Companies, suppliers examine Force Majeure as India-Pakistan tensions escalate

Force Majeure is a clause in the contract that excuses parties from fulfilling their obligations due to unforeseen and uncontrollable events like war, pandemic and natural disasters such as floods.

Companies and suppliers with ties to northern border states are examining the Force Majeure clause in their contracts as tensions continue to escalate between India and Pakistan, people with direct knowledge of the matter said.

These companies are constantly monitoring the supply chain to ascertain which parts of their supply chain could be effected and are examining the contracts that could be at high risk of default due to the unforeseen developments. This also has other financial impact on the companies including surging of insurance premiums for such high risk contracts, say experts.

There has been significant escalation between India and Pakistan in the last few days. Companies from auto, consumer and pharma companies that strong supply chain links to Punjab, Rajasthan and western Gujarat will be the most impacted by the ongoing tensions, say industry experts.

Force Majeure is a clause in the contract that excuses parties from fulfilling their obligations due to unforeseen and uncontrollable events like war, pandemic and natural disasters such as floods.

“So far, there has been no major disruption, however, situation remains volatile and hence companies want to have some idea regarding potential impact. As a part of this exercise force majeure applicability is being explored," said a person cited above.

Five years ago, during Covid-19 outbreak, the force majeure clauses had come into play due to lockdowns and travel restrictions. While war is covered under Force Majeure, its applicability will be very different from the Covid-19 time, say legal experts. In Covid-19 there was a disruption across the board allowing many companies to exercise the force majeure clause.

But in war, companies need to show how war directly impacted their ability to fulfill the contract. Like for instance, a shipping company failing to deliver a shipment on time may claim force majeure if the delay was on account of some war related issue issues.

"War is generally regarded as Force Majeure event. Force majeure event is based upon on a legal doctrine that excuses parties from contractual obligations when events beyond their control make performance impossible or impractical. However, one needs to show how the war has made his performance as contemplated in the contract an impossibility. Accordingly, one needs to show the evidence of this impossibility before invoking Force Majeure" said Amit Singhania, founder, Areete Law Offices.