Companies invoking the clause must remember that it does not ensure guaranteed protection from contractual obligations
Last month, the Bombay High Court dismissed a plea by Standard Retail, which invoked the Force Majeure clause against GS Global, a South Korea-based steel trading company from which it bought steel. The petitioner, a Mumbai-based steel importer, invoked the clause claiming inability to pay GS Global, saying it could not sell the steel due to the lockdown, and asked the court to restrain Wells Fargo Bank from encashing letters of credit. The court, however, held that the relevant clause in the contract was applicable only to the supplier of steel (GS Global) and not the petitioner.
Businesses have been finding it tough to fulfil contractual obligations since the coronavirus outbreak. While in normal circumstances, this would have led to penalties, litigations or termination of contracts, given the enormity of the current pandemic, companies can invoke the Force Majeure clause to defer or forego certain obligations. Force Majeure is a French term which means "Act of God". The clause, a part of commercial contracts, lists events - natural calamity, disaster, war or epidemic - that may exempt a party to a contract from fulfilling certain obligations. These may include supply of goods or services, purchase of goods or services, lending or payment for goods and services.
Countries across the world, including India, have called the coronavirus outbreak a Force Majeure event. In a notification dated February 19, the finance ministry said: "?it is clarified that it (coronavirus pandemic) should be considered a case of natural calamity and Force Majeure clause may be invoked whenever considered appropriate following the due procedures?". Since then, a number of companies have invoked the clause. While there could be genuine financial and logistical constraints in several cases, legal experts say invoking the clause in every case of non-fulfilment of obligation may not necessarily offer protection to a company. The coronavirus pandemic may not be treated as a Force Majeure event where performing an obligation is not beyond the control of the party. For example, non-performance of obligations such as manufacture, supply or payment for delivery of essential goods - since they are exempted from the lockdown - cannot be excused under the clause. Also, blatant use of the clause could lead to commercial disputes once courts start functioning normally.
The Rush Hour
Several companies, including Hero MotoCorp, Eicher Motors, Adani Ports and Dakshin Bharat Gateway Terminal, have invoked the Force Majeure clause in some cases to defer payments to suppliers. Hundreds of small businesses have found themselves on the other side of the fence after being denied payments by business partners under the clause.
Sonam Chandwani, Managing Partner, KS Legal, says one of their clients, a large paint company, recently used the clause to defer payment of retainer fee for April. The same firm has also refused payments to many vendors. Chandwani herself has been recommending clients to use the clause if they are unable to perform some of their obligations.
Voxxy Media, a Mumbai-based celebrity social media influencer firm, was supposed to shoot a celebrity influencer for a large fintech company in the last week of March. But due to the spread of coronavirus and the subsequent lockdown, the shoot could not be completed. So, it invoked the clause. "The brand was supposed to transfer our money but held back. We could not pay the celebrity, and the whole schedule went for a toss," says Kulbir Sachdeva, Director and Founder, Voxxy. Besides, some clients, for whom they had done some work in December and January were supposed to pay them in April, but they withheld funds for reasons like absence of the finance team and non-availability of laptops at home. According to Sachdeva, all this is resulting in cash crunch, but the company has no choice. "The contracts we have signed did not list pandemic under the Force Majeure clause, but given the situation, where everyone is stuck, and all businesses are suffering, we have no choice but to agree to some of the delays and non-payments," he says.
Retail outlets, restaurant chains and multiplexes are all invoking the clause as they look to either refuse or defer payment of lease rentals. Multiplex owners, including Inox and PVR, and restaurant chains such as Domino's Pizza, Speciality Restaurants and Starbucks, have sought waiver of rents.
Chandwani of KS Legal says most disputes will arise in the lease rental space. Though landlords are fine with late payments, they are not ready to forego the dues. "Start-ups in Mumbai and Bengaluru pay huge rents. So, I advised my clients to invoke the Force Majeure clause, but landlords did not agree. They want my clients to vacate the premises," she adds.
"You have goods inside our premises, we are ensuring safety and protection of your goods, we are spending on electricity. How can someone just say he won't pay? If you don't want to pay, vacate the premises," says an executive of Delhi-based real estate major DLF.
According to a large real estate player who operates in Mumbai and South India, most large companies and retail outlets with long-term lease agreements have been negotiating for a middle ground. However, there have been many requests for exemption from April rent, she adds.
Sudhir Kumar Dash, a chartered accountant and qualified lawyer, and Partner and CEO, PPG International, says his team has invoked the clause on behalf of a dozen or so clients. While in two to three cases, landlords agreed to waive the rent, in most cases, they agreed to forego 50-60 per cent of the dues, since neither party is in a position to bear 100 per cent liability.
Even football clubs have been using the clause. Chennai City FC, a premier Indian football club and winner of the 2018/19 season of the I-league, recently invoked the clause to terminate contracts of its foreign players, becoming the second club to do so. According to Chennai City FC officials, the club followed FIFA (Federation Internationale de Football Association) guidelines while triggering the clause. FIFA had said in March that the disruption to the game of football caused by coronavirus was a case of Force Majeure. FIFA Regulations on the Status and Transfer of Players state that cases of Force Majeure shall be decided by the FIFA Council, whose decisions will be final.
Act of God: Not Sacrosanct
"If a party is under an obligation to provide a live tutorial to students, he/she may not be able to take the benefits of the Force Majeure clause," says Mamta Binani, a lawyer and a corporate legal professional. So, the clause does not provide blanket protection. Instead, everything depends on wordings of the contract one has signed. That is why in case of GS Global Corp, Standard Retail was barred from taking advantage of the Force Majeure provision since, according to the contract between the two companies, it can be used only by the supplier (GS Global). Senior lawyer Vineet B. Naik, who represented GS Global, says the verdict is significant as similarly placed businesses will think twice before invoking the clause, and courts will not be flooded by such commercial litigations.
Force Majeure then should not be used to avoid commercial commitments. According to experts, Covid-19 is an unprecedented natural disaster that has affected individuals and corporate India, but as Force Majeure is not embedded in the Indian law, to use it, it must be stated clearly in the contract.
For example, in a recent judgment, the Bombay High Court decided in favour of Kishore Biyani-promoted Future Corporate Resources and Rural Fairprice Wholesale, and restrained IDBI Trusteeship from selling shares of the two Future Group firms. While pronouncing the judgment, the judge said the companies needed protection in light of the current situation arising out of the coronovirus pandemic. In a similar case, the Delhi High Court held that the lockdown was in the nature of a Force Majeure, and allowed Halliburton Offshore Services' plea, restraining Vedanta from invoking bank guarantees extended by the former in connection with a contract for integrated development of certain blocks (Mangala, Bhagyam and Aishwarya) in Rajasthan.
So, invocation of the Force Majeure clause in itself does not guarantee escape from an obligation. The onus lies with the party, which wants to invoke the clause to establish existence of events, circumstances or conditions resulting in Force Majeure. "The impact on the affected party's ability to perform its contractual obligations may vary depending upon the terms of the contract. It is common for Force Majeure clauses to specify the impact that the events or circumstances in question must have for the clause to be triggered," says Ranjana Roy Gawai, Managing Partner in law firm RRG & Associates.
However, for companies currently invoking the clause, the devil doesn't seem to lie in the details. Their primary concern is to minimise losses in a tough business environment. But in doing so, they are ensuring that courts, when they start functioning fully, have a lot of commercial litigations to deal with. Atul Pandey, Corporate and M&A Partner at Khaitan & Co LLP, says: "It is expected that once the lockdown is gradually lifted, parties will go for litigations, seeking to either enforce the Force Majeure claim, or deny its applicability. Given the substantial number of companies/individuals affected by the lockdown, it is expected that the volume of litigation will be quite extensive."
Invocation of the Force Majeure clause is, therefore, not an open and shut case. Companies have to look into the contractual and legal aspects as well as the reasonableness of the clause.