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Act of God finally gets attention by coronavirus menace

By Ashwin Hawelikar, Managing Partner on April 10, 2020

Force Majeure or often referred to as Act of God is a standard general term clause which finds its place in almost every agreement. According to Black’s Law Dictionary, the term ‘force majeure’ means an event or effect that can be neither anticipated nor controlled. Force Majeure or Act of God as the name suggest includes events/scenarios that are outside the control of humans such as natural disasters, war or war-like situations, labour unrest or strikes, lock-outs epidemics, pandemics, quarantine restrictions, blockades, hostilities, civil disturbances, revolutions, coups, riots, etc. A standard force majeure clause in agreements will state the following;

a) Events that are indicative of force majeure or Act of God;

b) Provision that a party shall not be liable for any failure of or delay in the performance of this agreement for the period that such failure or delay is;

i. beyond the reasonable control of a party,

ii. materially affects the performance of any of its obligations under this agreement, and

iii. could not reasonably have been foreseen or provided against.

c. That affected party shall promptly notify the other party regarding the force majeure event and its temporary suspension of its obligations and covenants.

d. Some agreements/contracts also state the period until which the force majeure event can continue, upon expiry of which either party gets the right to terminate the agreement.

Covid-19 has brought trade, business, professions to a grinding halt. Lockdowns, curfews made it worse. Upon the onset of this pandemic and thereafter lockdown, every employer was busy reviewing its force majeure clause in its agreements as that was the only guiding thing in the present time. Let’s now see the relevance of this standard force majeure provision in context of the on-going pandemic of Covid-19 that has affected more than 180 countries and points to contemplate in order to minimise the impact of Covid-19 on parties:

a. Look for force majeure provision in your agreements.

b. A standard force majeure clause shall impose an obligation on you to first and foremost inform the other party and gives a right to suspend your obligations until the force majeure event continues.

c. Once communicated, affected party must then look for specific provision in its force majeure clause if it stipulates for non-suspension of commercial obligations. This becomes crucial, as your commercial obligations such as revenue share or royalty payments may be directly linked to your service and payment obligations, as typically would be in the case of licensing, franchising contracts. Such commercial obligations also require suspension in these cases to remedy the financial loss for any business.

d. Further, affected party needs to look for any termination clause directly linked with the force majeure clause.

Covid-19 pandemic situation is uncertain. Depending upon the gravity of loss incurred due to suspension of obligations, covenants, payments, parties have to assess the situation, its adverse effects and have to mutually discuss and come up with a roadmap to cover not only the period when the Covid-19 and/ or lockdown impact continues but also for the period once the Covid-19 situation is over and things return to normalcy. It takes time to revive the business, hence affected party may not be able to honour its commercial obligations soon after the pandemic effect is over. As any non-compliance after cessation of force majeure event is construed as breach of the agreement. We are in the age of global economy and Covid-19 is a force majeure event that has affected the entire world. It has proved to be a major setback for everyone be it working professionals, companies, firms, SME’s, proprietorship. In such time of distress, it becomes crucial, that parties to agreement extend their support and co-operation to each other and help each other come out of this situation. We welcome any queries if you have on force majeure provision. STAY HEALTHY. STAY SAFE

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