Corona Outbreak- Legal implication for Corporates

COVID-19, the new virus which has taken the world by storm and upset the entire humankind has brought the business world to a complete halt.

COVID-19, the new virus which has taken the world by storm and upset the entire humankind has brought the business world to a complete halt. A scenario about which someone like Bill Gates had been warning but was not paid heed to. India is under a complete lockdown and so is most part of the world.  Because of this the corporate world is at a loss as they have been completely caught unawares so there is no preparedness in this sudden lockdown.

The only services which have been permitted are the essential services, defined under various notifications issued by the Government, required for the daily living.

Due to this sudden lockdown majority of the companies involved in other businesses and mainly into export of their products would have to rethink their operation and governance. As of now since only essential services are permitted the other companies engaged in non-essential services are forced to shut down their operations spiralling into non fulfilment of contract terms leading to commercial disputes, employment issues, default in repayment of loans to name a few.

COMMERCIAL DISPUTES:

The fact is that now is the time when the contracts will have to pass the scrutiny of Courts in India and around the world to let the parties get an advantage of the provisions of the contract for defaults being made during this period.  For a scenario like this the clause of the contracts of which the parties may try to take umbrage would be the Force Majeure which means unforeseeable circumstances that prevent someone from fulfilling a contract, which is also called an Act of God. The general clause in a contract for Force majeure reads as under:

Neither Party shall be liable for failure to perform its obligations under this Agreement to the extent such failure is due to causes beyond its reasonable control. In the event of a force majeure, the Party unable to perform shall notify the other Party in writing of the events creating the force majeure and the performance obligations of the Parties will be extended by a period of time equal to the length of the delay caused by the force majeure.

If the period of non-performance by either party exceeds a period of 30 days, the other party may by giving a written notice, terminate this Agreement. Such termination shall not relieve the other party of its payment obligations under this Agreement for such services rendered before the termination.

In case of such a clause the parties can seek relief as the circumstances currently are beyond reasonable control. However if the clause specifically mentions the conditions constituting force majeure and does not have any blanket cover then the parties may find it difficult to take refuge of this clause as well, since pandemics are something which the current generation has not seen and was beyond fathom. In such cases it will be completely left to the judgement of the Court and will be subject to interpretation.

However one thing to be noted is that even the force majeure clause rarely relieves the parties of financial obligations.  So the party failing to complete its obligation for supply may get relief, but the party supposed to make payment for part of the contract fulfilled by the other side may not have the same advantage.

The Indian Contract Act also protects non performance of obligations under such unforeseeable circumstances as a frustration of contract. Section 56 reads as under:

Contract to do an act afterwards becoming impossible or unlawful.—A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.

The commercial disputes are thus going to increase and shall be subject to Court’s interpretation of the current crisis and the business scenario around it. In these circumstances the corporates can attempt to renegotiate their contracts to cover the current crisis and fulfilment of the contract to a deferred date.

EMPLOYMENT DISPUTES

The current situation is going to impact the corporates financially and the direct effect will be on the employees working there. Layoffs are only a thing of time but a definite realty because the entire financial burden on companies will force them to cut cost which will result in retrenchment, though there is an advisory from the government not to lay off and to pay the full salaries to the employees. This may result in employment related disputes and litigation, as the retrenchment is not being done because of a breach of contract by the employee but because of the fact that the company cannot afford to keep the hire. The employment contracts and their clauses shall be tested in Courts and it shall have to be seen as to how far the Courts consider the fact that the circumstances were extraordinary to support the companies.

DEFAULT IN REPAYEMNT OF LOANS

A lot of business in India is dependent upon financial assistance from banks whether it is a big corporate conglomerate or an MSME. The banks have a lot at stake currently. Though some relief has been granted to the retail loan clients but that it is intermediary and is only for a certain period. This relief in the long run alters the total interest payable and the period. In the current scenario not many of these businesses will be able to repay their loan and their chances of being declared an NPA is quite high. The flip side of the small and medium sector is also that they were dependent upon China as a big market for getting their raw material or the commodities for resale. It will take them a long time to recover from the present setback. Thus the Courts are going to see a flood of cases of recovery being filed by Banks and other financial institutions.  The present does look a little grim for the corporate sector and we are definitely getting into recession. Businesses will take some time to recover from this aftermath but the economy should bounce back.

A clear legal eye on the various difficulties that might be faced by these Corporates can help them have a path charted out to follow once things settle down and the lockdown is called off.