Coronavirus lockdown: Time for businesses to renegotiate contracts to avoid catastrophic fallouts

April 10, 2020 5:39 PM

Every contract needs an inter se renegotiation and if parties failed in that, a legal contest is inevitable. If this issue is left unattended, the entire business cycle will be broken, and economic recovery will be delayed considerably.

Affluent companies may survive, however, companies with poor cash flow, if attempted to abide by their contractual commitments, will end up in bankruptcy.
  • Rajesh Vellakkat

Lockdown of businesses due to Covid 19 pandemic has created an unprecedented business situation. The symmetry among all factors of production like materials, labor and capital have been disrupted.  Entire business assumptions, based on which contracts were formed has now changed. Undoubtedly, large-scale contractual violations across industry can now be expected. Party who is unaffected by this situation, will assert their contractual rights, whereas the person affected will avoid the performance, using force majeure, impossibility, frustration and other legal defenses. 

Both central, state governments and regulatory bodies have been announcing relaxations and concessions on various compliances. However, expected disruptions to the private contracts have not been addressed. Affluent companies may survive, however, companies with poor cash flow, if attempted to abide by their contractual commitments, will end up in bankruptcy.  In the given situation, every contract needs an inter se renegotiation and if parties failed in that, a legal contest is inevitable. If this issue is left unattended, the entire business cycle will be broken, and economic recovery will be delayed considerably. Courts will inundate with matters, burdening the judiciary further.

Situation demands a statutory intervention in private business contracts and such interventions are not uncommon in the past.  Prescription of minimum wages, rent control law, land reforms etc. are all such instances. Legal interference with private choice has been justified and constitutionally upheld, if it is for the protection of the weak or preventing a larger public harm. Today, the situation necessitates a paternalistic approach overturning private choices, mandating an adjustment in contract terms for untangling the ensuing economic mess. 

Here below is a broad framework for “Law on Covid-19 economics” whereby all private contracts are intervened during notified period:

  • A statutory authority to do impact assessment for every sector and declare the economic impact ratio for different commercial arrangements. 
  • Statutory force majeure during the notified period. 
  • Stewardship by bigger companies, whereby they can help troubled companies using their CSR funds.
  • Changes in different types of contracts:
    • Waiver of interest on any debt instruments both for deposits and loans. Exceptions can be granted for small depositors and senior citizens. 
    • Moratorium on principal repayment and withdrawal limits for deposits. 
    • All private and public enterprises having cash surplus in their books are required to pay X% of their normal salaries to every employee. Companies that do not have surplus cash shall be allowed to reduce the salary depending on projected cash flows. 
    • Every employee should get a minimum base salary. Government should provide grants to all vulnerable organizations. 
    • All highly paid employees will get only a subsistence salary during the notified period.  
    • All commercial lease / license payment obligations (both tangible and intangible) to be waived and in some cases reduced. 
    • In relation to purchase contracts of movable items, all continuing purchase /supply obligations could be adjusted as per the relevant impact ratio. 
    • For every contract, either of the parties can pro-rata adjust contract value/ obligations as per sector specific impact assessment ratio. 
    • All disputes emanating during the period should be decided by a quasi-judicial panel and their orders are to be followed. Directly approaching regular courts or arbitration should be prohibited.  
    • contracting parties can disregard the provisions of this law and follow whatever they mutually agree. 

Such a legal framework will certainly reduce contractual disputes. This is an inevitable legislation, the government should consider for economic efficiency and distributive Justice.

  • The author is Partner, Fox Mandal & Associates, Advocates, Bangalore. Views expressed are the author’s own. 

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