COVID-19 lockdown: Better to renegotiate business contracts, say legal experts

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The 21-day lockdown amid the COVID-19 outbreak, has impacted businesses across sectors, and some have started to invoke the ‘Force Majeure’ clause in the contracts to protect themselves against performance obligations. However, according to experts, the best way to deal with the situation is to re-negotiate the contracts, rather than terminate them.

The term ‘Force Majeure’ is a French term, which means ‘superior force.’ It refers to an event or effect that can be neither anticipated nor controlled. The term includes both acts of nature and acts of people, including but not limited to natural disasters, riots etc. In such conditions, the force majeure clause in the contract/agreement, if present, will define the scope of applicability of this principle, Anant Merathia, a Chennai-based corporate lawyer said.

“It is the language of the clause in the contract that enumerates the application of the principle and also defines its scope. Businesses are reviewing their contracts, to determine the exact applicability on a case-to case basis,” he pointed out.

The real estate sector would be highly impacted starting from builder vs. contractor and builder vs. homebuyer obligations; leasehold relationships of lessors/landlords and tenants (especially in retail space), bulk volume trade contracts -- domestic and international -- are some key sectors where this has come into effect, amongst several others.

“There is a normal duty of the parties to mitigate the effects of the force majeure event and there must be substantial reason to prove that the said event is the cause of non-performance/impossibility of the contract. Impossibility does not mean physical or literal impossibility but that the event may have totally upset the very foundation of the contract/agreement,” Mr. Merathia said.

“There is always an alternative to renegotiate or to temporarily suspend the contract/agreement, extend its performance period and resolve amicably. Taking adverse actions leading to disputes/litigation thereby affecting business image and relationships is definitely not advisable in the present scenario,” he said.

K. Vaitheeswaran, advocate and tax consultant said even if the contract does not have a force majeure clause, Section 56 of the Indian Contract Act, 1872 stipulates that an agreement to do an impossible act is void. “Irrespective of whether a force majeure clause is present, the doctrine of frustration of contract will apply to cases where the performance becomes impossible owing to some act beyond the control of the parties to the contract,” he said.

For parties without a force majeure clause in the contract, it is best advised to renegotiate and include a clause for the same. The time for performance of the contract can also be re-negotiated and extended accordingly, to avoid unnecessary litigation, Mr. Vaitheeswaran said.

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Printable version | May 7, 2021 5:12:25 PM |

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