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2020 will be known as the year where nearly everything we read and talked about will have been in relation to the novel Coronavirus or COVID-19, that overwhelmed the entire world.
The legal profession is no outlier to this development, and in the last two months, much has written been written about the epidemic’s impact on commercial contracts and corporate dealings.
Many have argued for and against the applicability of the defenses of force majeure, Act of God, and frustration. Today I aim to make a case for the remedy of ‘change in law’ that has surprisingly been overlooked so far.
What is ‘Change in Law’?
A ‘change in law’ is added to contracts with a view to offsetting encumbrances upon one party that arise from a change in the applicable legislation at the time of making the agreement. It is mostly used in Public Private Partnership Agreements with long durations of execution, which are likely to see a change in the parties' cost of complying with the contract’s terms due to a change in the country’s legislation or legal framework governing the specific industry in question.
In such scenarios, though the burdened party cannot deny its duty to perform the contract, it can seek compensation from the party awarding the contract (which usually belongs to the public sector). This compensation is to be made by the Awarding Authority that is party to the contract and is to be made to the extent the change in law has altered the economic position of the burdened party.
However, it is important to note that foreseeable costs of complying with existing or proposed laws are expected to be included as part of the prices in the contract. It cannot be later claimed and the contractor or operator would be expected to bear this cost.
Further, change in law clauses, being subject to negotiations between the parties, need not include costs of compliance alone and can also include impacts on revenue of the business caused by the change in law or relief as to requirements of time stipulated in the contract.
If the change in law is such that its performance becomes legally impossible and the change strikes at the root of the contract, rather than simply suspending or hindering execution, then the contract can also be discharged.
Use of Change in Law in Indian Contracts
In India, the one of the most defining cases for change in law is the that of Energy Watchdog v. Central Electricity Regulatory Commission (Energy Watchdog) which considerably widened the scope of the clause, keeping in tune with business uncertainties and risks.
When we look at the origin of change in law, it was introduced in contracts to mitigate the losses caused by fluctuation in tax liabilities (see for instance, M/s Sumitomo Heavy Industries Ltd v. Oil & Natural Gas Company).
However, in Energy Watchdog, the Supreme Court interpreted change in law to include all laws in force in India or all Indian laws. Hence, though changes in foreign laws would not invite the application of the clause (see, Coastal Andhra Power Ltd. v. Andhra Pradesh Central Power Distribution Co. Ltd.), any change in law in India would qualify without being limited to a specific industry sector.
Further, change in law has strong case for being argued as a change in government policy regarding consent, approval, licenses and valuations, where the contract’s clause provides a wide enough scope for the same. For instance, the change in law clause of the Power Purchase Agreement (PPA) in Energy Watchdog included:
(i) the enactment, bringing into effect, adoption, promulgation, amendment, modification or repeal, of any Law or
(ii) a change in interpretation of any Law by a competent Court of law, tribunal or Indian Governmental Instrumentality provided such Court of law, tribunal or Indian Governmental Instrumentality is final authority under law for such interpretation or
(iii) change in any consents, approvals or licenses available or obtained for the Project, otherwise than for default of the Seller, which results in any change in any cost of or revenue from the business of selling electricity by the Seller to the Procurers under the terms of this Agreement, or
(iv) any change in the (a) Declared value of Land for the Project or (b) the cost of implementation of resettlement and rehabilitation package of the land for the Project mentioned in the RFP or (c) the cost of implementing Environmental Management Plan for the Power Station mentioned in the RFP, indicated under the RFP and the PPA.
Similarly, in the case of Adani Power Maharashtra Ltd. v. MSEDCL, the Ministry of Environment and Forest cancelling a term of reference that allocated the Lohara Coal Block to Adani Power, was interpreted as a change in law inviting restitution.
It is noted, however, that the foregoing is limited to commercial agreements and does not extend to taxation laws where the change in law must be substantive rather than clarificatory (Greatship India v. Commissioner of Service Tax) and cannot be a mere change in opinion (State of Uttar Pradesh v. Aryaverth Chawl Udyoug).
Change in Law as a Remedy in Times of Coronavirus
Having explained the position of law, I shall now aim to discuss the changes in government policy during COVID-19 that could qualify as ‘change in law’ and analyse the strengths as well as weaknesses of such a claim.
The Central and state governments have issued a slew of orders to combat the Coronavirus pandemic. These include the now extended nationwide lockdown declared by the Prime Minister on March 24, the multiple state government lockdowns issued prior to that, and the invocation of the invoked the Epidemic Diseases Act, 1897 (EDA).
Consequently, much of the commercial and private establishments have shut down. Resultantly, supply chains of service and production businesses have been delayed or are at a complete standstill. Several infrastructure projects are now in limbo, and will potentially see arbitration for claims of compensation.
Using the broad approach of ‘change in all Indian laws’ given by the Supreme Court in Energy Watchdog, many of agreements have a prima facie strong case for ‘change in law’ where such a term is included in the contract.
Both the notifications issued by the government and the invocation of the EDA alongwith the National Disaster Management Act, 2005 (NDMA) count as a change in Indian law that have been notified in the Gazette. These also include the actions undertaken by the state governments as amendments to the EDA and NDMA such as an ordinance promulgated by the Orissa government increasing the fines for violation of epidemic regulations.
Further, those policy changes which do not fall in the broad category of ‘law’ such as cancelling of permissions and licenses can also be claimed as a ‘change in law’ using the precedent of Adani Power Maharashtra Ltd. v. MSEDCL, provided the contract terms are broad enough to allow such construal.
Lastly, the Supreme Court and High Courts have themselves been pro-active with addressing concerns of citizens although the same may come at costs to private businesses. These may range from free testing by private entities to payment of minimum wage to migrant workers by contractors whose projects have otherwise been placed on an indefinite halt.
Invoking ‘change in law’ for contracts is most useful where the plaintiff does not qualify for force majeure or frustration of the contract. During the epidemic and lockdown, many supply and public-private infrastructure related agreements (including electricity supply) can be rejected for force majeure as being merely a hardship or long term contracts.
Further, even frustration and impossibility as grounds may fail in cases of essential services whose functioning have not been stopped by the government but have been made more onerous by virtue of the measures taken by authorities to control the virus.
Whereas ‘change in law’ may not divest the aggrieved party from its contractual duty, it can provide generous relief that would make the contract sustainable in the long run. Just like force majeure, the applicability of ‘change in law’ depends on the clauses of the contract drafted by the two parties.
Yet while force majeure clauses may not generally envision a situation of epidemic, most change in law clauses are formulated broadly enough for the current notifications and policy changes to be relied upon.
The author is a student of National Law University, Delhi.