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To pay or not to pay? COVID-19 forces a relook at contracts, agreements and deals

Legal firms have been flooded with calls from clients enquiring if they can re-evaluate a deal.

April 14, 2020 / 07:22 PM IST

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Recently, a group of steel traders approached the Mumbai High Court, seeking relief from a contract. They had sourced steel from a South Korean steelmaker. But even before the steel reached Indian shores, COVID-19 had struck.

The traders had an agreement with their auto clients, who however had now shut production and were refusing to take the orders. The traders were in a fix. Though the South Korean company had invoked the Letter of Credit, the traders wanted to cancel the contract.

They asked the court about possible legal recourses.

The steel traders are not alone. There are many more who want to have a re-look at contracts, after COVID-19 disrupted economic activity and brought businesses to a halt.

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Acquisition deals

A private equity major, which had signed the deal papers to buy equity of a company, is having second thoughts. "Can we use the Material Change clause to not go ahead with the deal?" a senior executive from the PE firm asked his lawyer.  The clause relieves one party from performing the terms of the agreement.

Also Read | Private equity players, real estate firms may permit deferral of rent: Report

"All kinds of agreements are now being questioned. Contracts, rental or lease agreements, deals, suppliers contracts...increasingly clients are calling to know if a contract can be re-looked," said Zulfiqar Memon, founder of MLM Legal.

It includes a client who wanted to send four notices to his tenants, asking them to pay up, and two notices to his landlords, asking for more time!

"People are giving all kinds of excuses to delay a contract. Some say staff is not there, others say traveling is a risk, or that they are unwell, and some even say they are not emotionally fine to honour the contract...all because of COVID-19," said Memon.

The clause

But is it possible to use COVID-19 as an excuse to not honour a contract or an agreement?

In the steel traders case, the Bombay High Court was clear that the South Korean company had honoured its part of the agreement. And that the steel traders have no option but to make the payment, even though the auto companies refused to take the material.

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Wasn't there a Force Majeure clause that the traders could have used? The clause can be used if one of the parties is unable to fulfil a contract due to unforeseen circumstances.

"The clause was there in the contract. But the contract was framed in such a manner that the Force Majeure clause was for the benefit of the South Korean company, and not for the purchaser," said Narendra Dingankar, Partner, Pioneer Legal.

Thus it matters, added Dingankar, how the contract is framed and even if the clause is there, how it is defined.

Similar to the force majeure clause is that of Frustration of Contract. This clause kicks in when circumstances around a contract change and the parties are incapable of performing their part of the deal.

Unfortunately, there will be few cases where both the sides agree on these clauses. But the last thing, say legal experts, the two aides would want to do would be to go for litigation.

"This is the time to get a bit creative in agreements. For instance, can the landlord take into consideration the changed economic environment and give extra time to the tenant to pay the rent," pointed out Memon.

Nevertheless it is clear, added Dingankar, once the lockdown is lifted, there could be a flood of litigation cases.

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Prince Mathews Thomas
Prince Mathews Thomas heads the corporate bureau of Moneycontrol. He has been covering the business world for 16 years, having worked in The Hindu Business Line, Forbes India, Dow Jones Newswires, The Economic Times, Business Standard and The Week. A Chevening scholar, Prince has also authored The Consolidators, a book on second generation entrepreneurs.
first published: Apr 14, 2020 05:59 pm