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 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.
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.
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.
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.
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.
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.
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.
This is intended for general information purposes only. The views and opinions expressed in this article are those of the author/authors and does not necessarily reflect the views of the firm.
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