CLAT Legal Reasoning
As the name indicates, CLAT Legal Reasoning section has a distinct element of law. To crack these questions, ideally, a candidate has to keep reading any news and opinion articles from at least one newspaper. A basic idea regarding the Current Affairs of legal issues will drastically improve the reading speed and comprehension. Though deeper understanding of law is not mandatory, keeping oneself abreast of the current happenings will prove to a competitive edge. The passages have been selected carefully to encompass a legal context in them.
As with the CLAT Logical Reasoning section and the CLAT English Language section, adequate attention has been given to ensure the passages are from a range of topics. Needless to say, the questions are pegged exactly at the level of difficulty of CLAT, with an eye on the samples published by the Consortium of NLUs.
Enough said. In for some serious Legal Reasoning? Let’s get cracking!
CLAT 2020 Legal Reasoning: COVID-19 induced 'Force Majeure' in Contracts
The COVID-19 pandemic has taken the entire world hostage in less than four months, and
the global economy has been hit the hardest with governments across the globe implementing
stringent policies including lockdown to control the coronavirus outbreak. The pandemic
today presents unprecedented challenges and impediments to businesses in conducting their
normal operations. The lockdown across the world has caused delays in the performance of
contracts and transactions. Now, the question that arises is whether the current situation can
enable parties to a contract to alter their obligations with non-compliance of terms neither
being regarded as a "default committed by any party" nor a "breach of contract"? There are
certain well-accepted practices for dealing with such extraordinary situations in commercial
transactions by the inclusion of force majeure & material adverse effect (MAE) clauses.
Determination of the types of circumstances so covered by the force majeure clause
contained in a contract is essential. Provisions of force majeure often cover natural disasters
like hurricanes, floods, and earthquakes as "acts of God." Other covered events may include
war, terrorism, civil disorder, fire, disease medical epidemics or by reasons of applicable laws
or regulations. Broadly, the Courts have interpreted the term "Force Majeure" as an event that
can neither be anticipated nor controlled by either of the contracting parties. A force majeure
clause applies in the context of ongoing contractual arrangements, whereas, an MAE or
material adverse change (MAC) clause applies to the allocation of risk in transactions before
their closure or completion. Pandemic and related consequences such as government action is
a type of event covered by a force majeure clause, however, its impact on the affected party's
ability to perform its contractual obligations may vary depending upon contractual terms. It is
common for force majeure clauses to specify the impact that the event or circumstances in
question must have, in order for the clause to be triggered. References may be made, for
example, to the event or circumstances having "prevented", "hindered" or "delayed"
performance. These terms require different levels of impact on performance before a party
can claim recourse to these clauses. In other words, the force majeure and MAC clauses act
as an exception to what would otherwise be treated as a breach of contract. Certain contracts
may state that, if a force majeure clause is applied, the contract may automatically be
terminated. On the other hand, some contracts may even state that the duty to fulfil the
contractual obligation may be suspended for a certain period of time and if the force majeure
event is not curbed or treated even after such time, then eventually the contract may be
terminated. Though there cannot be a one-size-fits-all solution to this question, and it depends
upon how the force majeure clause is worded in a specific contract; and in the absence of the
same, applicable laws related to the same will be required to be taken into consideration.
[Excerpt from Business Today, by Ranjana Roy Gawai, April 17, 2020]
Imagine, there is a domestic commercial Contract for supply of certain goods for certain price between A and B. However, in pursuance of the same, both A and B forget to negotiate and agree on the terms of a Force Majeure event and the Contractual document does not contain the Force Majeure clause. In such a situation, what would be the fate of the Contract in the event like that of COVID 19?
- As the parties did not negotiate on the Force Majeure Clause, either of them cannot take an exception to the Breach of Contract.
- The parties can invoke the Material Adverse Change Clause.
- In absence of such clauses in the Contract, the Courts may resort to the applicable law, i.e., the Indian Contract Act, 1872 to give relief to the parties.
- None of the above.
Explanatory Answer
Having not agreed on a force majeure clause before-hand, an event like COVID-19 is completely unanticipated by both parties. In such a case, there is a need for a third party to resolve disputes. “Courts have interpreted the term "Force Majeure" as an event that can neither be anticipated nor controlled by either of the contracting parties.”. Also, only Force Majeure clauses are applicable in the event of an ongoing contractual obligation. Hence, the parties cannot invoke the MAE clause – making option (b) wrong.
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