02 Apr Coronavirus: The need to invoke force majeure clause
Rifat Rahman, Associate
In Bangladesh, force majeure clause does not have any statutory basis and it is invoked similarly by applying the guidelines. However, even if the broad purposive interpretation of the clause plunks the outbreak of the Covid-19 beyond the events, the doctrine of frustration defined in section 56 of the Contract Act, 1872 may provide alternative remedies
The cross-border trades between Bangladesh and China have been affected by the recent Covid-19 outbreak. The non-performance of contracts, especially if one of the parties is based in China, has resulted in loss of thousands of dollars for businesses. Recently in March 11, the World Health Organization declared the virus as pandemic, three days after Bangladesh reported its first three confirmed cases of coronavirus. The direct impact of the outbreak can be seen at the declining rate of international trade of Bangladesh with China, including direct and consequential disruptions of business operations.
As Bangladesh is a trade partner to China, the non-performance of public and private contracts due to the virus outbreak will be extremely threatening to the economy of Bangladesh. The trade of Bangladesh with China ranges from public mega development projects to private commercial contracts. As a result, any non-performance of the contract by either party may invoke the force majeure clause into the contract.
As such, unless the governing law of the contract provides an implied statutory provision for unforeseen events, the contracting parties must expressly agree to include the clause in order to avoid unintended breach of contracts.
The doctrine is a civil law concept, but it is also widely applied in common law jurisdictions, and usually used by the contracting parties during international supply contracts.
The clause is invoked by the contracting parties as a form of temporary measure to exempt one or both the parties to a contract from performing their part of the obligations of contract because of an event which is taking place beyond their reasonable control. These events may range from industrial disputes, change of law, natural disasters, act of God, etc.
In contracts between Bangladesh and China, before any parties can invoke the force majeure clause, few factors should be taken into account. The contractual clause is itself first interpreted to assess whether it covers the event beyond the parties’ control by applying a “catch-all language” approach.
In this case, the nature of the event can be interpreted to include either the massive outbreak of the virus or the government intervention in imposing trade related restrictions.
In common law jurisdictions, this determination is made on an objective basis by taking into account specific wording of the clause to evaluate as to whether the outbreak or the intervention has rendered the contract impossible to be performed either legally or physically.
However, if during the assessment, it appears that the parties could have performed their obligations before the outbreak of the virus, or it is in some way possible to perform the obligations, then FM would likely not be available. Furthermore, the FM clauses usually contains notice requirement on the party seeking to invoke FM clause and provides guidelines as to what happens when a clause is invoked. Thus, each of the contracts are assessed on its merit.
In Bangladesh, force majeure clause does not have any statutory basis and it is invoked similarly by applying the guidelines. However, even if the broad purposive interpretation of the clause plunks the outbreak of the Covid-19 beyond the events, the doctrine of frustration defined in section 56 of the Contract Act, 1872 may provide alternative remedies.
The relevant section can be used to render a contract frustrated if it can be shown that the performance of the contract has become radically different because of the event than what the contracting parties have initially intended. On the other hand, in China, the doctrine of change of circumstances may be relied upon by the parties if the force majeure remedy is not available in the contract. To rely on the doctrine, the party seeking to enforce the doctrine has to show that the fundamental assumptions of the contract are materially changed resulting from circumstances outside of the sphere of regular commercial risks and as such it will be inequitable for the parties to perform the contract. In such cases, the contract may be terminated or modified, which is usually not a form of remedy in such claims.
Thus, at this stage, amongst many, the contracting parties may take into account a series of possible measures, including reviewing their contracts mutually in regards to the governing law of the contract; consider whether the broad interpretation of the clause covers an event such as outbreak of the virus, which may fall under an act of God, and whether there are any government restrictions in effect which may disrupt the performance of the contract. Mutual discussions between the parties may be initiated to mitigate the possible losses that may arise from non-performance and anticipate preparatory steps to minimize the future loss; and considering whether invoking the clause may eventually terminate the contract completely or not.
While the fear of Covid-19 is likely to play out for some time and taking into consideration that the virus is relatively new in Bangladesh, the best way of mitigating the losses can be by initiating a risk assessment and giving careful consideration to each of the terms of the contract and pre-plan a mutual gateway between the parties themselves if it so requires to invoke a FM clause.
Disclaimer: This article does not constitute a legal opinion or advice and is only the writer’s personal opinion on the issue. It is written solely for academic purpose.
The author is Barrister-at-Law, Associate at Mahbub & Company and Lecturer of London College of Legal Studies (South)