EFFECT OF COVID-19 ON COMMERCIAL CONTRACTS BY STALIN BENNY

INTRODUCTION

The Covid-19 has been the most knocking event in the 21st century so far. The whole world lives under the terrible state of lockdown in countering the COVID-19 occasion. The pandemic has put out an economic stagnation in the world market. It has led to restrictions on the free movement of people, goods and services. The entire economy has come to a standstill. It is in this hour of crisis, we have to look upon the effects of COVID-19 on the commercial contracts and how force majeure plays an important role in the functioning of the contracts across the period.

COVID-19 ON COMMERCIAL CONTRACTS

The commercial contracts are either by word or by written agreement. The written agreements being sounder, are the ones which are affected by the situations of the pandemic. The normal supply chain system has been disrupted. The entire system of production, construction, designing and delivering to the aimed individuals, have been completely distorted. Most of the organizations or parties perform their works and tasks on a contractual basis in our commercial world. If the marketing and supply of a product are done by one party, its production, designing and all other support factor services are done by another party.

The situation of a covid-19 pandemic may lead these contracts and their performances to be delayed, interrupted or maybe even terminated. This is done by the conscious will of any party to discontinue or delay the contract due to the pandemic shutdown. The other counter effects include involved parties like suppliers deliberately delaying the processes to delay or neglect the contracts. This may be by exhibiting COVID-19 as an excuse to move out from unfavourable or less benefit involved deals or else, it may be due to their genuine reason for the entire system being into the lockdown. Can a COVID-19 pandemic create a chance for the parties to neglect or terminate their contract! The answer to this question lies below

FORCE MAJEURE

The force majeure is nothing but a contractual provision, established on certain conditions of the interests of the parties (this French phrase means the supreme force). The force majeure is enforced as per the sections 32 and 56 of the Indian Contract Act 1872[i]. The provision allows the parties to alter the contract or even not perform it based on the occurrence of an unlikely and unpredicted event.

The event should be uncontrollable and unavoidable by the party looking for a change in the contract and the event should prevent or delay the party in fulfilling its contractual obligations. The event can be an Act of God or a natural disaster like flood, pandemics, earthquakes, etc. so the party can either delay the processes or even terminate the contracts in certain cases, provided that they have to present their side in front of the court and plead out of the financial penalty. This can be possible only if the force majeure clause is present in the contract terms of the contract. However, the parties have to prove that it has taken all necessary precautions and essential steps to avoid the event or to forecast the event earlier. The decision on the contract made by the court cannot be always the same. It is mostly based on the specific facts or terms in the contract of each case. The necessary clauses and essential facts to look upon on a situation of force majeure and it’s used, was recently well summarized in the supreme court case of Energy Watchdog V CERC (2017)[ii], by JUSTICE R.F NARIMAN[1].

COVID-19 AND FORCE MAJEURE

The Covid-19 has very evidently affected the chain supply and complete the production and transformation of products. Due to the lack of workers, suppliers and the important market structure in COVID-19 period, most of the contractual obligations could not be completed by the parties. The contracts are soon on the edge of collapse. Since the COVID-19 virus pandemic is an uncontrollable situation, which happened unexpectedly, it can be distantly connected within the force majeure clause and claimed.

Therefore, the clause provides an opportunity for the parties to reassess and come to different stand on the contract. Some parties may even view this as an opportunity to make amends in the price policy of the contract. This may be due to the inevitable changes and additional expenses incurred for the party to complete the deal. This extra expense may come in any form during the production, supply or even storage of the products during the shutdown period of the COVID-19.

However, it is mentioned in the guidelines provided by the Supreme Court that no party can claim free from their contractual obligations or liabilities, due to their negligence or wrongdoing. Neither they can take the “not guilty” side by blaming predictable events like monsoon rains, etc. therefore, all the parties looking for the lift of such liabilities have to prove themselves in the court about the unlikeliness of the event and also, show that they did all necessary mitigation to predict the event in the earliest, as per the available resources.

AFFECT ON THE BUSSINESS CONDITIONS

The COVID has not only endangered the business conditions in India, but it has shattered the performance of contractual agreements for some time ahead. Multiple parties are seeking out the court and other head administrations to check and assess their contract on the force majeure clause. This will distort the existing contracts and will tempt more people to use the pandemic as a ‘lucky chance’ to commit out of the contractual obligations.

They can come up with a new versed contract with more benefits or take advantage of the situation to negotiate better terms and conditions in the contract. These parties try to exploit the situation to gain more incentives and benefits. This has been already been effect possessing great challenges to the construction and manufacturing sectors. Indeed, the usage of force majeure event as a situation to exploit the contract to gain a better position is an amoral hazard in reality. Some even view this pandemic to drive better commercial terms as COVID-19 has resulted in a reduced number of competitors.

THING TO NOTE FOR THE PARTIES

All the parties looking to alter or terminate certain contracts should look into certain details. Any party seeking to terminate a commercial contract by the force majeure should be certain that the requisite elements necessary for force majeure were followed and was in place for the time and also, all the important notice formalities were performed.

 Another important factor which should be concentrated by the parties is that the termination provisions under the force majeure (prolonged), requires certain scenario like the whole of the activities of the contract to be prevented and not just the certain performances. Thirdly, it should be aware of the potential counterclaims by the opposite party for the breach of contract. The opposite party might raise issues like not enough mitigation taken by the party to assess and deal the pandemic earlier or May even question the full performance of all activities of the party.

NEW GOVERNMENT MEASURES

In the COVID-19 scenario, The Government has taken steps to ensure the greater good of the parties involved in commercial contracts in India. The Ministry of Finance of the central government of India has put out a memorandum (dated as 19-02-2020) concerning the “manual for procurement of goods, 2017”. It clearly says that if any issue or problems is arising in the financial sector and the completion of contractual obligations by the parties due to COVID-19, then those will be considered under the force majeure clause (wherever appropriate).

Also, the ministry of new and renewable energy came up with a similar initiative following “Solar Project Developers”[iii], to avoid financial penalty (in case of break of contract). All of these schemes have brought a certain relief to the situation in India, but it has not eradicated the issues arising from the pandemic and the contracts. The parties still have to appeal to the court and prove themselves to show that there was no alternative means or ways to perform the contractual obligations of the contract.

REMEDIES
  1. The language in the force majeure clause will determine the remedies possible. In the detail of the contracts, we can find a force majeure clause which in some case provide for the immediate termination of the contract in the occurrence of a force majeure event.
  2. In other cases, it might be mentioned in the contract that the contract will be put on hold until the force majeure event gets resolved and become normal.
  3. Some of the contracts and their written details must provide for the problems in time after which a party can move on to termination of the contract with issuing a written notice to the other party, in case if the activities or performances are suspended for a longer time.
  4. Some contracts may even demand a situation where the contracts are held and are in effect until the force majeure act even is over. This may mean that there will be provisions only for temporary suspension of the activities and obligations.
WHAT IF THE FORCE MAJEURE CLAUSE WAS NOT MENTIONED

In certain contracts, the provisions for the force majeure may not be there or the force majeure clause has not been mentioned under the commercial contract signed by the parties. In such a situation, the affected party or the party which could not complete its performance can then claim relief under the Doctrine of Frustration which has been mentioned under the section 56 of the Indian Contract Act, 1872.

This doctrine states that when a contract to do an act becomes impossible, or because of some event which the promisor cannot prevent, it becomes unlawful and the whole contract becomes void as the act becomes impossible. However, the party needs to show that its performances have become impossible due to the said event, to claim the contract is frustrated. Also, the party has to prove that it could not prevent the event in any case and the situation is never a self-induced event or occurred due to their negligence.

MEASURES TO BE TAKEN IN EXTREME SITUATIONS

In the extreme situation of the pandemic, each person has their part to do in the commercial world to make things smooth. The important measures to be taken for now are:-

  1. In case of force majeure, if the parties use the provisions under this form, it is essential of them to maintain all possible records of their activities to mitigate the event earlier and how the party tried to discharge its full potential to stop the occurrence of the event.
  2. The parties should keep a well-detailed record of all the notifications and important government orders issued during the time of the pandemic. This can play a major role in the later time of arbitration or litigation process
  3. The party should always try to assess and create an alternative way of performing the obligations. If this also leads to failure the party will indeed be able to counteract against a future claim from the other parties involved.
  4. The most important step is to analyze and study the force majeure clause and other terms in the contract multiple terms to ensure that no space for a claim in the later situation and the success of the force majeure event claim
  5. Maintain a record of all the expenses incurred additionally due to the situations of the pandemic.
  6. Make sure that all the notice formalities are done. Also, keep a track of all the mentioned notifications in case of termination of the contract in the commercial contract.
  7. There should ample evidence to prove that the contractual obligations could not be performed due to the force majeure event, the COVID-19 pandemic.
  8. There should be open discussions between the parties about the possibility of the continual of the contract and if termination, that too.
CONCLUSION

In short, we can understand there has been an increasing tendency to move out of the contractual obligations in the lights of the COVID-19 effects. More and more parties involved look for better terms in the contracts as the economic shutdown has led to the price drop and decrease in competition between parties. The government has even stepped into the field of commercial contracts to protect the interests of the parties.

Certainly, the rights of the parties should be preserved but at the same, it is essential to look upon both sides of the coin. Practically looking upon, the courts have to see this in a realistic way to ensure the smooth running of the economy. If more and more contracts get terminated and altered, it will lead to solid economic issues and the system have to keep its eyes open to them.

REFERENCES

[1]ENERGY WATCHDOG V CERC(2017) 14 SCC 80.

  • The Indian Contract Act, 1872
  • Specific Relief Act 1963
  • Energy Watchdog and Ors. V. Central Electricity regulatory commission, 2017. ((2017) 14 SCC 80)
  • https/mnre.gov.in – ministry of new &renewable energy

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect those of Katcheri.in.

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