Updated: Jul 15
The current crisis we are facing has not only created health-related concerns but has also made it extremely difficult for companies, especially start-ups to honour their commercial commitments. With the entire globe in isolation, disruptions in supply chains are inevitable. This has led to a grave concern and a pressing question: How important is a force majeure clause in a commercial contract? ‘Force Majeure’ is a contractual provision, which allows parties to suspend the contract temporarily if there is occurrence of some unforeseen event. Such events are typically elucidated in the contract. As a start-up founder, you would have barely found the time to sit and read through your commercial contract templates. Most of you would have now found that your commercial contracts do not have such a clause or if included, the clause is vague and broad. This lockdown is the time when you can update your commercial contracts to include or improve force majeure provisions.
Start-ups typically begin their commercial obligations by executing a memorandum of understanding which captures a very basic understanding of both parties’ obligations. A detailed contract follows later. Such a detailed contract may or may not include a force majeure clause. If your contract does not have a force majeure clause, do not worry, as you can always rely on the doctrine of frustration of contracts. Simply put, this means that if the object or the purpose of the contract has become impossible due to the happening of some unforeseen event, then the contract becomes void. The contract would automatically become void from the date of impossibility of performance. However, going forward, it would be beneficial for you to have a force majeure clause in your commercial contract templates. Let us see what would constitute a comprehensive force majeure clause:
It should be holistic
A force majeure clause should cover all the obligations that arise from a particular contract. It should begin as, “If at any time, during the continuance of this contract, the performance, in whole or part of any obligation under this contract…”; the usage of the words `any time’ and ‘any obligations’ show that the entire contract would be covered by this clause. Another way in which you can make your clause holistic is by making its invocation broader. For instance, using language such as, “No party shall be held liable for failure to perform or delay in performance…”. This will protect you against not only failure to perform but also a delay in performance. A broader clause would enable you to invoke force majeure easily.
Events triggering Force Majeure
As discussed above, a force majeure clause, suspends the performance of the contract temporarily on the occurrence of certain unforeseen events. These events would be required to be outlined specifically in the contract. You should always include as many events as you can and therefore have an exhaustive definition. Events such as, Act of God (this includes disasters such as floods, fires, earthquakes etc.), events which are beyond human control, wars, pandemics, terrorist attacks, epidemics, civil commotion, sabotage, acts of public enemy, governmental action etc. should be included. Please note that it is important to include the phrase `governmental action’, as it is the lockdown and not the pandemic per se which is hindering performance of contractual obligations. As you cannot specifically enumerate all such acts, you should add the following language: “including but not limited to” before you start enumerating the specific trigger events. This would give the required scope to your clause to include any event which may not have been specifically mentioned.
Effects of force majeure
A force majeure event temporarily suspends the contract. However, a well drafted force majeure clause should provide for both the long term and short term effects of occurrence of a force majeure event. For instance, if the unforeseen event continues for a long period of time, then a provision of mutual termination should be there. In case any advance payment has been made against the work which has not yet been completed, provision should be made to return such payment. Also, the maximum duration for which the clause shall remain in operation should also be provided. For example, “if the said event does not subside within six months, the parties shall have the right to terminate the contract based on mutual consent…”. A termination under force majeure clause should be in consonance with the general termination clause of the agreement. All confidential information and intellectual property should be returned post termination.
You may also include certain formal requirements such as provision of notice for invoking the force majeure clause in the contract. Non-compliance with the same may also disentitle a party from invoking such a clause. Even if the contract does not have an explicit notice clause, you should still notify the other party before you decide to invoke the force majeure clause.
If you already have an existing force majeure clause which includes an epidemic or a pandemic or is widely worded to include all unforeseen events, then you may invoke the clause in accordance with its requirements for the present COVID-19 crisis. However, if you think that the clause is not adequate enough to be invoked, you can improve upon it to make it comprehensive enough. Amend and modify your contracts now, while you have the time. Crisis does not announce itself before it descends, your contracts should be ready to handle such unforeseen situations.