This article has been written by Aman Khan Afghani pursuing the Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho. The article has been edited by Ruchika Mohapatra (Associate, LawSikho) and Dipshi Swara (Senior Associate, LawSikho).
We are all going through an unpredictable and unforeseen global pandemic that has affected everyone’s life in an adverse manner. Many people have lost their lives and many people have also lost their means of livelihood due to the pandemic. This has not only affected the manufacturing and supply chain, the stock market but has also affected the negotiation and execution of commercial contracts. It is true that the pandemic has changed the course of society for a considerable amount of time to come. Although medical science has developed at a considerable level, it still doesn’t offer complete protection from the current pandemic and also from future pandemics. The full effect of the virus is still uncertain and that is why it is very important that the business owners and companies should consider the possible implication of this pandemic on the negotiation and performance of contracts and should prepare legally for it. The issue has to be taken into consideration in the future of contract drafting and negotiation. So, addressing the key considerations that would impact the Negotiation of Contracts is important at present.
It is one of the most important clauses which is present in most contracts and has been a focal point of discussion during this pandemic. Force Majeure basically means the events for which one is not responsible or which are not in anyone’s control and cannot be prevented. One of the challenges faced by certain parties to the contract is the performance of contractual obligations during the time of this pandemic. In light of this pandemic, it has become inevitable to examine the wording of this force majeure clause as its implication largely depends upon its wording and that wording will have a large impact on the negotiation of contracts. It was also seen that whether this situation of COVID was a Force Majeure event or not would largely depend upon the case-to-case basis and each case has to be considered in isolation.
Force Majeure Clause has a wide meaning and it includes words like pandemic or epidemic which would make it impossible to conduct business, and the situations when this Force Majeure clause can be triggered and if COVID could be termed as Force Majeure event would also depend upon case to case basis and there isn’t a uniform principle in that regard. It is also required to note that at times an event that is there in the clause of Force Majeure does not necessarily trigger that clause because the situation is not adverse enough to trigger the Force Majeure clause or defense under that clause can be availed. For triggering the Force Majeure clause, it is extremely important that the situation in hand should be such that it is out of the control of either party but this beyond control thing is subjective and as far as the Corona is considered, there are many things that are within the control like maintaining social distance, etc. through which spread of corona can be handled, so these things should also be negotiated which drafting the Force Majeure clause.
So it is important that while drafting a contract, one should take into consideration the things that are supposed to be included in the Force Majeure Clause and the industry for which the contract is being made and one should anticipate the events which could have a bearing on that industry. Those events should be included and the events which would not have any bearing should be excluded.
There is a set of events that have to happen to conclude a contract. So conditions precedent are basic conditions that are required to be fulfilled before finalizing the contract. This clause is very crucial to negotiate upon. In this situation, the negotiation of a condition precedent would mainly depend upon the certainty of the deal, i.e. how parties are going to conclude the deal after forming the documents pertaining to the transaction. The parties should also negotiate to have lesser conditions precedent depending upon what conditions are in their control and what is not in their control. They are also required to keep in mind; the conditions that are not in their control but are mandatory like the regulatory approvals etc. The parties to the contract can also consider making some of the conditions precedents as conditions subsequent which can be fulfilled after the conclusion of the contract but keeping in mind the feasibility of that.
Long stop date
When the contract transaction is in the final stage, the difficulty could be faced by the parties in acquiring approvals pertaining to regulatory bodies or third party approvals, because in the events like COVID, the offices from where these approvals can be acquired remain closed. At times the parties can also fail to fulfill their obligations like conditions precedent, pre-closing obligation, etc., due to a lockdown because of the COVID scenario. At times the parties who are willing to transact mergers and acquisitions through schemes of amalgamation could not do as the scheme of amalgamation requires the Courts or Tribunal to be functional, which were closed during the pandemic. The lockdown restrictions had also impacted the stamping and registration of contracts.
So, given the above situations, it is very much required that the parties must negotiate to keep in consideration the extended long stop date (the period between signing and closing) and shall also include in the definition clause the compulsory or mandatory extension of the long stop date in situations of pandemic or catastrophes as it is prevailing these days (COVID).
It can happen that if the present situation of the COVID pandemic prevails for a longer period, there can be heavy fluctuations in the market, and due to that, changes would take place in the negotiation of indemnity clauses in any contract. Earlier there was trust between the parties but this pandemic has affected that trust. In the pandemic situation, it can be seen that in the near future, indemnity insurance will become a known product. It can also be observed that in the near future, parties will try to figure out and look for policy coverage to mitigate their losses which would arise because of loss of productivity and operations.
Representations and warranties
These statements of facts are being made by one party to the contract with the other party to the contract at the time of concluding and signing the contract. If in case any party breaches the representation and warranties that they had made, then the other party can definitely claim damages from the party which has committed breach for any loss which has been caused because of the breach. In this situation, certain considerations are supposed to be kept in mind while negotiating these representations and warranties which are:
- The party which is on the receiving end must try to evaluate the risks which could emanate because of this pandemic and accordingly ask for representations and warranties.
- The party which is giving the representation and warranties should try to include materiality qualifiers and shall try to disclose the facts concerning the crisis of pandemic in their disclosure schedule.
Material Adverse Change (MAC) effect
It is one of the most crucial provisions of an agreement. A MAC provision till the transaction is concluded. A MAC provision in a contract is an event or situation, which if in case occurs or is anticipated to occur, then it would bring adverse effect on the validity and enforceability of contract or on the assets, liabilities, or operation of the entity in question.
Here, the important question is whether this situation of COVID would qualify as a trigger to this MAC clause or not. So it can be said that for COVID to qualify as a trigger for MAC, the provision has to be assessed along with the express language of the contract and the very nature of the contract. So accordingly the negotiations have to be made.
Change in law
It can be observed that the government of our country has introduced various laws, measures, and guidelines to control the impact of COVID on the health of the people and on businesses. So it can be said that it is a good time to utilize the clause ‘Change in Law’. This change in Law clause helps either party to ask for termination or renegotiation of the contract, in case there is any change in the law because of which the party cannot fulfill its contractual obligations.
So in the prevailing pandemic situation, such clauses can be negotiated so that a way could be provided to allocate the increased cost which was incurred and suffered by the parties. The parties can also agree among themselves to limit the threshold of increased cost which has been suffered due to change in the law.
A detailed and well-worded change in law clause would benefit the party that becomes ineligible to qualify for the Force Majeure clause. Such a change in law clause becomes very important in the long run and therefore it has to be negotiated very carefully.
Finally, it can be said that in these testing times everything has been impacted, right from the normal day-to-day life of the people to the functioning of the businesses and even the whole nation has been put to a strict lockdown. So the clauses that were discussed were a few important clauses that are supposed to be negotiated keeping in mind the pandemic which we are facing. In conclusion, it can be said that there is no strict model for negotiation keeping the pandemic in mind, every contract or agreement has to be negotiated to keep in mind the type of relationship it is going to address, the type of Industry to which it belongs and how that industry may get affected by unexpected pandemics like COVID and the external circumstances that may create such an impact.
- Purvi Kapadia, Jinay Shah, “India: The Covid-19 Effect On Contract Negotiation”, available at: https://www.mondaq.com/india/litigation-contracts-and-force-majeure/954960/the-covid-19-effect-on-contract-negotiation.
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