The AK Law Chambers - COVID-19, Lockdown and Commercial Impact Series

Introduction and flagging the issues

Much has been discussed on the far reaching, worldwide financial, economic and social impact of COVID-19. However, closer home much remains to be said on the legal implications of the COVID-19. To this end, over the next few days, through a series of articles, we seek to analyze and classify the issues under the following heads:

1. The impact on contractual bargains;

2. A sector specific primer of contemporaneous steps for protecting one’s interests;

3. The impact on employment issues and issues of corporate governance; and

4. Other miscellaneous issues including problems of adjudication.

The Impact On Contractual Bargains

Most contractual obligations would certainly be impeded by recent developments. The extent varies. For instance, a contract for sale of goods with a specific deadline requiring cross border transportation would almost certainly become impossible to perform. A contract to construct a power plant, on the other hand, maybe pushed back but is not likely to become impossible to perform. The point in question would be whether time is of the essence of the contract. It could be said that if the question were to be answered in the affirmative, issues pertaining to frustration or impossibility of performance of the contract (covered by Section 56 of the Indian Contract Act) are more likely to arise. However, if the answer to the question were in the negative, issues pertaining to the interpretation of the force majeure clause and the impact of the same would be more relevant. Of course, where the recent developments have had the effect of changing the very basis of the bargain, aspects of frustration could also be attracted but these would be rare and restricted to the cases falling within the ambit of the test laid down in Alopi Parshad’s case (Alopi Parshad & Sons Ltd. v. Union of India, AIR 1960 SC 588).

What is the conceptual difference between force majeure and frustration? Does the basic premise that in a force majeure situation loss lies where it falls hold good universally? Can any exceptions be carved out? What is the role of causation in determining where liability should be pinned? Illustratively, if a particular loss is occasioned independently by two factors - first owing to a party’s breach which is not connected with the force majeure event and second by virtue of the force majeure event, can the breaching party use the defence of force majeure?

Where there is no force majeure clause, are there any recourses that a party has to adopt to keep the contract alive (i.e. not resort to a frustration argument) and yet argue that it has not committed a breach? What is the test to determine whether a contract stands frustrated? Under what circumstances can claims be made even in cases where a contract stands frustrated ? What is the concept of restitutio in integrum and how does it apply to frustrated contracts?

Another contractual issue that arises is whether the restrictions placed by virtue of the notifications issued by the Government of India under the Disaster Management Act, 2005 would constitute a “change in law” and if so, how does one construe a change in law clause harmoniously with a force majeure clause? Can a change in law clause be used to make a claim for damages even where the change in law is owing to a force majeure condition?

Yet another controversial aspect of contract law that may arise pertains to quantification of damages and the concept of remoteness. If the loss caused is consequential to a breach of the other party but is accentuated because of the prevailing epidemic and lockdowns, would such loss be too remote to claim ?

A Sector Specific Primer Of Contemporaneous Steps That Need To Be Taken To Protect One’s Interests

Based on the conclusions we draw from the legal issues set out above, we will be attempting to provide an industry specific primer on steps contracting parties would have to take to protect their interest in the future. A lot of the legal concepts explained will need to be supported with a thorough factual analysis and this will have to be done contemporaneously. Illustratively, whether a construction project is actually delayed because of the lockdown or whether there is a predominant delay event attributable to the parties (such as a failure to hand over the site or certain crucial drawings for construction by the employer) would require a delay analysis to be prepared. Our sector-wise analysis seeks to set out such requirements.

The impact on employment issues and issues of corporate governance

While the United States of America has recorded an unprecedented number of unemployment claims owing to COVID-19, India’s layoff rates are also not too far behind. We seek to discuss issues pertaining to termination of employment contracts, notice periods thereof, potential options to navigate this period, and issues pertaining to corporate governance. We will also address the effect of frustration and/or force majeure clauses in tenancy and service contracts.

Other miscellaneous issues including problems of adjudication

We are already experiencing difficulties in dispute resolution with almost all Courts closed except for urgent hearings. However, the proliferation of e-courts and e-filings in response to the paralysis in judiciary, as it were, augurs well for efficient dispute resolution. We analyze the opportunities the future may hold for developing an effective Online Dispute Resolution Model. Besides, we seek to study other miscellaneous issues such as the legal regime relating to lockdowns.

The authors are Anirudh Krishnan and Goda Raghavan, Partners, AK Law Chambers.