Current Affairs Brain Booster for UPSC & State PCS Examination
Topic: What Counts as ‘Act of God’
Why in News?
- Attributing the shortfall in Goods and Services Tax (GST) collections to disruptions due to COVID-19, Finance Minister Nirmala Sitharaman said the economy is facing an Act-of-God-like situation.
- The COVID-19 pandemic and the lockdown imposed across the globe to contain the spread of the virus has resulted in major disruptions in economic activity.
- Businesses are looking towards a legal provision — the force majeure or “Act of God” clause — to cut losses.
- On February 19, The Finance Ministry had issued an office memorandum inviting attention to the force majeure clause (FMC) in the 2017 Manual for Procurement of Goods issued by the Department of Expenditure clarifying that the pandemic “should be considered a case of natural calamity and FMC may be invoked, wherever considered appropriate”.
Force Majeure Clause
- The ‘Act of God’ is a clause used in private contracts to indemnify one or both parties from carrying out the terms of the contract due to events beyond their control.
- The law of contracts is built around a fundamental norm that the parties must perform the contract. When a party fails to perform its part of the contract, the loss to the other party is made good. However, the law carves out exceptions when performance of the contract becomes impossible to the parties. A force majeure clause is one such exception that releases the party of its obligations to an extent when events beyond their control take place and leave them unable to perform their part of the contract.
- FMC is a clause that is present in most commercial contracts and is a carefully drafted legal arrangement in the event of a crisis.
- Generally, an “Act of God” is understood to include only natural unforeseen circumstances, whereas force majeure is wider in its ambit and includes both naturally occurring events and events that occur due to human intervention. However, both concepts elicit the same consequences in law.
- The stance of the Centre in this matter is extremely worrying in a number of respects. For one, the entire burden has been put on States at a time when they can scarcely afford it.
- More importantly, the language used by the Centre, claiming an ‘Act of God’, reveals a distressing tendency for the Centre to step back at the same time when it is most needed.
- It is worrying that the Centre conceives of itself as a private player in a market economy, when what is urgently required is for it to transcend this role.
- In adopting the logic of a private contract, the Centre is jeopardising the social contract upon which our democratic system rests.
- While private entities in a situation of profound economic distress may claim force majeure to protect against risks, the government of a country must not do so.
- In China, where the COVID-19 outbreak originated, the Council for Promotion of International Trade is issuing force majeure certificates to businesses. China’s Supreme People’s Court had recognised the 2002 SARS outbreak as a force majeure event.
- Singapore enacted the COVID-19 (Temporary Measures) Act in April to provide relief to businesses that could not perform their contractual obligations due to the pandemic.
- The Paris Commercial Court in July ruled that the pandemic could be equated to a force majeure event.
- In the UK, the Financial Conduct Authority has brought in a test case before the High Court to look into business insurance contracts and interpret the standard wordings in such contracts.