Relief to government contractors as coronavirus covered under 'Force Majeure Clause': What it means?

The Ministry of Finance has declared novel coronavirus, Covid-19, to be covered under "Force Majeure Clause" (FMC), bringing major relief to companies undertaking central government contracts. The coronavirus outbreak in China has significantly disrupted the supply chains, affecting a lot of other countries including India that rely on the country's exports.

By covering Covid-19 under FM clause, both parties involved in an agreement are free from contractual liability from fulfilling their obligations. But the memo issued by the finance ministry excuses a party's non-performance for a set duration of time but does not excuse performance in while.

"A doubt has arisen if the disruption of the supply chains due to coronavirus in China or any other country will be covered in the Force Majeure clause. In this regard, it is clarified that it should be considered as a case of natural calamity and FM may be invoked, wherever considered appropriate," the ministry wrote in the memo.

Finance Minister Nirmala Sitharaman, on Tuesday, met with industry and other bodies to evaluate the impact of coronavirus on India's trade. On Thursday, the minister met Secretaries to discuss the disruption in the supply of raw materials from China due to the deadly virus outbreak. The memo clarifies any doubts regarding trade impact due to coronavirus to be covered under FMC.

What is Force Majeure Clause?

A force majeure clause allows a party to suspend or terminate the performance of its obligation under a contract due to circumstances beyond human control such as wars, riots, crimes, or acts of God or natural calamities.

By invoking FMC for coronavirus, the ministry also allows either party to terminate the contract without any financial repercussion on either side if the reason of FM is delayed for a period exceeding 90 days. Companies carrying out government contracts that are dependent on affected areas must notify of force majeure at the earliest and cannot be claimed ex-post facto.

Furthermore, the memo also clarifies that if an FM situation, in this case, the coronavirus, affects the purchaser alone, the organisation must communicate with the supplier along similar lines.