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03-Apr-2020

The steady advance of the novel coronavirus (COVID-19) in India and across the world has seen a concomitant increase in the uncertainties for business on a daily basis. While the elephant in the room is  currently compliance and handling of employees and taking necessary steps as per government policies and relevant employment and labour laws, the impact on corporate entities is also far and wide on other aspects. [1]  One of the biggest gradual fallouts of this business disruption will arise from inability or difficulty in performance of contractual commitments. This will give rise to potential claims against counter parties across the board on account of non-delivery of goods/services, both from a domestic and international perspective.

A vital issue in this regard will be reliance and invocation of Force Majeure provisions in contracts. In this context, the manner of notification and the communication sent to counterparties will assume considerable importance, as the communications issued now will form the basis of cause of action for future claims against counter parties.  Therefore, it is vital that parties adhere to and comply with all contractual provisions and legal requirements as applicable.   Given the far-reaching effect of this pandemic, undoubtedly, parties will lend each other a helping hand and arrive at compromises and arrangements. However, in our experience, the necessary paper trail is sometimes found missing or inadequate when the dust settles, and sympathy and empathy evaporate.

While it is foreseeable that there may be relaxations and government bailout packages in certain sectors, such relief will likely be available only to parties that meet the certain criteria that may be announced from time to time. It therefore becomes vital that proper procedure of law is also followed despite the grim situation, to ensure one’s legal and contractual rights are fully safeguarded in the process. Having said that, it needs to be remembered that in order to seek relief from the performance of one’s contractual obligations, the contract must contain a force majeure clause. There is no such concept as implied force majeure.  Hence, you need to examine the force majeure clause in your contract, when you want to invoke or anticipate your counterparty’s possible invocation. In this scenario, please consider the following:

 

1.                   Examine the Contract – In India, whether the parties may be excused from contractual performance will largely depend on the wording of the force majeure clause in the contracts. Such clauses may be of various types – ranging from those which provide an exhaustive list of events that would constitute an event of Force Majeure (war, famine, flood, epidemic, pandemic etc.) to a broad standard into which events of various types may fall (for e.g., “unforeseeable events”, “factors beyond control” etc).  Consequently, it may be advisable to obtain legal advice at an early stage on whether COVID-19 will constitute an impediment sufficient to invoke the contractual force majeure clause in your case. 

 

Similarly, the force majeure clause in your contract may very likely prescribe a degree to which the event in question must impede contractual performance.  This may range from the high standard of the event “preventing” or “making impossible” the performance of the contract, to the relatively lower standard of the event “impeding” or “disrupting” the said performance.  Once again, early legal advice may allow you to safeguard your interests without missteps. 

 

This examination must also be undertaken where you contemplate the receipt of a force majeure notice from your contractual counterparty.

 

2.                   Examine the impact of COVID-19 – In light of the above, consider examining the precise impact of COVID-19 on your business operations in general, and your performance of your contractual obligations in particular.  You may not be entitled to invoke the force majeure clause in your contract merely if COVID-19 renders the performance of the contract more onerous or costly, or less profitable. Courts and Arbitral Tribunals in the coming months will likely be called upon to adjudicate whether parties that invoked force majeure clauses citing COVID-19 in this period were genuinely prevented/impeded (as the case may be) from performing the contract.  Financial difficulty has been held to not be sufficient by itself to frustrate a contract or render it impossible to perform in Indian jurisprudence from a statutory perspective.

 

As the recipient of a force majeure notice, attempt to understand whether and how your counter-party’s business is affected by COVID-19.  This may not always be easy in such uncertain times, especially when faced with a counterparty with unclear or opaque internal processes.  However, one may consider addressing pointed queries to the contractual counterparty itself on how COVID-19 is affecting business (if business relations allow this), or alternatively engaging industry-specialist consultants and advisers to help illuminate the same.

 

3.                   Take mitigating steps – The force majeure clause in your contract may require you to take all reasonable or possible steps (as the case may be) to avoid, overcome or mitigate the effects of the purported impediment. In such a case, it would be open to the counterparty to show that you could have taken steps that would have allowed you to perform the contract despite COVID-19. This may include viable alternative supply chains / technology-driven solutions etc.

 

As the recipient of a force majeure notice, consider contributing to your counter-party’s attempts at taking mitigating steps. This may include suggestions for your counterparty to consider and implement, as well as changes/concessions in your own contractual expectations to keep the contract viable.  While a party invoking a force majeure clause may or may not be contractually required to consult their counter-party on possible mitigating steps, it would certainly help for a party resisting such invocation to demonstrate before a court or tribunal that viable suggestions were discussed and ignored by the claimant party.

 

Further at this stage, it is important to consider suspension of contract, merely delaying the performance thereof or consider in light of COVID-19 the impact on the eventual performance if time was of essence, or if there has been a supply chain disruption, or if the contract was in a back to back arrangement with another party. In such cases, one can consider novation or repudiation of the contracts as deemed fit.

 

4.                   Proper communication in writing – Every contract has its own requirements which need to be adhered to. But during such times, one can lose track of the compliance requirements under the contract and the sector in general. Thus, it is vital that such communications are reviewed and maintained adequately, so as to pursue or resist future claims if any.

 

5.                   Procedural Requirements – The force majeure clause in your contract may also require you to notify your counterparty within a reasonable time of the impediment arising and affecting your performance of the contract. In the present case, the triggering event need not necessarily be the initial outbreak of COVID-19 in December 2019 and may constitute a particular stage in the advancement of COVID-19 or a particular governmental decision in this regard.  Please make sure such compliance is maintained and the nature of disruption is highlighted. It needs to be remembered that force majeure is a question of fact and the burden of proof in force majeure claims lies with the person claiming relief. As such, it is necessary that due diligence is conducted before putting up the claim and it would be ideal to identify the disruptions and the indulgence being sought from the counter party. Certain sectors also have independent reporting requirements that need to be complied with.

 

6.                   Contractual Alternatives – Pertinently, a force majeure clause may not be the only avenue your contract offers to deal with COVID-19 related uncertainties. Do examine your contract for a price adjustment clause, changed circumstances clause, hardship clause or other similar arrangement that may facilitate a mutually beneficial and conciliatory response to the present situation.

 

As a party anticipating the invocation of force majeure by your contractual counterparty, early adoption of one of these processes may help avoid the invocation of force majeure through a timely and mutual resolution of the uncertainties or difficulties created.

 

 

7.                   Frustration or impossibility to perform – If your contract does not contain an express provision on force-majeure, one can still examine if the necessary ingredients of Section 56 of the Indian Contract Act, 1872 are otherwise made out, and whether the doctrine of frustration or impossibility to perform are made out in this regard. This is a statutory provision available for all Indian law governed contracts. Frustration of contract being a Common Law doctrine, it will also be available in common law governed countries which may have statutory provisions similar to Section 56 embedded in their domestic laws.

 

 

Contracts Going Forward

This may also prove to be a trying time to negotiate and enter into new contracts. First, the sheer physical constraints imposed by city-wide lockdowns and travel restrictions may necessitate the negotiation and execution of contracts through electronic means. Please see here a helpful guide by the Firm on this point.

Second, in view of the indications that the public health effects and economic effects of COVID-19 will be felt for several months, contracts executed in the next 6-8 months should at least consider addressing the effects of COVID-19 in the express language of the contract. These efforts may range from mentioning “epidemics” or “pandemics” as impediments in the force majeure clauses in these contracts, to specifically mentioning COVID-19 and incorporating sector-specific effects thereof into the contract. As stated above, the role that can be played by clauses other than force majeure to address these uncertainties should not be disregarded.

Third, one can consider drawing up adequate agreements for suspension of contracts, delay in performance, extending the tenure etc. depending on the peculiar facts and circumstances of your case.

Fourth, and more importantly, do please consider the sensitivity around whether this is the right time to attempt a renegotiation.  This may create a negative perception for the future – so achieving a right balance is recommended.

 

Sector-Specific Questions/Considerations

In this peculiar scenario, the following is a list of the issues and considerations from certain specific sectors. This list does not include sectors such as Direct Tax and Company Law compliance in which detailed notes have already been generated by the specific teams.  

 

1.                   Real Estate – The Real Estate sector is facing considerable challenges on various fronts:

·         Rent and Conveyance: There arise economy-wide issues such as whether lease rentals are generally payable by businesses during business disruptions or government-mandated lockdown of business premises. Further transactions that require physical verification of originals and physical searches to check encumbrances, such as sales transactions, will likely have to be deferred. Further, certain transactions also require stamping and registration before they take effect (for eg., the passing of title in a sale transaction). These processes pose a very big challenge in the present situation of lock down and uncertainty.

·         Construction: There are significant difficulties in timely completion of work on account of worker unavailability, supply chain disruption etc. These challenges are compounded by the strict provisions of the Real Estate (Regulation and Development) Act, 2016, as well as buyer-centric contract conditions. Even if contractors can invoke force majeure clauses in their contracts, questions arise as to the relief/exemption to which such contractors would be entitled. Finally, resumption of work in the sector may also take significant time, given the mass return of migrant labour to their hometowns.

·         Hospitality: Questions arise in the hospitality sector on the retail front as well as in the relationship between operators and owners. As regards retail, operators are dealing with cancelled bookings (including bulk bookings) as well as operational challenges including health measures to be adopted, information to be shared with guests etc. As regards the owner-operator relationship, questions abound regarding the impact of a complete shutdown on performance tests, operators’ fees, owners’ rent, extension of tenure etc. 

 

2.       Energy, Infrastructure and Resources – COVID-19 has caused a drastic fall in the global demand for oil on account of the slowdown in travel, industrial production and personal consumption. Industrial plants/facilities in India may also not be willing to honour the take-or-pay clauses under their contracts with suppliers in the present situation.  A detailed write-up on these implications can be accessed here. 

 

3.       Alternate Energy - A sub sector of infrastructure which has seen a lot of traction in the past one week of the COVID-19 outbreak in India is the wind and solar energy sectors. Right from disruption of service providers, operation and maintenance (O&M) contract violations and force majeure notices, the sector has seen some interesting cost-benefit analysis calls being taken by parties. In our experience, O&M contracts tend to have lengthy lock-in periods. Due to the present epidemic situation, some entities have sought to terminate such O&M contracts or arrive at different commercial considerations for the same. Again, it becomes absolutely vital that all such communications are made strictly in adherence with the extant laws, sectoral guidelines and contractual provisions. Further, self-governing bodies and associations are also issuing specific guidelines and considerations regarding these issues.

 

4.       Insurance – There will be a spate of insurance related claims following the COVID-19 outbreak. The key questions which arise here include whether there is a duty to return amounts when certain losses have been covered where both parties to a contract have insurance cover as well as a duty on a party to claim the amounts payable under a contract from back-end insurance? There is likely to be a spate of litigation and arbitrations for the differential claims in such scenario and hence it is vital that the reporting and the notices being given out at present are adequately worded.

 

CONCLUSION

It is thus vital to note that Force Majeure claims are heavily dependent on the contract terms and conditions. Substantial cost benefit analysis and legal considerations need to be weighed in before invoking the same. It is a challenging task to determine if one should invoke the force-majeure clause or wait for the counter party to invoke the same in such situations. The practical guidelines mentioned above can assist in providing answers to some of these questions, but it would be prudent to review each contract and the situation surrounding it on a case to case basis for each entity.

In these testing times, every sector has been impacted and the entire nation has been put into an unprecedented 21-day lockdown. The Supreme Court of India took suo-motu cognizance on 23 March 2020 of COVID-19 and extended the limitation period for all petitions / applications / suits / appeals in any court / tribunal / forum in India, which is a welcome relief and testament to the fact that dispute resolution and claims will enter unchartered waters in the coming days. While access to courts is still available, it is limited, and right from the Supreme Court to the lowest magistrate courts, everyone is operating on extremely limited capacity. The 21 days lockdown imposed from 25 March 2020, provides an opportunity to reassess one’s businesses and  contractual relationships, in order to safeguard one’s rights. While we stay safe and honour the government directives, at the same time, it is important to not lose sight of one’s contractual and legal obligations and take all necessary measures to fortify and safeguard the same. 

 

Authors:-

Sudip Mullick (Partner – Real Estate)

Manavendra Mishra (Principal Associate – Dispute Resolution )

Aaditya Gambhir (Associate – Dispute Resolution )


[1] Our colleagues from our Employment, Labour and Benefits’ practice have released multiple client publications on these matters.  These are accessible on our firm’s COVID-19 Resource Center accessible here.  

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