Comprehension

The COVID-19 pandemic has taken the entire world hostage in less than four months, and the global economy has been hit the hardest with governments across the globe implementing stringent policies including lockdown to control the coronavirus outbreak. The pandemic today presents unprecedented challenges and impediments to businesses in conducting their normal operations. The lockdown across the world has caused delays in the performance of contracts and transactions. Now, the question that arises is whether the current situation can enable parties to a contract to alter their obligations with non-compliance of terms neither being regarded as a "default committed by any party" nor a "breach of contract"? There are certain well-accepted practices for dealing with such extraordinary situations in commercial transactions by the inclusion of force majeure & material adverse effect (MAE) clauses. Determination of the types of circumstances so covered by the force majeure clause contained in a contract is essential. Provisions of force majeure often cover natural disasters like hurricanes, floods, and earthquakes as "acts of God." Other covered events may include war, terrorism, civil disorder, fire, disease medical epidemics or by reasons of applicable laws or regulations. Broadly, the Courts have interpreted the term "Force Majeure" as an event that can neither be anticipated nor controlled by either of the contracting parties. A force majeure clause applies in the context of ongoing contractual arrangements, whereas, an MAE or material adverse change (MAC) clause applies to the allocation of risk in transactions before their closure or completion. Pandemic and related consequences such as government action is a type of event covered by a force majeure clause, however, its impact on the affected party's ability to perform its contractual obligations may vary depending upon contractual terms. It is common for force majeure clauses to specify the impact that the event or circumstances in question must have, in order for the clause to be triggered. References may be made, for example, to the event or circumstances having "prevented", "hindered" or "delayed" performance. These terms require different levels of impact on performance before a party can claim recourse to these clauses. In other words, the force majeure and MAC clauses act as an exception to what would otherwise be treated as a breach of contract. Certain contracts may state that, if a force majeure clause is applied, the contract may automatically be terminated. On the other hand, some contracts may even state that the duty to fulfil the contractual obligation may be suspended for a certain period of time and if the force majeure event is not curbed or treated even after such time, then eventually the contract may be terminated. Though there cannot be a one-size-fits-all solution to this question, and it depends upon how the force majeure clause is worded in a specific contract; and in the absence of the same, applicable laws related to the same will be required to be taken into consideration.

Question: 1

Based on the Author‘s argument in passage above, which of the following is correct ?

Updated On: Jul 9, 2024
  • Force Majeure Clauses, generally have a uniform impact on the performance of Contracts in all the cases.
  • The Impact on the performance of Contracts by the usage of Force Majeure Clauses is dependent upon the way such clauses have been constructed in a particular Contract.
  • Both Force Majeure and Material Adverse Change Clauses have similar impact on the performance of Contracts.
  • All of the above.
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The Correct Option is B

Solution and Explanation

The correct option is (B) :The Impact on the performance of Contracts by the usage of Force Majeure Clauses is dependent upon the way such clauses have been constructed in a particular Contract.
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Question: 2

Imagine, there is a domestic commercial Contract for supply of certain goods for certain price between A and B. However, in pursuance of the same, both A and B forget to negotiate and agree on the terms of a Force Majeure event and the Contractual document does not contain the Force Majeure clause. In such a situation, what would be the fate of the Contract in the event like that of COVID 19 ?

Updated On: Jul 9, 2024
  • As the parties did not negotiate on the Force Majeure Clause, either of them cannot take an exception to the Breach of Contract.
  • The parties can invoke the Material Adverse Change Clause.
  • In absence of such clauses in the Contract, the Courts may resort to the applicable law, i.e., the Indian Contract Act, 1872 to give relief to the parties.
  • None of the above.
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The Correct Option is C

Solution and Explanation

The correct option is (C) :In absence of such clauses in the Contract, the Courts may resort to the applicable law, i.e., the Indian Contract Act, 1872 to give relief to the parties.
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Question: 3

In the same fact situation as mentioned above with a modification that there is a Force Majeure Clause in the Contract between A and B, let us suppose, that B, who was to supply goods to A on certain date and time, faced issues in relation to procurement of goods due to mill strike and also because of rise in prices of goods. In this case, can B claim the suspension of performance of Contract on the basis of the Force Majeure Clause ?

Updated On: Jul 9, 2024
  • Yes, B can, depending upon the way, the Force Majeure Clause is worded.
  • Such situation cannot be covered under Force Majeure as it is just a case of disappointed expectations and hence B cannot invoke the clause. It is merely a case of commercial hardship.
  • B can invoke the Force Majeure clause as the clause is too broad to cover such situations.
  • None of the above.
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The Correct Option is B

Solution and Explanation

The correct option is (B) :Such situation cannot be covered under Force Majeure as it is just a case of disappointed expectations and hence B cannot invoke the clause. It is merely a case of commercial hardship.
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Question: 4

Typically, the MAE (Material Adverse Change) provision in an agreement contemplates events which if they occur, or are likely occur, would have a “materially adverse change or effect on the assets, business, property, liabilities, financial condition, results, operations of the target” or that "affects the ability of the transacting parties to consummate the transaction" or the "validity or enforceability of the transacting parties to its rights and remedies under the transaction documents". Which of the following sample clauses in a contract resembles an MAE clause ?

Updated On: Jul 9, 2024
  • “In the event either party is unable to perform its obligations under the terms of this agreement because of Act of God, strikes, equipment of transmission failure or damage reasonably beyond its control, such party shall not be liable for damages to the other for any damages resulting from such failure to perform…”
  • “Except with respect to payment obligations under this agreement, no party shall be liable for, nor such party shall be considered in breach of this agreement due to, any failure to perform its obligations under this agreement as a result of cause beyond its control, including any earthquake, labour problem, unavailability of supplies…”
  • Both of the above.
  • None of the above.
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The Correct Option is D

Solution and Explanation

The correct option is (D) :None of the above.
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