What Is Force Majeure?
The law relating to Force Majeure under Sections 32 of the Indian Contract Act, 1872. It is a contractual provision agreed upon between parties.
The occurrence of a force majeure event protects a party from liability for its failure to perform a contractual obligation. Typically, force majeure events include an Act of God or natural disasters, war or war-like situations, labour unrest or strikes, epidemics, pandemics, etc. The intention of a force majeure clause is to save the performing party from consequences of something over which it has no control. Force Majeure is an exception to what would otherwise amount to a breach of contract.
What is the impact of force majeure clause in various commercial agreements in the light of COVID and in the light of invocation of 2 acts by central goverment?
Given the supply chain disruption caused by the COVID-19 pandemic, it is likely that performances under many contracts will be delayed, interrupted, or even cancelled. Counterparties (especially suppliers) to such contracts may seek to delay and/or avoid performance (or non-performance liability) of their contractual obligations and/or terminate contracts, either because COVID-19 has legitimately prevented them from performing their contractual obligations, or because they are seeking to use it as an excuse to extricate themselves from an unfavorable deal. Further, companies may not be able to perform their obligations under their customer agreements because of their suppliers’ non-performance and may in turn seek to delay and/or avoid performance (or liability for non-performance) of their contractual obligations and/or terminate contracts. Parties may also cite COVID-19 as a basis for renegotiation of price or other key contractual provisions (e.g. volume of materials exported from or imported into affected areas due to shifts in supply and demand). In this context, it is important to determine if COVID-19 will be considered as a ‘force majeure’ event.
Some force majeure provisions may not explicitly list examples, and may simply state that a party will be excused for nonperformance due to unforeseeable events arising through no fault of its own and beyond its reasonable control. A party attempting to use such a clause to excuse its nonperformance or delay in performance due to COVID-19-related circumstances will still likely have to convince the court that it attempted to carry out its performance, but could not do so without incurring some unreasonable expense due to the pandemic
A Covid-19 pandemic could make it more difficult for parties to perform their contractual obligations.
There are two possible instances, which may suggest that a force majeure clause covers a pandemic:
- if the contractual definition of a force majeure event expressly includes a pandemic. Inclusion of pandemic to the list of force majeure events will provide clarity as to whether Covid-19 outbreak would trigger a force majeure clause in a contract; or
- if the force majeure clause covers extraordinary events or circumstances beyond the reasonable control of the parties. Such general, catch-all wording may be invoked if it is determined that the factual circumstances caused by the pandemic are beyond reasonable control of the affected party.
Having said that, whether a party can be excused from a contract on account of Covid-19 being declared a pandemic is a fact-specific determination that will depend on the nature of the party’s obligations and the specific terms of the contract.
A force majeure clause must be expressly provided for under the contract and protection afforded will depend on the language of the clause. In the event of a dispute as to the scope of the clause, the courts are likely to apply the usual principles of contractual interpretation.
A factual determination based on the specific terms of the contract. The courts would examine, whether in each case, impact of Covid-19 pandemic prevented the party from performing its contractual obligation.
In the absence of an express force majeure provision of contract, Frustration of contract will apply as per section 56 of Indian Contract Act.
The said Provision, deals with if the act or purpose of the contract become impossible to perform and become unlawful subsequent the contract being enter into, the contract would get frustrated and automatically from the date of the possibility, the contract would consider void.
The doctrine of frustration will apply if:
- the underlying event is not the fault of any party to the contract;
- the event or circumstance occurs after the formation of the contract and was not foreseen by the parties; and
- it becomes physically or commercially impossible to fulfill the contract, or transforms the obligation to perform into a radically different obligation from that undertaken initially.
The doctrine of frustration results in the contract automatically coming to an end. The parties to the contract will no longer be bound to perform their future obligations. Because of the dramatic consequences contractual frustration, the threshold for proving frustration is much higher than that for most force majeure provisions, since it must be shown that the obligations impacted by the event or circumstance are fundamental to the contract.
Force majeure clauses commonly contain a prompt and time bound notification requirement, which can operate as a contractual condition precedent to relief or not. Such provisions are generally enforceable, and so complying fully with all notice requirements will be important for parties seeking to invoke force majeure.
What will be impact on insurance policies in the light of invocation of 2 acts by central government and force majeure clause?
Insurer might not settle a claim under your health insurance policy if the disease is declared as an epidemic or pandemic by the World Health Organization (WHO).
If person have been suffering from any respiratory-related disease, then his claims under a regular indemnity type health insurance policy or a specific coronavirus insurance policy might not get settled. For instance, if person have been suffering from severe cough, respiratory diseases, breathlessness, flu over the past few days and you plan to take treatment for it, policy might not cover even if it results in symptoms for coronavirus disease/infection.
The insured will not get claim filed for treatment of a disease within the policy waiting period of a health insurance policy if the disease treatment is excluded within the waiting period. Typically, most policies exclude several kinds of treatment in the waiting period of the policy.
A waiting period is a pre-fixed time period starting from the date of purchase of the policy. Coverage of many diseases starts only after this waiting period is over in most health insurance policies.
In the case of health insurance policy, If person are travelling from a coronavirus affected country and diagnosed positive, you will be covered under regular indemnity health insurance policy as long as you are being quarantined in India.”
However, the special coronavirus insurance policy does not cover people who have travelled to coronavirus affected countries such as China, Hong Kong, Macau, Taiwan, Italy, Kuwait, Japan, Singapore, South Korea, Thailand, etc.
Every company impacted by the COVID-19 outbreak would need to consider if adverse financial consequences of business interruption resulting from COVID-19 can be claimed under the insurance policy. Companies should review their existing business interruption insurance policies to protect themselves against any losses sustained from exposure to the epidemic. The extent of insurance cover available to a company will depend on the specific terms of each policy. However, the following aspects should be considered:
- Check if there is any general exclusion for epidemic or pandemic outbreak.
- Analyse if the policy covers insurance arrangements where part performance has been done by a company.
- Notify the insurance company any material event, which may result in the company being required to make an insurance claim and such notification requirement under the insurance policy needs to be strictly adhered to, including details of the actual and potential losses, if required.
- Stay up to date with clarifications and guidelines with respect to claims process issued by insurance companies.
It may also be advisable for the company to contact the insurance company and obtain a written confirmation regarding the specific coverage of the policy. Specific clarification should be obtained as to when COVID-19 will become a notifiable event for claiming insurance and determining the relevant loss period
Insurance Regulatory and Development Authority (IRDAI) on March 04, 2020, issued a circular stating that where hospitalisation is covered in a health insurance product, insurers should ensure that the cases related to COVID-19 are expeditiously handled and all expenses incurred during the course of treatment, including during the quarantine period, must be covered by all the insurers subject to the terms of the policy contract and extant regulatory framework. IRDAI has also asked insurers to offer need-based health insurance plans to cover the cost of treatment for coronavirus. Also, all claims reported under COVID-19 shall be thoroughly reviewed by the claims review committee before repudiation. This is relevant in the context of employee-related insurance obtained by companies.
Post COVID-19 being termed as a pandemic by WHO, insurers may deny claims if pandemic and outbreaks are expressly excluded under the terms and conditions of the policy. Most standard insurance policy contracts exclude pandemics from coverage because they are considered a high-risk item with unnaturally higher level of claims. Actuaries are also unable to calculate the risks related to possible pandemics as the situation is very different each time and depends on the underlying disease each time. Some policies exclude epidemics and pandemics altogether, whereas some policies cover medical costs overseas in relation to pandemics and epidemics, but not cancellation costs or loss of bookings.
India’s lockdown to contain the new coronavirus outbreak has brought businesses across the nation to a halt, causing losses. While companies do buy insurance to protect themselves against business interruption, according to insurers such policies don’t cover a pandemic like Covid-19.
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