Understanding “Force Majeure” in the Times of COVID-19

COVID Pandemic has rendered hundreds of organizations to reconsider their priorities. While multiple enterprises are letting their employees function from, some of them are resorting to salary cuts and firing. Salary cuts and deduction in allowances is pushing millions of millennials into depression. While the Reserve Bank of India has announced a moratorium on EMIs for 3 months but rent continues to be a major concern.

The global economy is contemplating a recession, businesses are contemplating measures that reduces overall expenditure and offers them with a capital to last a little longer. In the long run, both organizations and individual people are expected to face financial crisis. Those with meagre salary will face issues with survival while the ones with handsome allowances are likely to experience a depreciation in asset, lifestyle and health.

Amid all the chaos, Force Majeure is a term that has rose to popularity. Be it businesses, industry experts, real-estate messiahs or millennials, all of them are discussing Force Majeure as if it is another name for deadly coronavirus.

Also Read: How to plan your personal finance for pandemics like coronavirus?

What is Force Majeure?

Force Majeure stands for “an event that cannot be controlled, anticipated or avoided”. Often related to terms like an act of gods, terrorism, and earthquake, Force Majeure is a necessary clause in contracts. In Indian laws, Force Majeure finds a very subtle mention but carries a lot of weight.

According to Economic Times “Force Majeure is a contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event that the parties could not have anticipated or controlled.’ While force majeure has neither been defined nor specifically dealt with, in Indian statutes, some reference can be found in Section 32 of the Indian Contract Act, 1872 (the “Contract Act”) envisages that if a contract is contingent on the happening of an event which event becomes impossible then the contract becomes void”.

Top events that are considered to be a part of Force Majeure clause are:

  1. Acts of God
  2. Earthquake
  3. Hurricanes
  4. Terrorism
  5. Acts of Government
  6. Explosions
  7. Fire
  8. Plague
  9. Epidemic
  10. Pandemic

What is included in a Force Majeure Clause?

A Force Majeure clause relieves parties from performing its obligations under a contract in case of a pandemic, epidemic, acts of god or terrorist activities. A force majeure clause in simple language can be defined as a protective umbrella for parties who are liable to pay rent or fulfil certain duties according to the legal contract.

Force Majeure clause comes under effect only when the event is out of control of liable party’s hand. If there’s an event that comes under the vicinity of the party or if the party is found to be under the control of situation that Force Majeure can be deployed and the party will be requested to fulfil his or her contractual duties.

If the event lies under the clause of Force Majeure then the concerned party will be relieved from the duties till the impact of event continues. In this case, COVID-19 is the event and since it was declared a pandemic by the central government, Force Majeure clause is applicable here.

Note: It is also important to understand the language mentioned in the contract. Indian rules have mentioned Force Majeure quite subtly and it is not that a common practice until and unless pressurized by either of the parties.

Why is This Clause Necessary?

Well! Let’s consider the contemporary scenario where pandemic COVID-19 has rendered millions of organizations across the country helpless. Millions of people are sitting at home with no work, no income and no assurance of income. While the government is catering to the needs of people listed in BPL but people who belong to middle class or people who run small enterprises categorized under MSME are facing issues too.

Clauses like Force Majeure will help small scale entrepreneurs and business owners put their contractual duties on hold until the normalcy returns to the market. The government has announced a 40 days lockdown, which is likely to be increased in cases the infection continues to grow.

Impact of Force Majeure Loans?

The Reserve Bank of India understands the impact of ongoing pandemic hence they have taken accurate measures to cut the effect on common people. The RBI has introduced EMI Moratorium for 3 months. If sources are to be believed the moratorium will likely be extended for 2 months. Government is trying its best to support the common people. Banks on the other hand have implemented the suggested moratorium but they are likely to continue charging the interest on the principle amount for the 3 months.

Final Thoughts

Going forward the true impact of pandemic will come in light; job losses, economic upheaval and falling stock market will coax government to take extensive measures. One thing people and businesses will learn from this pandemic is the use of Force Majeure, going forward every contract will highlight the mention of this clause and use it protect themselves during the tough times.  

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