Covid-19 has resulted in a spate of uncertainties that both governments and businesses are little prepared for. The Central and State governments have so far announced various relief measures such as financial assistance and subsidies to businesses, enhancement of timelines for statutory compliances, waiver of limitation in court proceedings, assurance of payment of salaries despite being in a state of lockdown, and subsidised food and other such measures.
With respect to contracts entered into by both governments and private parties, a standard legal response has been to seek declaration of the lockdown and disruptions in supply chains created by Covid-19, as a situation of force majeure — a French term that translates to a “superior or irresistible force”. Most contracts have force majeure clauses, that may range from generic terms covering all events or combination of events outside the control of the affected party, to extremely limited and narrow provisions which allow for only very specific events, that allow for suspension of contractual obligations.
More than a month before the Central government imposed a preventive lock down across India on March 24, the Finance Ministry allowed for declaration of force majeure when the government was engaged in procurement of goods or services, if the supply chain for the relevant project/contract was affected by Covid-19.
This was followed by the Ministry of New and Renewable Energy directing its implementing agencies (such as SECI and NTPC) to grant suitable “extension of time” for contracts based on evidence produced by developers in support of their respective claims of disruption of the supply chains due to spread of coronavirus in China or any other country.
The main limitation of the force majeure clauses in contracts, however, is that these are typically contested by counter-parties as regards the duration and extent to which a party can seek suspension of obligations, which will inevitably result in a flurry of disputes and terminated or suspended contracts. This will likely result in parties that are already burdened with economic effects of Covid-19, soon having to deal with legal suits for contractual damages or penalties.
Other than force majeure clauses, some contracts may also provide for situations relating to “change in law” and “change in scope”. The legal measures enacted by the government such as those relating to the ‘lockdown’, are also changes in laws of India.
It is apparent that apart from the immediate material and adverse impact of Covid-19 during the period of the lockdown, there will be the continued impact on parties for at least 6-12 months, depending upon a relevant sector. There will be a general tendency for individuals as well as enterprises to move towards conserving cash, and therefore sectors such as travel and tourism, hotels, automobile, real estate, and electronic goods, may take several months for a full recovery. Construction projects across infrastructure sectors are also likely to face knock-down effects in terms of delays in supply of raw materials, labour or commercial viability.
To resolve the uncertainties resulting from the situation, India should consider suitable statutory intervention that can provide clarity and certainty on how Covid-19 related effects should be addressed. This is likely to play an effective role in containing the spectre of multiple disputes.
Singapore passed the ‘Covid-19 (Temporary Measures) Act, 2020’ on April 7. The ‘temporary’ measures under the Act will be in place for an initial period of six months from the commencement of the law, and its duration may be extended for an additional period, which, as of now, is not intended to last beyond a year.
These measures seek to protect Singaporean enterprises from legal actions for breach of contractual terms, if such non-performance was caused to a material extent by Covid-19. These include protection from legal actions for payment of damages, insolvency proceedings, enforcement of security over immovable and movable property, encashment of performance bonds given pursuant to construction contracts, or termination of leases for non-residential purpose due to non-payment of rent. The Act also provides relief in respect of forfeiture of deposits for events and tourism-related contracts where the non-performing party postpones an event.
The overall objective and intent of the Singapore Act is to provide a clear mechanism for preventing a spate of disputes and mitigate the economic fallout of Covid-19. A similar law in the Indian context will ensure greater certainty and objectivity by streamlining the criteria and factors to be considered for assessing the required relaxation of contractual obligations.
The writers are Partners at Clarus Law Associates, New Delhi