COVID-19 has had a major impact on contractual obligations all across the globe. The Pandemic has brought the world to a standstill. With nation-wide lockdowns being imposed in countries across the globe, the world is facing an economic crisis.
Parties have been unable to fulfill their Contractual obligations. The Pandemic has proven as a true test of the effectiveness of contracts. Sub-standard contracts have rendered a lot of parties remediless and have caused not just financial but reputational loss to businesses.
In the wake of the COVID-19, various elements of contracts have gained significance. These are the same aspects which were not even given a second glance. The essence and prominence of contractual clauses such as the Force Majeure Clause, the Termination Clause, the Suspension of Obligations Clause, the Notice Period Clause, etc have been brought to light.
Agreements are the heart and soul of any business arrangement. They define and categorically lay down the terms and conditions governing the obligations of the parties to the Contract. This article attempts to highlight the impact that COVID-19 has had on Contracts. We have also tried to identify existing ambiguities in contracts and their possible solutions.
IMPACT OF COVID19 ON CONTRACTS
Suspension of existing Contractual Obligations
Due to the spread of COVID19, the entire country has been in a lockdown from 25.03.2020. It is an unprecedented situation that has taken the entire world by shock. Contractual obligations have either become impossible to fulfill or their performance has been delayed indefinitely.
In this situation,where the contract provides for suspension, a lot of contracts have been ‘suspended’. The rights and obligations of the parties have been brought to a sudden halt. Most contracts fail to provide for an exit route or a recovery mechanism when faced by such a scenario. In such a case, the parties choose to merely suspend the obligations under the contract for the time being, till the situation improvises. Hence a status-quo is imposed on the performance of the contract, until further notice whereby parties mutually agree to shift or terminate the existing paradigm.
In extremely rare scenarios, the contract provides for the suspension of the obligations of the parties under contract. The suspension clause usually specifies the procedure to be followed by the parties in the event that such suspension is unavoidable. The clause also lays down the maximum time period for which the contract may be suspended. In the current COVID-19 scenario, it has been observed that very few contracts provide for suspension of a contract and most of them provide for termination instead.
The most common type of Suspension Clause is as follows:
“This Agreement shall be suspended upon any of the following events, and shall remain suspended until such event is rectified:
(c)Situation Z … ”
The second-most common type of Suspension Clause is:
“The Parties may mutually agree to suspend the contract for a period not exceeding 2 months from the date of suspension. Further, in the event that the contractual obligations are not resumed after such suspension period is over, the contract shall be deemed to be terminated by mutual consent of the parties.”
The Pandemic is witness to the fact that if the Contract is not explicitly clear about the suspension of obligation of parties, the parties are left remediless. The contract that was meant to be a backdrop of a calculative business arrangement, turns into nothing but a gamble. By virtue of such sub-standard contracts, the parties are left to negotiate and arrive at a compromise or are left at the mercy of the party having a upper hand in the business arrangement.
Termination of Contracts
Consideration the disruption of the supply chain caused by the pandemic, it is very likely that performances under many contracts will be delayed, interrupted, or even cancelled. Most Contracts provide for an exit mechanism to parties in the event that the parties are unable or unwilling to fulfil their obligations. However, the ambiguities present in such exit mechanisms can prove to be detrimental to the rights of the parties governed by the contract.
Often times, the termination of a contract can be initiated only by a specific party to the contract. Certain contracts require that the request of termination of a contract may be approved by a specific party to the contract at their sole discretion. Furthermore, certain contracts also necessitate a mutual agreement of parties for the termination of the Contract.
The most common form of a Termination Clause is as follows:
“PARTY ONE may terminate this agreement with immediate effect by delivering notice of the termination to PARTY TWO, if
PARTY ONE fails to perform, has made or makes any inaccuracy in, or otherwise materially breaches, any of its obligations, covenants, or representations, and
1.the failure, inaccuracy, or breach continues for a period of ‘x’ no. of Business Days’ after PARTY ONE delivers notice to PARTY TWO reasonably detailing the breach; or
2.there is or becomes any Law that makes effecting this agreement illegal or otherwise prohibited, or
3.any Governmental Authority issues an Order restraining or enjoining the transactions under this agreement.”
Most parties to commercial contracts have initiated termination of contracts. In the event that these termination clauses do not provide for a proper exit mechanism, heavy penalties may be levied on parties. The Pandemic has initiated a stark realization of the adverse effects of sub-standard contracts. The common contractual templates that are utilized by parties have dire consequences. COVID-19 has highlighted this harsh reality in the form of heavy losses and legal implications against parties to such contracts.
Force Majeure Clause
This is probably the most talked about clause in COVID-19 times. From being the least used clause in a contract, it has now become the most scrutinised and the most invoked clause of recent times, in any contract. Often times, contract did not even incorporate a force majeure clause. Its presence was limited to a small, three-four line paragraph which was the result of the same paragraph from an initial contract which may not even be related to the current contract.
A force majeure clause basically relieves the parties to the contract from carrying out their obligations upon the occurrence of a certain specific set of events, which are beyond the control of the parties. Most contracts specify a particular specific set of events that qualify as force majeure events. A force majeure clause may provide for immediate termination of a contract without any legal consequences. It may also provide for the termination of the contract if the force majeure event continues for a specified period of time.
The nature of a force majeure clause is determined by the nature of the contract and the obligations of the parties therein. The current COVID19 pandemic may or may not be considered as a force majeure event depending on the force majeure clause in a contract. There is no straight jacket formula that can be applied to determine a force majeure event. However, it is settled law that:
- A force majeure clause cannot be assumed to exist under a contract. It is pertinent for the clause to explicitly be specified in the contract for its application.
2.Force Majeure and the doctrine of frustration are both concepts of the law of Contract but they are not the same thing. Their applicability and basic framework vary from one another on a large extent.
3.Force majeure clause will not apply if alternative modes of performances are available.