This article is written by M.Arjun, a law student from Government Law College Thrissur and Sarthak Chawla. Here he discusses the impact of coronavirus on commercial contracts.
When was the last time when the whole world had an intense discourse on a common topic? Not in the recent past. Perhaps not even in the 21st century. The Covid-19 spread by the novel coronavirus has literally taken the world by storm. The virus which was first found in the Wuhan city of China is now proliferating, scrambling the medical, social and financial structure of the world nations. The affected countries are deploying stringent measures such as declaring emergencies, curfews and lockdowns to curb the spread of the deadly virus.
Apart from the serious medical issues, the pandemic wreaks havoc to International trade and commerce. The devastation caused by the coronavirus is clearly evident on businesses from a local Kirana store to a multinational corporation. The global supply chain mechanism is disrupted. The outbreak of the virus has literally given rise to various challenges for businesses throughout the world. The impact of Covid-19 on commercial contracts is growing and the contracting parties are forced to respond to the turmoil created by the extensive spread of the virus. There has been a growing uncertainty in the commercial relationship of businesses due to the performance of contractual obligations during the pandemic. In this article will discuss the potential implications of the coronavirus on commercial contracts.
Non-performance of contract due to pandemic
Coronavirus has affected a major chunk of businesses in such a way that the contractual obligations of the parties are either difficult to perform or impossible due to other safety measures of government. The related provisions for the situations when it becomes impossible to perform the contracts are given under Section 32 and Section 56 of the Indian Contract Act, 1872. Section 32 elucidates that the performance of the contractual obligation is contingent upon the happening or non-happening of a specific event. If the event has happened then the contract will be valid, otherwise, it would be “Impossible to perform” Whereas, Section 56 itself states “Agreement to do impossible act” which means that if performance of the contractual obligations has become unlawful or impossible to perform, it will be considered void.
The domestic economy is also seeing the declining graph since the lockdown, the market is dipping with each passing day and the government is taking every possible decision to not let this deadly virus affect industry or individuals in any possible way. Recently, Supreme court of India had invoked its powers conferred under Art 142 of the constitution to extend the limitation period in all cases, following which Ministry of Finance has also issued an office of the memorandum dated 19th February 2020 providing that “ Coronavirus shall be considered as a Natural Calamity and FMC may be revoked”.
This pandemic has already crippled the legal Industry and the courts are taking appropriate steps to reduce the stress among businesses and individuals. The court’s proceedings of urgent matters are happening through video conferencing. The supply chain of the domestic and trans-border businesses have been affected and hence contractual obligation issues are at peak. During this phase, all the parties to the contract and legal experts are coming together to review their contracts so that contractual obligations are fulfilled with no or minimum loss. Parties are also relying on the “Force Majeure” clause for discharging the commercial agreement obligations.
Impact of Force Majeure Clauses
Most of the commercial contracts usually incorporate a force majeure clause. A force majeure clause must be expressed. It prevents the parties from the risk of breaching the contract when an unforeseeable event occurs. Force majeure events are beyond the control of the contracting parties. The applicability and enforceability of the clause heavily depend on the language used under this clause. An express provision that identifies pandemics, epidemics or outbreaks as force majeure events shall help the parties to trigger the force majeure clause more efficiently. However, most contracts include Act of God and that of government skimp on terms such as disease and pandemic. The impact of coronavirus can be construed in both ways; the virus by itself as a natural phenomenon and measures such as social isolation, curfew and quarantine as government actions.
The party claiming under a force majeure clause should bear the burden to prove that his performance of the contract is absolutely hindered due to the coronavirus. It is necessary that the non-performance of the contract is not reasonably foreseeable. The party should show that he doesn’t have any alternate means to fulfil his obligation. A mere increase in costs for meeting the contractual obligation may not help a party to activate the force majeure provisions laid down in the agreement.
The contract may also have requirements by which the relying party should make a notice to the other party before invoking the force majeure provisions. All the necessary information regarding the force majeure claim including potential consequences and the time by which the force majeure event is expected to conclude should be conveyed. Such communications should be properly documented. The other party should make sure that all the notice requirements are met and the party relying on the clause has discharged the performance of the contract due to the coronavirus. The party may also check if the relying party has any potential alternative means to tackle the unforeseeable circumstances created by the virus. A contract may have conditions by which a prolonged continuation of a force majeure event confers a party the right to terminate the agreement with a written notice to the other party. Some contracts may also provide for holding the obligations until the end of the force majeure event.
The Government of India through an office memorandum dated February 19th 2020 has announced that the supply chain disruption caused due to the coronavirus outbreak comes under the term “Force Majeure”. However, it is to be noted that it applies to government procurements. It states that the parties invoking the force majeure clause is not free from the performance of the contract. Rather the performance of the contract is suspended for the force Majeure period. The party relying on the clause should serve a notice to the other party and cannot make any claim ex-post-facto. The memorandum also states that if the performance of the contract is delayed for a term exceeding 90 days, either party can terminate the agreement by written notice, without any financial impact on either party to the contract.
However, this may not be applicable to various private contracts. The parties should show that the coronavirus is the only reason for the breach of the contractual obligation. Applicability of force majeure provisions in such agreements are always subjected to the interpretation of the courts.
Invocation of Force Majeure Clause
It solely depends upon the interpretation of the Force Majeure clause by the courts which will be different from one contract to another depending on how vast its interpretation is possible. The party which is taking defence under the Force Majeure clause must prove that the event falls under this clause and the party has taken steps to perform the contractual obligations. In the absence of the Force Majeure clause, Doctrine of Frustration arises when there is an occurrence of any unforeseeable event and the fundamental purpose of the contract is frustrated. Under English law, frustration in contract leads to termination of the contract. However, there should not be any party’s fault in the process of frustration, otherwise, the contract will not fall under the purview of this Doctrine and one of the parties will have to face damages.
Potential Contractual Concerns
The coronavirus has potentially influenced a wide set of contracts; from a normal travel agreement in a booking website to a complex M&A deal. Sporting leagues, live concerts and conferences are getting cancelled or postponed. With much of Europe, US and Asia affected, trade deals across the world are drastically impacted. A wide variety of agreements such as in broadcasting, licensing, venue-hire and manufacturing can be affected by the cancellation of the events across the globe. Various contractual concerns arising for the parties include:
Complying with the contractual time limits
Contracts, especially commercial contracts mention a time frame within which the parties should fulfil the mutually agreed obligations. Time is an important factor in the performance of the contract. Contracts usually come with a time frame according to which the parties shall serve notices, make payments or even terminate the contract. Due to precautionary measures for restraining the spread of the virus and government actions such as lockdowns, businesses are having a hard time sticking to the time frame agreed upon in the contract.
Nevertheless, the wording used in a contract may explicitly include terms like “business days” which can make the situation even more complex. For instance, due to the spread of the coronavirus, the Chinese Government extended the holidays for Chinese New year. These extensions cannot be calculated as business days even and the time frame agreed in the contract can be breached. Even close down of government services can be debated as holidays. In such cases, it is always recommendable that the delaying party communicate the delay and enter into an appropriate arrangement. Relying on legal ramifications and force majeure clauses can further cause unnecessary delay and adversely impact the business relationship between the parties.
Termination and breach of contracts
Invoking force majeure clauses can result in an extensive cancellation or suspension of contracts. This situation is not good for any business relationships. During such instances it is necessary that the parties should review the contracts and identify potential risks. Non performance of the contractual obligations should be communicated by the parties beforehand. Since the impact of the virus is not reasonably foreseeable it will be better if the parties recognise that it is a tough time for all businesses and enter into good faith negotiations. Time extensions, waiver of certain obligations and various other contractual amendments can turn out to be an amicable dispute resolution procedure.
Contracts With No Force Majeure Provisions
If a contract does not expressly provide a force majeure clause or if the force majeure clause does not suffice the relevant circumstances, the parties can count on the “Doctrine of Frustration”. It is dealt under section 56 of the Indian Contract Act, 1872. A party to a contract can invoke the doctrine when the performance of a contract is frustrated or made impossible by an unforeseeable circumstance or situation. Impracticability in performing the contractual obligation cannot be claimed if the impracticability is a result of actions by the defendant party.
The party relying on the doctrine should prove that there is a material change in the circumstances relating to the contract from its time of creation. A frustrated contract shall be deemed to be terminated. It is because a frustrated contract cannot be completed as a consequence of the unforeseen event and this supervening event renders the purpose of the contract. However, the potential applicability of doctrine of frustration is limited. The court strictly requires the parties to demonstrate the factors by which the performance of the contract is impossible. The parties should also show that the contract has become different or redundant as its central purpose is affected by the unforeseeable event. Parties have to make a proper review of their contracts to seek other reliefs from clauses such as “representations, warranties, indemnity, limitation of liability” and other relevant clauses.
Effect on Various Contracts
The pandemic is said to have an effect on a range of agreements such as employment agreements, loan agreements and insurance agreements. Employers are mandated as per law to provide a safe workplace environment to its employees. Facilities like work from home, emergency leave, medical leaves etc are said to have a profound impact on various employment agreements. A lot of countries are coming up with special guidelines and legislations to provide paid leaves for many employees. Various labour law issues such as work hours and wages, lay offs, retrenchments, workplace safety, employee travel etc are on the rise.
The outspread of coronavirus is having a significant impact on businesses. Businesses are forced to default their loan thereby breaching the loan agreement. Banks are forced to extend the period for repayment of the loans. Agreements may be altered so that they waive any breach of the same for a considerable amount of time.
Stakeholders should review their insurance policies considering the financial and medical injuries caused by the virus. Businesses are getting disrupted and large events throughout the world are getting cancelled. Businesses generally have business disruption insurance policies. The extent of protection offered by these policies due to the spread of virus should be reviewed. Companies should comply with all the notice requirements. In addition, travel insurance issues are also on the rise as companies are circumventing the impact of coronavirus on their policies.
Various effects of the coronavirus is also said to have an effect on the “Material Adverse Change (MAC) of a business. MAC refers to a change in circumstances which significantly reduces the value of a company. MAC may give a party a right to terminate or rather avoid the performance of the agreed contract.
Securing Force Majeure Relief
The following considerations have been evident for having a defence under Force Majeure Clause:
- Drafting Language and interpretation: As noted above, the word “epidemic” should be expressly mentioned under the Force Majeure Clause for discharging of obligations as there is no definition provided under Indian law. In the current situation, the parties can claim defence of Force Majeure through the series of events or circumstances for Example Lockdown for 21 days and after that extension of more 15 days will constitute a series of events, if the contract effective date is after 22nd of April.
In my opinion, the series of events started in January when WHO declared the Public Health Emergency of International Concern. The contracts which were in process during this phase should have possibly included the context of the Pandemic or any information related to that, as the court will look at the steps taken by the party under the obligations. The court will take the series of events in consideration to corroborate that the events were beyond reasonable control and it prevented or delayed the performance of contractual obligations while delivering the judgment.
A Force Majeure may also be drafted as an inclusive list with a catch-all provision that Force Majeure clause could be extended on account of any other event unless that other event is specially named in a list of excluded items. The interpretive rule of ejusdem generis which means that a general term describing a list of specific terms shall denote other things that are like the specific elements.
Occasionally, events that are missed out of force majeure list of events could be brought back within its fold if those events were themselves the consequence of an event of force majeure.
Adoption of techniques such as work from home and video conferencing can lead to a surge in e-contracts. As per section 10A of the Information Technology Act, 2000, e-contracts are valid and enforceable. They can be entered into through communication mediums like email, fax or other internet mediums. Electronic documents are also admissible as evidence before the courts as per section 65A of the Indian Evidence Act.
Given the present world scenario, travel restrictions are imposed in various parts of the world. Parties to a contract can rely on e-contracts for making urgent contractual arrangements. The parties should keep in mind that all the essentials of a valid contract listed by the Indian Contract Act, 1872 should be met. Electronic signatures should be reliable and the parties should prove that the parties agree to be legally bound by the contract. However e-contracts do not apply to negotiable instruments, wills, trust deeds, power of attorneys and contract of sale of immovable property. The use of e-contracts can be a big boon in the present plot of lockdowns, curfews and other travel restrictions.
The outbreak of the virus is growing rapidly and more countries are starting to get affected. World nations are instructing their population to stay home. The medical, financial and legal issues created by the virus are becoming critical day by day. Law Firms and attorneys are confronted by a variety of legal issues arising from the coronavirus. Contractual issues especially in relation to force majeure clauses are a consequential impact of the virus. In addition trade related disputes, employment issues and insurance coverage issues are some other legal issues arising from the outbreak. Parties to an agreement should make a strict review of their rights and obligations with their counsel. The virus will eventually be conquered but the potential implications of the virus on the economy is expected to be huge. Hence it is advisable for businesses to understand the circumstances and consider commercially sensible solutions such as making amendments to contracts, extending the time of performance or by making other changes in the performance of the contract.
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