A clause that was initially created to protect contracting parties is now being misused by buyers as a deadly weapon to avoid liability
As the world unravels the novel coronavirus, it has claimed millions of people’s lives, jobs, and freedom, and has forced economies to come to a staggering halt. Although most industries have been hit hard by this pandemic, the textile industry of Bangladesh can be said to have witnessed the hardest blow. The industry has lost billions of dollars due to delays or cancellations of orders. However, the worst part is that, a clause that was initially created to protect contracting parties is now being misused, typically by buyers, as a deadly weapon to avoid liability.
Essentially, centuries ago when the first contract was made, the most imperative element that the parties relied on was trust -- a trust that the parties will fulfill their obligations, come what may. But as the society progressed, this trust was codified into a document and a number of clauses were invoked to protect all the parties involved. One such clause is “force majeure,” a concept that is somewhat corroborated in Bangladeshi law under s.56 of The Contract Act 1872.
Professor Anowar Zahid (an expert in international trade law) defines force majeure as something unexpected and beyond reasonable human foresight, an occurrence of which makes the performance of the contract impossible and, therefore, discharges the parties from the contractual obligations. Such events could be war, hurricanes, fires, earthquakes, terrorism, etc.
Nevertheless, whether or not a party can plead Covid-19 as a force majeure event depends on whether or not the contract contains a clause in this regard. If it is there, still it depends on how it is crafted. For example, it (force majeure clause) may include terms like "pandemic," "epidemic," "quarantine,” "illness," "plague," "outbreak," or "disease." Even depending on the context, Covid-19 could arguably be included within the scope of broader catch-all phrases, such as "Act of God," or "circumstances beyond a party's reasonable control.”
But if the aforementioned terms like "pandemic" or "epidemic" are not included in the contract, Covid-19 might not be considered as a force majeure event unless the contract is being carried out in areas where the government has instructed all non-essential businesses to discontinue operation, consequently, deferring the performance of the contract.
If the force majeure clause itself is not included in the contract, a party may still rely on the principle of rebus sic stantibus, when the circumstance under which the contract was originally made has fundamentally changed. This is an exception to the principle of pacta sunt servanda (promise must be kept).
However, the court of law takes a very restricted approach to give effect to the force majeure clause or the stantibus principle, and performance will only be exempted if the event that caused the party’s non-performance is specifically identified. Essentially, the court wants to be satisfied with two important things, namely that the force majeure has the direct effect on the performance of the contract, and that the party relying on this clause has taken steps to avoid and mitigate that effect.
At this point, it is crucial to understand that if an event such as the Covid-19, results into economic hardships, that hardship does not amount to a force majeure event. Many of the foreign buyers are unfortunately using the Covid-19 situation as a force majeure event (although Covid-19 did not directly affect their performance in any way) and cancelling their orders without monetary compensation. Some of these orders had already reached the buyer’s ports! Such cancellation is utterly illegal because as mentioned, one simply cannot terminate or cancel an order because of economic hardships as it does not constitute a force majeure event.
Furthermore, force majeure clause can only be invoked in cases of an executory contract ie, a contract that is yet to be executed. Because the orders cancelled by the buyers are basically contracts that have been executed, there is no scope for the application of a force majeure clause.
These illegal cancellations have led to huge disruption in society as millions of workers lose their jobs and almost all of them experience unjustified pay-cut. Rubana Huq told DW that BGMEA is trying to secure workers' wages: "We are trying not to shut down the factories,” alluding to a calamitous situation that is principally caused because of these illegal cancellations.
To settle such illegal cancellations, the appropriate first step would be the buyers and sellers negotiating, with the aim of reaching a common ground. However, due to lack of dispute-resolution-provisions in the contract, negotiating becomes a difficult job to pull-off.
Hence, it is very important to draft a contract incorporating sufficient dispute resolution provisions such as arbitration, which can ultimately help both the parties settle disputes that may arise during the performance of a contract, without having to go to the court, thus maintaining privacy and speed.
The whole purpose of this article is to make people aware of the “force majeure” clause so that everyone can understand when such a clause is applicable, when it is not, and what can be done if such a clause is unjustifiably invoked. This article also aims to promote the incorporation of a dispute resolution provision in the contract in order to help people avoid exploitation, huge financial losses, and save the jobs of millions.
Anusha Islam Raha is an LLB (Hons) graduate from BPP University, UK. She is an LLM student pursuing her career as a teacher.