How to draft Force Majeure Clause after Covid-19?
Force Majeure Clause is the most important boiler Plate Clause….the world claims, finally.
The pandemic of Covid-19 has made every business entity to refer and/or rely upon their force majeure clause in the respective contracts, wherever, it permitted them to breathe with it.At the same,it left most of them struggle with their contract in as much as the clause was not supporting many elementary factors to invoke force majeure clause in the wake of lockdown in entire India.
This clause so far was a left over clause and have had been used in a stereo type copy paste manner before Covid-19. Thanks to Covid-19, the respect towards this clause has enhanced a lot amongst business communities and legal fraternity at large.
Force majeure, also referred to as an act of God, is a clause that indicates the contract can’t be performed and parties cannot discharge their obligations due to a pre decided unforeseen set of circumstances and events categorically defined in the contract itself.
The golden aspects which need to be considered and kept in mind while drafting force majeure clause in any contract or agreement :
1. Force majeure is a creation of the contract and hence it will be only to the extent it has been incorporated in the body of the contract.
2. Some of the ideal clauses for Force Majeure can be as below:
Clause 1: Neither Party shall be liable for delay or failure in the performance of any of the obligations under this contract, if, and to the extent, such delay or failure is due to war, Governmental action or restriction, lockdown, change in law, embargo, fire, national strike, tornado, volcano, hurricane, hostilities, reduced working capacity and/or working restrictions or limitations due to Governmental orders or directions or acts of God(including but not limited to an Epidemic, a Pandemic or any other situational pertaining to any disease), (the “Force Majeure”) directly affecting the area, within which the concerned Party is operating or performing its duties/ obligations/ responsibility/ undertaking/ liability, under and in terms of this Contract, provided that:
a.performance, discharge of obligations, is affected due to such event of Force Majeure for a consecutive period of 14 (fourteen) days; and
b.the affected Party has on best effort basis endeavored to minimize the damages.
Provided further, the payment terms shall be excluded from the ambit of this clause.
Clause 2: Any Party claiming any event of Force Majeure (“Affected Party”) shall notify the other Party in writing (“Force Majeure Notice”) by the 15th (fifteenth) day of the period in which such performance of duties/ obligations/ responsibility/ undertaking/ liability is affected by the event of Force Majeure, and provide; (a) full particulars of the cause of the event of Force Majeure; (b) the date of first occurrence thereof, along with evidence demonstrating that such event of Force Majeure is continuing without any break, whatsoever, for a period at least ten days;
3.The clauses of Force Majeure should be meticulously articulated so that the mischiefs which may have occurred during the Covid-19 could be checked and disputes can be avoided at any given point of time.
4. This clause should also recognize various important factors as below:
a.which will be the triggering event,
b.How notice has to be served upon to other party?
c. What shall be the stipulated deadline within which it shall be exercised?
d. What shall be the manner of issuing notice?
e. To whom such notice has to be served?
c.How the Force Majeure Period shall be computed?
d.When it can lead to termination of a contract? How many days of continuity of force majeure events will be a criteria of termination?,
e.What shall be the minimum specific length of time say an event lasting less than seven (7) days shall not be considered a force majeure event,
f.When shall it require the unaffected party to continue to perform when the affected party has ceased performance due to a force majeure event,
g.What shall be the evidence of Force Majeure, etc.
There are many incidental factors to the force majeure clause and hence one has got to substantiate their anticipations for this clause atleast after a very bad experience we all had after a series of lockdown and implications on businesses.
Over a period of last 5 months and still today, we have had seen that this clause has been applied and defended in a manner which was never originally intended for in a given contract. The applications so far have been to merely avoid or defer their contractual obligations even without realising and satisfying the sine qua non to this clause. This has resulted contractual breaches in an elated manner.
With the background of Covid-19 era, one should be extra conscious while vetting or drafting the force majeure clause in their existing or new business documents.