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Cash flows are biggest victim of crisis

Berjis Desai / ECONOMIC TIMES OF INDIA Share:
(U.S. Air Force photo by: Airman 1st Class Shelby Pruitt) (Photo by Shelby Pruitt)

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, in that 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.

Ra 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 tribunals 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 forums and the 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 themselves 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 because 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.

Unlike arbitration, mediation is not legally binding. 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.. ECONOMIC TIMES OF INDIA

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