Force Majeure: Your Friend during Geopolitical Conflicts

By Resham Jain and Malika Bhasin (Intern)

During the Covid-19 pandemic, we witnessed a rapid shift in the way legal and business community interpret Force Majeure (“FM”) clauses in commercial contracts. These are no longer perceived as standard boilerplate clauses, but hold significance especially where performance of contracts is hindered due to socio-economic and geopolitical tensions. Typically, FM events mean instances and circumstances which are beyond reasonable control of the contracting parties. A widely worded FM clause includes both natural calamities and man-made events including wars and conflicts which are likely to render the performance of a contract impossible. Once an FM event is triggered, parties may suspend their obligations under the contract for a pre-agreed duration or till the time the occurrence persists or even terminate the contract if the FM event continues to exist without any visibility of a closure. This suspension of obligations or early termination is usually without any liability or penalty. However, the aforesaid depends on how strictly or loosely the FM clause is drafted. In this post, we examine the interpretation of FM clauses during hostile and war-like situations through the lens of the on-going Russia-Ukraine conflict crisis.

Russia v. Ukraine: 2022-armed conflict

On February 24, 2022, Russia invaded Ukraine under the garb of launching a “special military operation” to “de-militarize” Ukraine and “protect Ukrainians” from their own democratically-elected government. Although, the claims were unfounded, Russia managed to capture some of the key locations including Kyiv, Ukraine’s capital. Over the past month, Ukrainian forces have fought valiantly and successfully pushed back Russian troops from a number of areas. Currently, Russia is contemplating scaling down its military operations. Both parties are likely to engage in diplomatic talks to de-escalate the conflict.

However, the socio-economic side-effects of the war are already prominent and any further escalation can cause serious damage. The invasion also led to imposition of various sanctions on Russia which has substantially impacted global economy and financial markets, including Indian exchanges. India is the third-largest importer of crude oil. The impact of Ukrainian crisis on prices and availability of crude oil remains a key risk for our economy.[1] During FY 2020-21, the bilateral trade between India and Russia amounted to USD 8.1 billion. India is also heavily dependent on Russia for its defense procurement. If the war continues, it is likely to have significant consequences for Indian trade and businesses especially MSMEs due to over-arching uncertainty, disruption in global supply chains, price inflation, blocked inventory, liquidity crunch caused by halt in payments and receivables, etc.[2] Some of the impacted sectors include pharma, textile, steel and chemicals.

Force Majeure vis-à-vis War and the Indian perspective

As global businesses continue to grapple with ill-effects of the Ukrainian crisis, it is important to re-look at some of the key clauses in commercial contracts. At the onset of the Covid-19 pandemic, when trade and commerce was hugely impacted, parties turned towards the FM clauses in their negotiated contracts in the hope of some respite. Now, similar exercise must be undertaken during the Russia-Ukraine war.

At the outset, a standard FM clause states wars and conflicts as an FM event. The applicability and interpretation of a FM clause during geopolitical conflicts is no different from any other circumstance covered thereunder. All modern contracts have such FM clause, but in the absence of an express provision, parties can rely upon the doctrine of frustration. In the Indian context, this doctrine is set forth under Section 56 of the Indian Contract Act, 1872 (“ICA”). Section 56 states that a contract will become void if the performance of the contract is rendered impossible. Indian courts do not interpret impossibility in the literal sense and even circumstances which make the performance impractical or useless from the parties’ standpoint or against the underlying object and purpose of the contract, will automatically be deemed void. However, mere inconvenience or difficulty in performance are not valid grounds for arguing frustration of a contract. Therefore, the threshold is high and aggrieved parties must conclusively demonstrate impossibility to invoke FM provisions and seek necessary relief.

Having said that, it does not imply that parties are not liable to mitigate any losses that may occur due to non-performance. While the aggrieved can claim damages under Section 73 of ICA, the apex Indian court upholds that the one who seeks damages must also take all reasonable measures to mitigate any losses. In the absence of such measures, appropriate damages may not be recovered. Again, the onus to prove damages and losses is high and lies on the party demanding such relief.   

On February 28, 2022, the Ukrainian Chambers of Commerce and Industry declared Russian military aggression as a FM event. The letter bearing no. 2024/02.0-7.1 further confirmed that these circumstances were “extraordinary, unavoidable and objective circumstances for business entities and/or individuals under the contract, tax or other obligations, the fulfillment of which became impossible due to the occurrence of such FM event.”[3] This is likely to give some relief to both global and Indian businesses who are trading with Ukraine.

Conclusion

Going forward, it would be prudent for affected parties to re-assess the FM provisions. A FM event is usually triggered upon furnishing a written notice to the other party. Therefore, such procedural formalities should be promptly undertaken to demonstrate bonafide before courts, if at all the issue is escalated into a dispute. Additionally, parties should consider widening the scope of the term “war” and “conflict” under the FM clause by including terms such as declaration of war, armed and non-armed conflict, sanctions, government action, military operations, and the like. Lastly, it is crucial to understand that triggering of a FM event will not entitle parties to any contractual or legal remedies. It is necessary that the war or conflict renders performance of contractual obligations impossible. Mere hindrance will not suffice in the eyes of law.


[1] https://www.businesstoday.in/magazine/current/story/the-economic-impact-of-the-russia-ukraine-conflict-324788-2022-03-04 (last accessed on March 31, 2022)

[2] https://yourstory.com/smbstory/russia-ukraine-conflict-indian-small-business-msme/amp [last accessed on March 31, 2022]

[3] https://ucci.org.ua/uploads/files/621ce831ac29f951072237.pdf [last accessed on March 18, 2022]

 

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