Decoding the Force Majeure Clause in a business contract

Due to the uncertainty brought on by the COVID-19 outbreak, businesses in India and throughout the world are unable to fulfil their contracts. Oil refineries and the airports in Delhi and Mumbai in India have cited the “Force Majeure” provision and are asking the Airport Authority of India to waive their payments as a result. Similarly, CREDAI, the leading organisation of real estate developers, is attempting to use it in order to avoid penalties for project completion delays. The phrase was also used by the Indian customs ports to permit the clearance of goods at ports.

Definition of Force Majeure 

A clause known as “force majeure” is incorporated into contracts to release parties from liability in the event of unavoidable catastrophes that disrupt the expected course of events and prevent participants from upholding their obligations. These clauses typically cover both man-made diseases and armed conflict, as well as natural disasters like hurricanes, tornadoes, and earthquakes.

What is the importance of Force majeure?

Contracts for supplies, distribution, real estate, and financing, among others, frequently contain “Force Majeure” clauses. You might not be able to fulfil your promises or obligations in the event of an unforeseeable circumstance like the spread of COVID-19 and a corporate lockout. You also lack the financial means to cover the contract’s damages for non-performance. To safeguard your commercial interests and the contract under such circumstances, you can apply the “Force Majeure” clause. If you have legal representation, you can keep the contract and get a temporary reprieve from fulfilling your commitments. Some advice to help you:

  • If you’ve signed long-term contracts, you can try to renegotiate the terms of the agreement for the affected period, such as the next six months. This will aid in safeguarding your contractual and commercial interests. 
  • When there is a supply or distribution agreement, you can increase your supply of goods (or services) as demand increases to make up for any non-performance. 
  • Make sure that none of you is looking for alternative business deals during a crisis while entangled in legal issues that may have a negative impact on the company.

When can you invoke Force majeure?

Upon the occurrence of an unforeseen event, the clause is triggered in accordance with the terms of the contract. A contract’s parties may send each other notices advising the other of the occurrence of an event, their incapacity to fulfil their obligations, and their intention to invoke a provision. In such unanticipated circumstances, the clause permits parties to temporarily be relieved from fulfilling their duties. The parties may choose to end the agreement in some circumstances if the unexpected incident lasts a long time. When using the “Force Majeure” clause in a contract, the parties should seek legal counsel to determine the impact on their business and how to carry out their contractual responsibilities.

Special Considerations for Force Majeure

Although it is not covered in the organization’s Incoterms, the International Chamber of Commerce has attempted to define force majeure by using the standard of “impracticability,” which states that it would be unreasonable difficult and expensive, if not impossible, to carry out the terms of the contract. 

Both parties must be unrelated to the event that creates this predicament, and it must be unexpected and unavoidable. However, it can be exceedingly challenging to demonstrate these circumstances, and in international tribunals, the majority of force majeure arguments are rejected. 

Contracts with clear definitions of what constitutes force majeure—ideally, ones that address local threats—hold up better under scrutiny in any jurisdiction. The concept’s use can be strictly confined, even in systems based on civil law.

Force majeure provisions make a lot of sense in theory. One benefit is that they help parties manage risk more effectively and safeguard themselves in case the unthinkable occurs completely out of the blue. 

The major problem is that these terms tend to benefit the big players because they aren’t always clear and open. These provisions give large, strong insurance companies a way out of their responsibilities. On the other hand, if the average Joe stands to gain from a force majeure exception, they might not have the resources to support their claim.

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