Resolving Commercial Disputes in a Post COVID-19 World

Commercial legal conflicts are bound to arise in the wake of the economic devastation touted to follow the global recession, forecast for the aftermath of COVID-19. These disputes will inexorably involve the interpretation and applicability of various contractual provisions, including much talked about force majeure clauses; contractual provisions inserted to protect parties from unforeseen and unavoidable acts, transcending “acts of God” and encompassing strikes, accidents, acts of war or terrorism and other events beyond the control of parties.

Contracting parties have raised repeated queries whether, in the current scenario, they would need to fulfil contractual obligations or to resort to the shelter offered by invoking force majeure. Each contract would require scrutiny to determine whether pandemics would strictly stand covered. However, owing to the current climate of uncertainty in the global economy, perhaps it is not prudent or in any party’s interest to terminate existing contracts by invocation of force majeure. Parties may be better placed in reassessing and renegotiating contracts, resulting in novation, or entering into fresh contracts to supersede them. The goal should be to balance equities and maintain the continuity of contractual relationship with a view to resume performance obligations and achieve the underlying objectives of the contracts, once the restrictions are lifted and it becomes practically possible to do so.

In light of the abysmally gloomy economic projections, the IMF’s Managing Director issued a foreboding message that “the highest risk we see is a wave of bankruptcies and layoffs that would make the recovery from this crisis harder.” The Indian Government has attempted to act upon the assertion that saving lives and protecting livelihoods ought to go hand in hand in the form of a Rs-1.7-lakh-crore ($22.6-billion) economic stimulus plan to provide the needy with the necessary safeguard of food security and direct cash transfers. Other initiatives, such as to immediately issue pending income tax refunds upto Rs. 5 lakhs, have provided some succor to citizens. It is hoped that the Government may announce a package for the MSME sector.

India can neutralise some of the calamitous economic effects of the pandemic by taking a lead from USA and Japan, whose Governments have announced massive stimulus and recovery packages to keep their economies propped up. The United States has passed a historic USD 2 trillion relief and stimulus package, aptly named the CARES Act which provides for a slew of measures to, inter alia, keep workers paid and employed and allow healthcare system enhancements. It also provides for assistance to severely distressed sectors of the United States economy through, inter alia, limitations on employee compensation, suspending aviation excise taxes and providing temporary relief from troubled debt restructuring, as well as placing a moratorium on foreclosures for Federally backed mortgage loans. Indian companies and businesses are still awaiting similar announcements to provide them with some optimism for the future. Industries across the spectrum will be affected, with tourism, hospitality and the aviation sector likely to be hardest hit.

Businesses will therefore be well advised that existing contracts, which are a vital part of the survival of any business, aren’t terminated in haste. Many contracts may already have been substantially performed by either, or both, parties. Owing to the inconclusiveness of when the pandemic will subside, parties should assess the mutual benefit of continuing existing agreements, along with the modalities associated with the performance of contractual obligations, albeit by crafting creative and innovative alternatives.

For example, in a commercial lease where a majority of the term remains, it may not be in either party’s interest to terminate the lease. In the instance of retail establishments which remained closed during the lockdown and yet are obligated to pay rent for such period, one option is for the parties to enter into a revenue sharing agreement which will potentially allow both parties to gain as economic activity bounces back. Similar solutions can be evolved for other types of agreements.

Ironically, in March 2020 the International Chamber of Commerce updated its model force majeure and hardship clauses, specifically to assist business draft contracts which may be adaptable to unforeseen events such as COVID-19. Though these clauses would not come to the aid of parties who entered contracts earlier, lessons may be taken from the updated ICC Hardship Clause. It provides for a situation when the continued performance of a party’s contractual duties becomes excessively onerous due to an event beyond its reasonable control which could not reasonably have been expected to be taken into account at the time of the conclusion of the contract and could not be avoided or overcome. Parties are bound to negotiate alternative contractual terms which reasonably allow them to overcome the consequences of the event. If they are unable to agree to alternative contractual terms; the invoking party may terminate the contract. Alternatively the parties are entitled to request a judge or arbitrator to adapt the contract with a view to restoring its equilibrium, or to terminate the contract, as appropriate.

Indian contracting parties should adopt a similar approach to resolve obstructions in the performance of contracts. Parties may find greater benefit in turning to other alternative and less cumbersome methods to resolve an impasse in negotiations such as mediation and conciliation, which are without the rigours of court procedure, and are non-adversarial in nature. Mediation and conciliation have, in fact, proven to be quite effective means of resolving disputes in various branches of law such as family and matrimonial disputes, without parties having to resort to tedious litigation. Costly and time-consuming litigation will be more burdensome as the courts are also bound to be overburdened due to the pandemic.

Notably, the Commercial Courts Act, 2015, which governs the dispute resolution procedure for commercial matters, was amended in 2018. Section 12A was incorporated mandating a three month period for parties to explore the possibility of a settlement in pre-litigation meditation. Mediation has even been institutionalized, e.g. the Delhi High Court has established “Samadhan”- the Delhi High Court Mediation and Conciliation Centre with a trained panel of legal professionals to fulfil the role of mediators, to assist parties in adopting a resolution oriented approach towards reaching a settlement. Recently, the Indian Institute of Corporate Affairs in association with Samadhan conducted an intensive certification programme to train mediators with a comprehensive understanding of mediation techniques in view of the requirements of the Companies Act, 2013 and provide suitable persons to be empanelled under Section 442 of the Companies Act, 2013.

The mediation process is not bound by the strict rules of procedure and evidence, and is instead guided by principles of fairness and justice, having regard to the rights and obligations of the parties, usages of trade, and the circumstances of the dispute. The parties, themselves, remain responsible for taking decisions and the mediator only facilitates the process and cannot impose any settlement or conditions on the parties. Parties are allowed to be represented by legal professionals, however proceedings remain confidential and are not disclosed to court in the event that the parties are unable to arrive at a settlement. If, however, the mediation process results in the parties reaching a settlement, such settlement will be binding upon the parties under Section 73 of the Arbitration and Conciliation Act, 1996. The settlement is sent to the court, which records such settlement and passes a decree thereupon, which has the same force and can be executed like every other decree of court.

Parties should, thus, engage in active and cooperative dialogue to ensure that existing contracts, which currently are in a state of suspended animation, are either novated or are suitably altered to ensure that the damage which ensues due to the COVID-19 pandemic is equally or proportionally absorbed. Future risks ought to be balanced between the parties to streamline rapid resumption of performance of contracts to avoid prolonged dispute resolution which would only further hamper parties’ abilities to bounce back after the lockdown. Eventually, as stated by the IMF’s Managing Director, economic survival is an equal part of surviving the pandemic.

The author is Tanveer S. Oberoi, a former law clerk to a sitting Justice of the Supreme Court. He practices in all Courts in New Delhi. He can be reached on toberoi@indlawchambers.com.