Force Majeure and COVID-19

Dr Zia Ullah Ranjah

Dr Zia Ullah Ranjah

Will Covid-19 trigger a force majeure clause?

The outbreak of coronavirus has severely hit all industries. It has become a nightmare for tenants in the retail industry as well. The lockdown of mega shopping centers, malls, small shops, social distancing rules, and self-quarantining for uncertain future has shaken the markets worldwide.

In the circumstances, many in the retail industry are asking whether they can trigger the force majeure (superior force) or ‘Act of God’ clause to justify the refusal or suspension of the payment of the rental. It is an extremely important question. A single answer may not be provided for all kinds of industries and contracts. Any answer would essentially depend on the language of a force majeure clause, relevant law, and the ability or inability of a tenant to meet the contractual obligation. To open a discussion on this issue, however, I make the following comments:

The examples of a force majeure include prevention, delays or stoppages due to strikes, lockouts, labour disputes, terrorist acts, acts of God, governmental actions, inactions or delays, civil commotion, extreme weather, fire or other casualties, or other causes beyond the reasonable control of the party obligated to perform.

In Pakistan, Section 56 of the Contract Act, 1872 provides that: “[…] A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent…becomes void when the act becomes impossible…”

Black’s Law Dictionary explains that a force majeure clause, “is meant to protect the parties if a contract cannot be performed due to causes which are outside the control of the parties and could not be avoided by the exercise of due care.”

As per Section 56, the corona epidemic qualify as an ‘event’ beyond the reasonable control of the parties.  However, this ‘event’ may or may not be triggered by a tenant as an excuse to delay or to refuse to pay the rental. Again, a definite answer lies on the facts and circumstances of each case.

As the epidemic is unique, courts in different jurisdictions will apply or interpret rarely invoked clause of force majeure considering the economic reality of a particular industry and financial circumstances of the parties. The courts will have to allocate and balance the obligations and the risk of parties and assess the probability of performance under a particular agreement.

A force majeure clause may contain specific or broad language to describe or specify event(s) which constitute a force majeure. For example, it may state that ‘anything out of the parties’ control would be termed as a force majeure or it may specify certain  events and then add a broad ‘catch-all’ statement that, “for other reason whether of a like nature or not that is beyond the control of the party affected.” In short, a specific force majeure clause would have a limited application and a liberal or more general clause will have wider application allowing a tenant to make a stronger claim.

In my opinion, a broad force majeure clause would apply, notwithstanding the word ‘epidemic’ is mentioned or not as a qualifying event. However, a party invoking force majeure clause must be required to demonstrate that the epidemic directly caused the failure to meet lease obligation. In short, the success of any claim would depend on specific terms of a lease agreement, the overall circumstances of a particular industry, and the financial situation of a tenant. The carve-out clauses, would also be read in specific agreements and impact the outcome of the claim.

As a matter of defence for the non-payment of rent, the tenants may also rely on the doctrine of ‘frustration of purpose’ to argue that the stated purpose of the contract is frustrated, due to epidemic and ensuing government directions, laws and orders; hence, they are unable to perform their obligation. To deal with the pandemic’s impact on future business relations, the tenants may also reach out to their landlords to negotiate modifications and forbearance agreements seeking a waiver, reduction, or postponement of the rental.

With these preliminary observations, I leave the discussion open for the legal fraternity.

Note: The above comment is a general in nature and may not be taken as a conclusive opinion. Special industry contracts such as construction and energy etc do provide specific force majeure legal frameworks.

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