Impact of COVID 19 on commercial contracts

The outbreak of COVID-19, the pathogen causing coronavirus has been widely reported and the suffering consequences continue. Countries around the world have imposed mass travel bans, temporary lockdowns, and extremely restricted human movement. The World Health Organization has declared the outbreak as a pandemic. Domestic and transnational trade has come to an unprecedented standstill. It has led to a crippling effect on the domestic market and its network of supply chain. The lethal virus already has the legal industry in wrangles. Recently, even the Supreme Court of India had invoked its plenary powers under Article 142 of the Constitution to extend the 'limitation period' (by way of suspension) in all cases against the usual timeline as enumerated under the Limitation Act, 1963.

There has been adverse impact on the world economy. Such a negative impact has affected the domestic market chain at its core. The immediate results were supply-chain disruptions, 'unintentional' and imminent delay in performance and carrying out of the 'contractual' obligations. From construction contracts to manufacturing and supply agreements, the variety of contracts which are likely to be affected by the spread of COVID-19 is undoubtedly humongous. Additionally, this new impossibility brings out challenges against land acquisition, financing of big projects and delay in engineering and technological research and advancements. Counterparties, including suppliers and professional service lenders (e.g. Independent Consultants & Accountants) may seek to avoid immediate performance, by citing delay or non-performance borne out of an unexpected event. Parties may cite this pandemic as a ground for opting re-negotiation of price and terms of the contract.

 

At this unfortunate state of affairs, parties to commercial contracts and legal experts, nationally and internationally are continuously reviewing and assessing their contractual provisions for seeking suitable rights and obligations, specifically on the potential routes for discharging the commercial arrangement or contract, particularly force majeure and change in legislation. It squarely forms a defense against the grunt norm of pacta sunt servanda (latin for "agreements must be kept").

Safeguards of Commercial Contracts​

In the light of this current pandemic, few safeguards to be resorted in commercial contracts are:-

  1. Re-assess and review the contract in which the force majeure, change in legislation and change order clause exists and analzse the relevant factors and incidents mentioned to initiate the 'rule to excuse'.

  2. Ensure 'all' or 'any' notification procedure as prescribed in the conditions of the contract. Comply strictly with the conventional 'notice' formalities.

  3. Mutually (along with the other parties to the contract) analyze the impact of the outbreak of COVID-19 on the contract and its performance.

  4. Initiate a chance to perform the contract in a possible alternative way; a failure will safely rule out a future 'defense' with respect to an alternative method of performance.

  5. Collect evidences to accord non-performance of the obligation to the sole event, in the current scenario, the pandemic.

  6. Keep a strict record of the various notifications and orders by government and administrative bodies. The same may be evidenced during the litigation/arbitration stage.

  7. All records with respect to unavoidable additional expenditure incurred must be maintained.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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