The Effects of COVID-19 on International Contracts

How to handle the case in which a supplier or customer within an international supply chain defaults on a contract? When can Force Majeure be invoked? What are the consequences on contracts? How to minimize risks to the company’s business?

To answer these questions, it is necessary to analyze the content of the contracts and understand what the law applicable to the individual agreements provides for.

Our experts explain how to manage the effects of the Covid-19 pandemic on industrial and commercial activities and share operational advice for managing international contracts during the emergency.

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India

How is Force Majeure regulated under Indian law?

Force Majeure has been defined in the Manual for Procurement of Goods, 2017, which is a manual used by the Government of India to procure goods. The manual specifies what constitutes as Force Majeure, the implications of the clause, such as:

  • A Force Majeure clause in the contract frees both parties from contractual liability or obligation when prevented by such events from fulfilling their obligations under the contract.
  • A Force Majeure clause does not excuse a party’s non-performance entirely, but only suspends it for the duration of the Force Majeure event.
  • Notwithstanding the punitive provisions contained in the contract for delay or breach of contract, the supplier would not be liable for imposition of any such sanction so long as the delay and/or failure of the supplier in fulfilling its obligations under the contract is the result of an event covered in the Force Majeure clause.

The clause also specifies the procedural conditions which have to be fulfilled while invoking the Force Majeure clause. These conditions are:

  • The firm has to give notice of Force Majeure as soon as it occurs and it cannot be claimed after undue delay.
  • There may be a Force Majeure situation affecting the purchase organization only. In such a situation, the purchase organization is to communicate with the supplier along similar lines as above for further necessary action.
  • If the performance in whole or in part or any obligation under this contract is prevented or delayed by any reason of Force Majeure for a period exceeding 90 (Ninety) days, either party may at its option terminate the contract without any financial repercussion on either side.
What is the Doctrine of Frustration and is it applicable under the Indian Law?

The Doctrine of Frustration is based on the impossibility of performance of a contract. In other words, due to factors outside the control of the parties to the contract, it becomes impossible to fulfill. The Doctrine of Frustration is a common law principle which is inherently applicable in India. Indian courts have upheld the idea time & again. This doctrine is used as an alternative to the Force Majeure clause, as Force Majeure meagerly delays the performance of the contract, whereas through the invocation of the Doctrine of frustration, the contract can be considered as void.

Under the Indian law, a contract to perform an impossible act is considered as a void contract. The same principle is extended to a contract wherein the contract was initially made to perform an act but eventually, after the contract is made, the act becomes impossible or illegal to perform. In such cases, the contract becomes void as well.

Is Coronavirus considered as a Force Majeure event in India?

On 19 February, 2020, the Government of India, through the Department of Expenditure, Procurement Policy Division, issued an Office Memorandum clarifying that the disruption of the supply chains due to the spread of Coronavirus in China or any other country will be considered as a case of natural calamity and Force Majeure clause may be invoked, wherever considered appropriate, following the due procedure. The Office Memorandum made a clear reference to the Manual for Procurement of Goods, 2017, for this purpose.

How to prove a Coronavirus Force Majeure event in India?

Generally, the burden of proof is on the party claiming the application of a Force Majeure clause. For the purpose of the Coronavirus outbreak, the government of India has already issued a memorandum clarifying that the outbreak will be considered as a Force Majeure event. Additionally, the party invoking the Force Majeure clause must provide evidence which proves that the delay in the performance of the contract occurred due to the outbreak of the Coronavirus and that alternative measures have been taken to ensure that the contract would be fulfilled within 90 days.

In the case of the plea of frustration, the burden of proof is more extensive. Since the Indian government has not recognized the outbreak of Coronavirus as a reason for invocation of the Doctrine of frustration. However, the courts in India can be moved to consider the Frustration of a contract. For this purpose, the onus is completely on the party to prove that the obligation defined under the contract has become impossible to perform, due to the outbreak. The party invoking the Doctrine of Frustration will have to prove the following:-

The obligation under the contract has become impossible (or unlawful in certain cases) of being performed.

  • If a condition was required to be fulfilled for the performance of the contract, then the condition has become impossible to be fulfilled. This will also be applicable in case of Contingent contracts.
  • The party invoking the Doctrine of Frustration could not possibly prevent the event, which leads to the obligation being impossible to perform.
  • No other recourse is available for the performance of the obligation.
What to do in case of notice of Force Majeure in India?

In case of the invocation of Force Majeure, the parties have different courses of action to pursue.

The first step is to make sure that a Force Majeure clause has been defined in the contract and what are the implications of the clause specified in the contract. It is imperative that the parties comply with the arrangements contemplated in the contract as regards Force Majeure, if this clause has to be invoked. The parties can mutually decide on alternative solutions for the execution of the contract. The parties must ensure that all reasonable efforts are taken to execute the contract, despite the Force Majeure event. Evidence signifying that such efforts were taken must also be put on record. The parties can further mitigate the damages and additional costs that may be incurred while exercising the alternate solutions. The parties must mitigate the significant or radical change from the obligation originally undertaken and collect evidence of the same to be put on record. The parties must ensure that they fulfill the burden of proof which is imposed upon them while invoking the Force Majeure clause, as specified in this article.

Additionally, the buyer may have obligations under subsequent contracts, or towards other buyers. They buyer should mitigate the same to the seller and insist that the contract be executed. This can be done in writing to ensure that the same comes on record. The buyer must collect evidence that the seller failed to perform their obligations and invoked the Force Majeure clause, and due to the same, the subsequent contracts have been affected.

The same steps can be taken while exercising Frustration of the contract. Additionally, it is also imperative to check the insurance policy and make sure that the contracts are covered by the relevant insurance policies. Usually the insurance policies disclaim liabilities in case of Force Majeure events, but it may differ on a case-to-case basis.

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