The present situation has caused the Indian economy to crumble to a halt. Some businesses have already been forced to shut down and there is a sense of increasing panic in many businesses. Businesses are looking towards a legal provision ‘the force majeure’ or “Act of God” clause to cut losses.
Attributing the shortfall in GST collection due to Covid-19, Finance Minister Nirmala Sitharaman said the economy is facing an Act-of-God-like situation. In this article, we shall discuss an overall view of “Act-of-God”.
What is a force majeure clause?
In law, a contract is built around a basic standard that the parties must complete the contract. When a party fails to complete its part of the contract, the loss to the other party is made-up. However, sometimes when completion of the contract becomes impossible to the parties, the law carves out exemptions. A force majeure clause is one such exemption that releases the party of its obligations to an extent when events beyond their control take place.
FMC is a clause that is present in most commercial contracts. When this clause is triggered, parties can decide to break from their obligations temporarily or permanently without breaching the contract. Companies in such situations use the clause as a safe exit route.
Generally, an “Act of God” is understood to include only natural unexpected situations. Force Majeure on the other hand is wider in its ambit and includes both naturally occurring events and events that occur due to human intervention.
What happens when a force majeure is triggered?
If a party in a contract understands that the other party has invoked the force majeure clause in an unjustified situation, it can move court seeking completion of the contract.
Court rulings have established that force majeure cannot be invoked when the fulfillment of the contract has become difficult, but only when it has become impossible. It looks into whether the party arguing the failure of completion has tried all other roads to fulfill its responsibilities before invoking force majeure.
Will ‘Act of God’ Clauses in Indian Contracts Help Restart the Economy?
In China, where the Covid-19 outbreak began, the Council for Promotion of International Trade is announcing force majeure to businesses. China’s Supreme People’s Court had recognised the 2002 SARS outbreak as a force majeure event too.
Singapore enacted the Covid-19 Act in April to provide relief to businesses that could not fulfill their contractual responsibilities due to the pandemic. The Paris Commercial Court in July ruled that the pandemic could be equated to a force majeure event.
In India, Several large business houses have already invoked the terms of force majeure to postpone the payment of license fees and to check the penalties. PVR Cinemas, which has 870 screens across the country, has invoked force majeure as grounds to not pay any rent during the lockdown period. Several large retail chains such as Reliance Retail, Big Bazaar, McDonald’s, and Dominos Pizza have also already invoked the doctrine of force majeure to redeem their legal liability to pay license fees or rental dues and/or penalties.
India’s top LPG importer has also invoked force majeure due to the lockdown as grounds to stop the import of LPG gas from Qatar Gas. They argue that low demand during this period has meant that the storage supply vats remain full and hence any additional supply cannot be stored at this time.
In order to restore the balance of the economy, the government, as well as private professionals, must allow some generosity businesses. They can then open shops again, to continue with the employment of their workers and pay salaries and taxes once again. A weak economy makes people hesitant to takes risks, which in turn doesn’t create new jobs, generate any income, stimulate spending or increase manufacturing. This becomes a downward cycle. It remains to be seen whether the courts and insurance companies will accept the claims of force majeure. It also remains to be seen whether governments will allow companies and business houses an exemption from the payment of dues due to the present lockdown.
As of now, taking ridicule at Finance Minister Nirmala Sitharaman over her Act of God remark on the economic slump, senior Congress leader P Chidambaram Tuesday said the government should not “blame God for a man-made disaster.”