Gautam Bhatikar participates in the IR Virtual Series – International Contracts: How has the global pandemic impacted international contracts?

Gautam BhatikarSenior Partner, Legasis Partners

Foreward by Andrew Chilvers

The COVID-19 pandemic is one of those once-ina-lifetime events that few people predict but which affects everyone – individuals, businesses and governments.

During the past four months the pandemic has caused huge disruption to companies across the globe as many have suddenly found it impossible to fulfil their contractual obligations. From retail and the construction industry to hospitality and manufacturing, every area of the world economy has suffered.

As a consequence, lawyers and their clients are now rushing to look more closely at the force majeure doctrine as an option for businesses that are no longer able to perform their contractual obligations.

Different legal systems have different legislative definitions for force majeure. For instance, English common law – unlike in civil law – has no universal definition. The ability of a contracted party to invoke force majeure will depend on the presence of a force majeure clause and the particular terms set out in the contract.

Can force majeure justify a suspension of performance or the unilateral imposition of new deadlines or cancellations of purchase orders?

When you look at force majeure as an event – particularly when trying to define force majeure – it’s an event that is neither anticipated nor do people have control over it.

There are a few points that are relevant when it comes to actually dealing with force majeure, particularly in courts and particularly when it comes to negotiating with the parties. Or trying to come up with some sort of stopgap arrangement that needs to be arrived at during the period, ie, of the pandemic.

The first point is that the World Health Organization has called COVID-19 a global pandemic, so there’s no doubt it is a force majeure event. The second point would come as to whether a so-called force majeure event has been referred to in part of the contract. If it is a part of the contract and it spells out anything to do with an act of God, this then is very much a force majeure. Also, you need to understand if the force majeure event is a temporary measure; for instance, in the case of the supply or a product. Is the failure to supply the product temporary or permanent? As a result of force majeure is that a work stoppage and is it temporary or permanent?

If a force majeure event has occurred, then if the seller is ready to supply and the buyer is unable to buy, then the contract would be terminated because it’s impossible to fulfil the contract. As with my other colleagues, the COVID-19 pandemic was so unforeseen that many of the cases will have to be looked at individually.

Does the COVID-19 crisis and possible breach of international contracts fundamentally alter assumptions surrounding risk allocation, supply chains and access to markets?

In India by the end of March it was declared that everyone should work from home. There are two aspects here to think of when addressing the situation. The first aspect is logistics and supply chain and the second is the whole gamut of this supply as it is broken down into essential and the non essential commodities.

Essential commodities involve food, healthcare, medical supplies and access to the Internet. The government, looking at the initial risk issues, decided to step in and ensure essential commodities were available including Internet, connectivity, IT support and banking on the Internet. All these were taken care of, including, to a large extent, insurance cover. One interesting element to this pandemic has been that legislators have been looking back at a law associated with the plague during the British era in India. This was the Epidemic Act of 1897. Nobody had even looked at it since then but suddenly we have a pandemic and there’s the invocation of the Epidemic Act and the Disaster Management Act, which gives power to local authorities to deal with the situation on the ground.

Once all this has been addressed the government and companies are going to have to look at the level of disruption that has occurred, particularly when it comes to supply chain and logistics, how we get back to some kind of new normal. There will have to be significant risk allocation regarding this new normal, but at the moment no one knows what this looks like.

Where a contract does not contain a force majeure clause, how simple is it for parties to consider the doctrine of frustration? In which jurisdictions would this apply?

In India we have the doctrine of frustration as part of the contract. I think there are two aspects to look at. The first would be whether this so-called frustration is a temporary frustration in nature or is it something that is permanent and it makes the contract impossible to perform in future.

If it’s a temporary issue then there is always the possibility that we’ll renegotiate the contract and look at a new time limit for the contract. These additional days can be added to the contract prior to completion. This then overcomes frustration and completes the contract. The second issue is if the contract is an impossibility to perform. Then the contract becomes void.

These are the two basic concepts that are part of the doctrine of frustration. Now, looking at all of the contracts with that in mind, what’s happened in India is that most parties have to go through negotiations to eventual settlements. These are not normal times and most companies and the government are working towards resolutions despite the difficulties. But we’ll have to see what the new normal looks like in the long term.