A Way Out of Contract-Killing

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The Covid-19 pandemic damage is taking the bottom out of commercial contracts. It is becoming commercially impracticable to perform such contracts. Is the pandemic an ‘act of god’? Does it amount to a force majeure event? Has it made performance impossible? Is a party to a contract relieved from its obligation to perform, as the Covid-19-instigated lockdown amounts to a material adverse event? What will be the economic consequences if we default on our obligations and commit a breach?

To perform such contracts, on the other hand, is to invite financial disaster. Like Hamlet, to perform or not to perform is the question agitating the minds of CEOs, CFOs and general counsel of India’s corporates. Long-term commitments to purchase goods or render services have suddenly become commercially unviable. The coveted acquisition that seemed so lucrative has turned into a nightmare. A single breach may trigger several such breaches through multiple, interlinked contracts. Corporate reputations and carefully cultivated long-term business relationships are at stake.

Request for extending time and forbearance in performance will soon turn into nasty correspondence and, subsequently, legal notices being exchanged. Most of these contracts contain an arbitration clause, with reference to a three-member arbitral tribunal. If the counterparty to the dispute is not interested in expeditious disposal, the constitution of such tribunal itself can be a long drawn-out affair. Meanwhile, if interim orders are required to be obtained, the parties will be compelled to approach a court of law. This translates into multiple legal proceedings before different fora, and mounting cost of litigation.

Cash flows are the biggest victims of this crisis. At the same time, when commercial stakes are so high, most corporates would like to avail of the best possible professional assistance. Success fees are not legally permissible in India. At the same time, law firms can’t be expected to provide credit to clients for work done as also third-party liability like payment of fees to senior counsel.

To compound matters, the jurisprudence on the subject in India is hardly enlightening. If there is no express provision in the contract for force majeure, Indian law ordinarily does not imply such a clause. The same goes for material adverse change (MAC) clauses in a contract. The doctrine of commercial impracticability to perform a contract, developed under New York law, has not found much favour with the Indian Supreme Court. The legal outcome of such disputes is, therefore, anybody’s guess.

Needless to add, the time taken in arriving at a final determination of such a dispute can be horrendously long. Even if an arbitral tribunal publishes its award fairly quickly, challenges to such an award before the high court and the Supreme Court are inevitable.

The privy council has caustically observed that the trouble of a litigant in India begins when he gets hold of a decree. To implement or execute such ajudgment is another long drawn-out process. In this Kafkaesque scenario, the litigants could well become sick or insolvent. In these circumstances, is there a practical commercial solution before a corporate embarks upon a highly unproductive litigation? Courts highly encourage mediation.

Unlike arbitration, mediation is not legally binding. However, in the current scenario, formal mediation may not work so effectively. Disputing parties to a contract may, instead, explore obtaining a dispassionate view of the dispute from a seasoned person having commercial experience and knowledge, not necessarily a lawyer. What is required is a creative commercial solution to the dispute. Courts do not rewrite contracts for the parties.

However, such an informal mediator can rewrite and redesign the contract that causes minimal damage or disruption to both disputing parties. Of course, if such a mediation effort fails, the contracting parties are at liberty to litigate. Such an exercise is bound to narrow differences and result in a solution that may have escaped both the contracting parties.

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