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The 2019 Novel Wuhan Coronavirus (Covid-19) has done two major things. One, it has caused panic and at the same infected many people, leading to the death of around 3,300 people. Two, it has had a major bearing on global business. Though there isn’t much data available just as yet, on how the Covid-19 has affected business globally, yet news reports mention that many companies in China and other countries where the Coronavirus has spread, are encouraging the employees to work from home, due to the high risk of human to human transmission. It is also suspected that the Shipping industry, the labour and manufacturing industry will impact the most from the spread of the virus.
The parties to a contract who conduct business Internationally i.e. where both the parties are located in different countries, fall within the domain of International Law. For any contract to succeed legally, there must be consideration, consent, lawfulness and legality. One of the essentials of a contract is “meeting of minds” and an “intention to create a legal relationship.” A contract has to be drafted keeping in view the balance of rights and liabilities of both the parties, and at the same time mention the exit options, and the duration of such obligation, wherever necessary.
A very essential clause in any contract, especially contracts of International Commercial Nature, is the “Force Majeure Clause”. The Force Majeure Clause is a provision incorporated in a contract that absolves the parties from performing their any particular or all contractual obligation(s) due to the occurrence of certain circumstances which is/are beyond reasonable human control, making performance impracticable, impossible and/or inadvisable. It is important to incorporate the circumstances which shall be covered by the force majeure clause in the contract. Usually natural disasters such as floods, tsunamis, earthquakes, etc. which are disturbances referred to as an “Act of God.” Medical emergencies which include the outbreak of pandemics and epidemics such as the Wuhan Coronavirus, the Ebola and many others can also be brought within the ambit of the Force Majeure Clause. Other circumstances such as a civil war, political turmoil/strikes, outbreak and/or threat of war, outbreak and/or threat of terrorism among others are very common and must be incorporated in the contract. Thus, the litmus test for determination of what can and cannot be included within the scope of the “Force Majeure Clause” is that the contemplated event should be “beyond the control” of the affected party. Normal occurrences such as negligence, breach of trust, human intervention cannot be brought within the scope of the said clause.
China’s largest importer of Liquefied Natural Gas (LNG), a leading company had invoked its force majeure clause to suspend its contracts with three suppliers due to the coronavirus outbreak. Further, a Chinese International Trade Promotion agency mentioned that it would offer force majeure certificates to companies who find it difficult to sustain their business with foreign counterparts.
Essential Sub-clauses within Force Majeure Clause –
a) Demarcation between what are the Political Events and Non-Political Events and what steps must the affected party take.
b) Other events, if any.
c) Notice period i.e. Notice of Force Majeure Event – When should the affected party intimate the other party regarding the Force Majeure event.
d) The duration of the Force Majeure.
e) When should the parties resume performance, if there is a scope for the same?
f) Performance excused – When can performance(s) be excused?
What happens when there is no Force Majeure Clause in a Contract?
Under common law jurisdiction such as India, the “doctrine of frustration” is the usual go-to when there is no force majeure clause in a contract. In India, the Indian Contract Act, 1872 recognizes the doctrine of frustration under Section 56. Section 56 absolves a party to a contract from discharging their duties in the event of an intervening act which makes performance of the contract either impossible or unlawful. Situations such as:
a) Destruction of Subject Matter: When a contract can’t be fulfilled due to the elimination of a certain essential element which was required for performance of the contract, such as destruction of a music hall [Taylor v. Cadwell, QB (1863) 3B&S 826], loss of crops [Howell v. Coupland, (1876) 1 QBD 258)] etc.
b) Change of Circumstances: A contract will frustrate when the circumstances are such which make the performance of the contract impossible in the manner and at the contemplated time, as held in Parmeshwari Das Mehra v. Ram Chand Om Prakash [A.I.R. 1952 Punj 34,38.]
c) Non-occurrence of contemplated event: Sometimes when the non-occurrence of an event contemplated by both the parties, the value of the performance of the contract is destroyed. In Krell v. Henry, where the contract was to hire a room for a coronation ceremony which got abandoned, is a leading case law on the same.
d) Death or incapacity of the party: As held in Robinson v. Davison, [(1871) LR 6 Exch 269] “a party to a contract is excused from performance if it depends upon the existence of a given person, if that person perishes.”
e) Government and/or Legislative Intervention: Governmental and/or Legislative policies and laws can prevent the performance of the contract in a certain jurisdiction.
f) Outbreak of War: When an outbreak of a war makes it practically impossible to fulfill contractual obligations. In A.F. Ferguson & Co. v. Lalit Mohan Ghose, [A.I.R. 1954 Pat 596], performance of the contract of life insurance became impossible since the insurer was a German company and upon the outbreak of war, the Government of India closed its business.
Under Civil Law jurisdiction such as Germany, an excuse for performance due to hardship (improvisation) is allowed. Germany also allows excuses of performance when it becomes impossible. Certain contracts that are governed by the United Nations Convention on Contracts for the Sale of Goods or a Uniform Commercial Code (CISG) permits excusing performance where there is a failure to perform the contract owing to an unforeseen impediment.
What should the Entrepreneurs & Businessmen do during medical emergencies such as the Coronavirus?
● Incorporate or amend wordings such as “medical emergencies”, “epidemics” or likewise, to a new or existing contract (if possible).
● Proper due-diligence of the existing contract and understanding if the clauses protect you or not.
● Verifying if insurance covers the risk of the potential loss, if any.
● Risk assessments which vary from supplier to supplier.
● Being up to date with the spread of the virus. Ensuring there is minimal contact with that location. Reliable media houses and WHO Data is definitely advisable.
● Proper training and education regarding the virus needs to be transmitted to employees, independent contractors, and other business partners.
● Ensuring methods of virus prevention are up to date.
Thus, it is crystal clear that the Corporates can definitely incorporate certain clauses in the agreements/contracts which have already been executed by them. Further, in case their agreements/contracts lack those clauses then they can definitely execute supplementary agreements/ contracts which can be easily executed in the electronic form and which are commonly known as “E-Contracts” respectively. These outbreaks of deadly diseases should not act as an impediment in the on-going trade and businesses between the Incorporations which includes cross border trades and transactions. The execution of supplementary “E-Contracts” shall act as a further stepping stone in order to enable smooth trade and bilateral economic and political relationships.
Authored By: Adv. Anant Sharma & Mayank Barman