majeure as the clause that relieves a party from certain contractual obligations during events such as earthquakes or floods. Non-business people also sign agreements all the time, sometimes without realizing it. Will your gym extend your membership? Will your French holiday be refunded? Will your insurance company hide behind Force Majeure and not pay Covid-19 deaths? (Fortunately, Life Insurance Council of India has confirmed all insurance companies in India must pay Covid-19 deaths, without applying Force Majeure).

It is naïve to think Common law will protect us because of the pandemic. Force Majeure is not a creature of law, but of individual agreements.

Agreement: First thing is to check the FM clause in your agreements. Does it include an epidemic, or a catchall phrase such as ‘any other event beyond the reasonable control of the party?’ Existence of the clause doesn’t automatically protect you. The pandemic must have actually affected your ability to perform. E.g. our internet provider, phone company, Netflix are not (yet) affected.

Mitigation: You need to show you have made attempts to find alternatives. With office and traffic shut, your employees are working from home. Your Chinese supplier couldn’t supply, but you have found a Malaysian supplier.

Notification: You must notify the other party of your inability. If the other party notifies you, you must respond quickly. UN Sale of Goods contracts require a notice within reasonable time. Create as much documentation as possible. Talk to the other party, and ideally renegotiate the contract.

Certification: If possible, demand from your government such a certificate. Since 27 February, China has issued a record number of ‘Certificates of Force Majeure’. In international trade, that will protect several Chinese companies.

Doctrine of frustration: Where the purpose of contract becomes impossible, the doctrine of frustration may apply. If a couple booked a wedding hall that was shut by the lockdown, the purpose is frustrated. In such a case, the agreement will be void (and the court is likely to ask the hall management to return the deposit to the couple). 

While the pandemic is on, some sympathy and flexibility will be shown. After the pandemic, courts everywhere will engage in millions of cases, where the force majeure clause and the parties’ subsequent actions will be closely scrutinized.

Ravi

Useful reading: One (Global)/ Two (US and China)/ Three and Four (USA)/ Five (UK)/ Six (UN)