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Tags Current Affairs

Act of God

Date: 06 September 2020 Tags: Bills & Laws

Issue

Attributing the shortfall in GST collections to disruptions due to Covid-19, Finance Minister Nirmala Sitharaman said the economy is facing an Act-of-God-like situation.

 

Background

The Covid-19 pandemic and the lockdown imposed across the globe to contain the spread of the virus has resulted in major disruptions in economic activity. Businesses are looking towards a legal provision, the force majeure or “Act of God” clause to cut losses.

 

Details

  • The law of contracts is built around a fundamental norm that the parties must perform the contract. When a party fails to perform its part of the contract, the loss to the other party is made good.

  • However, the law carves out exceptions when performance of the contract becomes impossible to the parties.

  • A force majeure clause is one such exception that releases the party of its obligations to an extent when events beyond their control take place and leave them unable to perform their part of the contract.

  • FMC is a clause that is present in most commercial contracts and is a carefully drafted legal arrangement in the event of a crisis.

  • When the clause is triggered, parties can decide to break from their obligations temporarily or permanently without necessarily breaching the contract.

  • Companies in such situations use the clause as a safe exit route, sometimes in opportunistic ways, without having to incur the penalty of breaching the contract.

  • Generally, an “Act of God” is understood to include only natural unforeseen circumstances, whereas force majeure is wider in its ambit and includes both naturally occurring events and events that occur due to human intervention.

  • War, riots, natural disasters or acts of God, strikes, introduction of new government policy imposing an embargo, boycotts, outbreak of epidemics and such situations are generally listed. If an event is not described, then it is interpreted in a way that it falls in the same category of events that are described.

  • In case a contract does not have a force majeure clause, there are some protections in common law that can be invoked by parties.

  • For example, the Indian Contract Act, 1872 provides that a contract becomes void if it becomes impossible due to an event after the contract was signed that the party could not prevent.

  • If a party to a contract believes that the other party has invoked the force majeure clause in an unjustified situation, it can move court seeking performance of the contract.

  • Vaguely indicating that the pandemic failed the contract would face a legal challenge. The court would look into specifics like whether a lockdown imposed to contain the pandemic locally prevented performance of the contract.

  • The International Chamber of Commerce has developed a Model Code on the force majeure clause reflecting current international practice.

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