Would invoking Force Majeure be economically efficient amidst the economic crisis during COVID-19?

Author- Nishtha Kheria, Amity University, Noida.

Would invoking Force Majeure be economically efficient amidst the economic crisis in the backdrop of COVID-19?

Introduction:

Amidst humanity’s most cryptic hour since World War II, [[1]] nations around the globe are implementing social distancing actions. Some are even sharing force majeure certificates [[2]] like China to exempt parties in financial commitments from the performance. [[3]] Amidst such an economic disaster, it would be fascinating to know whether parties can efficiently take advantage of force majeure conditions.

Economic Crisis due to COVID – 19

An economic hibernation image is recommended wherein the reduction of organizational assets and the collection of securities in the private area would be restricted.[[4]] It is because; the harsh withdrawal is prophesied to accompany[[5]] which would see huge lay-off charges.[[6]] Around half a trillion US dollars in the form of 300 consolidation opportunities are enduring to be met.[[7]] But, coming to India, the supply chain was already with a “downslide impact on businesses”.[[8]] The casual sector forming 45% of its GDP[[9]] is in jeopardy as observed from the plight of migrant laborers. [[10]]

What is force majeure?

Etymologically, it means a higher performance, one past human power, like an Act of God. [[11]] The source is from the French Civil Code or Napoleonic Code of 1804. [[12]] Article 1218 of the code describes a force majeure situation as-

“In contractual circumstances, there is force majeure where a situation beyond the power of the debtor, which could not plausibly have been anticipated at the time of the termination of the agreement and whose results could not be withdrawn by suitable means, prevents enforcement of his commitment by the debtor.” [[13]]

Indian Supreme Court holds that such a settlement saves the operating party from the results of anything over which the parties have no authority. [[14]] Four basic conditions are externality, unavoidability, enforceability, and causation with the outside event. [[15]]

Typically, the intermediary event has to past parties’ power. [[16]] The outcomes must also be inevitable [[17]] heading to failure. [[18]] Force majeure clauses in the agreements tend to designate the risks of misprediction among the parties. [[19]] Parties are available to settle upon what may establish inconstant in the future. [[20]]

Impossibility and Efficiency – Economic Analysis

In a contract, contingency survives since the performance is to take place in the future. If a failure takes place, it is interpreted as a crime. Thus, the risk gets allotted to the promisor. But if the concept of failure is strongly entreated, risk transfers to the promise. Hence, one has to find the higher risk carrier to designate the peril efficiently. [[21]]

The two determinants for obtaining higher danger bearer are the restriction of danger from developing and security from likely harm. The first may not be adequate since the event would mostly be inevitable. To find more affordable insurer, risk evaluation (possibility * measure of loss) and business costs (buying protection policy) are recognized. Posner, therefore, ensures that in case of promise is the higher risk bearer (cheaper insurer), the difficulty can be entreated and release should, therefore, be granted. [[22]]

Let us take an example of producing a printing device. If printer (promisor) claims for the machine from a manufacturer (promise) to be marketed and established at his assumptions, which later takes fire, the mystery appears as who should bear the risk? Since fire broke in the printer's premises, he was in a better situation to block it. But, since it was unexpected and assuming there was no misconduct on his part, it is reasonable to move to the second test.

Though the printer can understand the possibility of fire incidents better, it is the manufacturer who is entirely revised to estimate the extent of the cost since he has more information about the steps of creation. Thus, the manufacturer is quite satisfactory to self-guarantee against any likely loss in the future. Hence, secretion can be allotted since the promise is the higher risk bearer. Similar production contracts have been released on the ground of difficulty when stores got damaged by fire unexpected and without liability of either party. [[23]]

The great shutting down of the Suez Canal case was concluded with a similar financial review. Transatlantic held for discharge from carrying wheat to Iran. Implementing economic analysis, the court found the shipping business was better to risk bearer since it could predict the magnitude of loss more satisfying and could have insured against likely risks in the future. The consignment could still be transported through the Cape of Good Hope. [[24]]

Hence the analysis of contract terms would depend on the risk-bearing capabilities of the parties as well as the encompassing circumstances. [[25]]

Problem with Enforcing Force Majeure

Common-law courts have been reserved in releasing performance due to an unclear evidentiary foundation.[[26]] The style used in agreements is also distinctive as in the US, 42% of the transactions settled in 2019 used the expression of "act of God" linked to 23% using exactly "pandemic" word.[[27]] Since the event is defined within the forms of the clause, [[28]] its impact would vary from case to case[[29]] depending on how the clause has been bartered. [[30]]

The opposing party directing violation can always hold upon lack of foreseeability in a pandemic which occurs every 10 or 100 years. When we talk about those dealings recorded into after the COVID- 19 cases began exploding in India, particularly at the beginning of March, it would be hard to prove for the party declaring discharge how the event is inevitable.

The difficulty lies in ascertaining the causality with the triggering event as proposed by the International Chamber of Commerce.[[31]] Parties can harp upon the expression “increased break down of transport” but given the leisure admitted by some state governments in India, it would be uncertain as to how far would this choice be useful.[[32]]

Merely because the administration becomes difficult, it does not establish difficulty. [[33]] In case of alternative means available, such a clause cannot come to a party's performance, as it appeared in the Suez Canal case. [[34]] Thus, wars [[35]], change in regulatory strategy on jute import, [[36]] rallies [[37]] and increase of rates [[38]] have not been held to be heading to difficulty. Similarly, mere market changes like financial withdrawal [[39]] concerning the profitability of the contract also does not constitute difficulty. [[40]]

Conclusion

The interpretation above shows that the appearance of a pandemic would not give automatic support to parties to get an apology from fulfilling their contractual commitments. To strike an equilibrium between two contradictory laws of pacta sund servanda (fulfilling the hypocritical duty) [[41]] and clausula rebus sic stantibus (excusal from execution on record of change in conditions), [[42]] one needs to find who would be the higher peril bearer to allow secretion efficiently. Hence, even in the state of the pandemic, if the promisor can play his part having better capability to deal with perils, the force majeure should not be implemented subsequently.

[1] International Monetary Fund, https://www.imf.org/en/News/Articles/2020/04/03/tr040320-transcript-kristalina-georgieva-participation-world-health-organization-press-briefing (last visited May 20, 2020). [2] A force to be reckoned with-Chinese firms use obscure legal tactics to stem virus losses, the virus has led to firms trying to get out of contracts, The Economist (Apr. 20, 2020), https://www.economist.com/business/2020/02/20/chinese-firms-use-obscure-legal-tactics-to-stem-virus-losses. [3] CCPIT Guides Enterprises to Leverage Force Majeure Certificates, which Help to Maintain Nearly 60% Contracts, China Council for the Promotion of International Trade (Apr. 20, 2020), http://en.ccpit.org/info/info_40288117668b3d9b017163990e5a082a.html. [4] Lukasz A. Drozd & Marina M. Tavares, Responding to COVID-19: A Note 2-23 (Fed. Reserve Bank of Phila., Working Paper No. 20-14, 2020), https://doi.org/10.21799/frbp.wp.2020.14. [5] Sayajit Chatterjee, Debt Overhang: Why Recovery from a Financial Crisis Can Be Slow, 2 Business Review 1 (2013), https://philadelphiafed.org/-/media/research-and-data/publications/business-review/2013/q2/brq213_debt-overhang-why-recovery-from-financial-crisis-can-be-slow.pdf; Gauti B. Eggertsson et. al., A Model of Secular Stagnation: Theory and Quantitative Evaluation, 11(1) Am. Econ. J.: Macroeconomics 1 (2019), https://doi.org/10.1257/mac.20170367. [6] Ezra Klein, How the Covid-19 recession could become a depression, Vox (Mar. 23, 2020, 09:20 AM) https://www.vox.com/2020/3/23/21188900/coronavirus-stock-market-recession-depression- trump-jobs unemployment. [7] Matthew Jennejohn et. al., COVID-19 as a Force Majeure in Corporate Transactions, in Law in the Time of COVID 141, 141 (Katharina Pistor ed., 2020). [8] Jitesh Kadian & Rashi Paliwal, A New Emerging Pandemic COVID-19: Its Social, Legal and Economic Impact, 31 (8) Purukala 1166, 1171 (2020). [9] S. Mahendra Dev & Rajeswari Sengupta, COVID-19: Impact on the Indian Economy 1-6 (Indira Gandhi Inst. of Dev. Research, Mumbai, Working Paper No. 013, 2020), http://www.igidr.ac.in/pdf/publication/WP-2020-013.pdf. [10] Jitesh Kadian & Rashi Paliwal, A New Emerging Pandemic COVID-19: Its Social, Legal and Economic Impact, 31 (8) Purukala 1166, 1171 (2020). [11] Abdullah Qazi, Force Majeure Clauses and the Limitation of Liability, Mondaq (Sept. 4, 2019, 08:00 AM), https://www.mondaq.com/construction-planning/842460/force-majeure-clauses-and-the-limitation-of-liability. [12] James Gordley, Impossibility and Changed and Unforeseen Circumstances, 52 Am. J. Comp. L. 513, 518 (2004). [13] See Ministere De La Justice, http://www.textes.jus-tice.gouv.fr/art_pix/THE-LAW-OF-CONTRACT-2-5-16.pdf (last visited May 20, 2020). [14] Dhanrajamal Gobindram v. Shamji Kalidas And Co., AIR 1961 SC 1285 (India). [15] Alan Berg, The detailed drafting of a force majeure clause, in Force Majeure And Frustration of Contract 63, 71 (Ewan McKendrick ed., 1995). [16] Int’l Inst. For Unification of Private Law [UNIDROIT], UNIDROIT Principles of International Commercial Contracts 2010, art. 7.1.7. [17] Yohannes Hailu Tessema, Force Majeure, and the Doctrine of Frustration under the UNIDOROIT Principle, CISG, PECL and the Ethiopian Law of Sales: Comparative Analysis, 58 J.L. Pol’y & Globalization 33 (2017). [18] United Nations Convention on Contracts for the International Sale of Goods art. 79, Jan. 1, 1988, 1489 U.N.T.S. 3; Code Civil [C. civ.] [Civil Code] art. 1792 (Fr.). [19] Yohannes Hailu Tessema, Force Majeure, and the Doctrine of Frustration under the UNIDOROIT Principle, CISG, PECL, and the Ethiopian Law of Sales: Comparative Analysis, 58 J.L. Pol’y & Globalization 33 (2017). [20] Id. [21] Richard A. Posner & Andrew M. Rosenfield, Impossibility and Related Doctrines in Contract Law: An Economic Analysis, 6 J. Legal Stud. 83 (1977). [22] Id. [23] Siegel v. Eaton & Prince Co., 165 Il. 550, 46 N.E. 449 (1896). [24] Tsakiroglou & Co. Ltd. v. Noblee Thorl GmbH [1962] AC 93 (HL) 94 (appeal taken from Eng.). [25] Richard A. Posner & Andrew M. Rosenfield, Impossibility and Related Doctrines in Contract Law: An Economic Analysis, 6 J. Legal Stud. 83 (1977). [26] Matthew Jennejohn et. al., COVID-19 as a Force Majeure in Corporate Transactions, in Law in the Time of COVID 141, 150 (Katharina Pistor ed., 2020). [27] Id. at 149. [28] Mary v. State of Kerala, (2014) 14 SCC 272 (India); Day v. United States, 245 U.S. 159, 161 (1917). [29] Lebeaupin v. Crispin [1920] 2 KB 714. [30] Christian Twigg-Flesner, A comparative Perspective on Commercial Contracts and the impact of COVID-19 – Change of Circumstances, Force Majeure, or what? in Law in the Time of COVID 141, 161 (Katharina Pistor ed., 2020). [31] International Chamber of Commerce, https://iccwbo.org/publication/icc-force-majeure-and-hardship-clauses/ (May 20, 2020). [32] Christian Twigg-Flesner, A comparative Perspective on Commercial Contracts and the impact of COVID-19 – Change of Circumstances, Force Majeure, or what? in Law in the Time of COVID 141, 155 (Katharina Pistor ed., 2020). [33] M/s Alopi Parshad & Sons Ltd. v. Union of India, 1960 (2) SCR 793 (India). [34] Energy Watchdog v CERC (2017) 14 SCC 80 (India). [35] Satyabrata Ghose v. Mugneeram Bangur & Co., AIR 1954 SC 44 (India); M/s Alopi Parshad & Sons Ltd. v. Union of India, 1960 (2) SCR 793 (India). [36] Naihati Jute Mills Ltd. v. Khyaliram Jagannath, (1968) 1 SCR 821 (India). [37] Mary v. State of Kerala, (2014) 14 SCC 272 (India). [38] Coastal Andhra Power Ltd v. Andhra Pradesh Central Power Distribution Co Ltd, FAO (OS) No. 272/2012 (Del. HC). [39] Stuart D Kaplan et. al., Trump v. Deutsche Bank: Does the Credit Crisis Constitute a Force Majeure Event?, Martindale (Mar. 23, 2009, 08:00 AM), https://www.martindale.com/business-law/article_Blank-Rome-LLP_648084.htm. [40] Tandrin Aviation Holdings Ltd v. Aero Toy Store LLC, [2010] EWHC 40 (Comm)]. [41] Reinhard Zimmermann, The Law of Obligations: Roman Foundations of the Civilian Tradition 581 (Juta & Co., 1990). [42] Robert Feenstra, Impossibilitas and clausula rebus sic stantibus, in Fata Iuris Romani: Études D’histoire Du Droit 364, 368 (Robert Feenstra ed., 1974)