A well-drafted contract is the safety valve of any business transaction but there are always times when even a well-drafted contract seems not so well drafted. The reason is that foreseeing every contingency is not humanly possible. Take for example, COVID-19 lockdown; who would have thought that the world will come at a standstill in a matter of days, pausing or stopping the majority of financial activities. This resulted in many businesses bleeding losses in some or the other way.
And the time of the crisis is the time when legal contracts become important and are read through. So, while many businesses invoked or deliberated on invoking Force Majeure or Impossibility clauses, some parties had their moment of realization that their contracts cover every worldly situation except for the one we are living through right now. This time is unforeseen even as a legal practitioner, because who could have imagined that Force majeure can have such a global application at the same time.
However, every crisis has a learning lesson, and this time is no different. Post COVID-19, there would be some major changes in the legal and policy documents of businesses. Some of the changes that will have to be considered in the contracts would be as under :
Force majeure Clause
While Force majeure is generally intended to include occurrences beyond the reasonable control of a party, It has become imperative to analyze if your existing clause covers all the scenarios. For eg: You are a manufacturer or a service provider based in India and the contract jurisdiction is another country where there is no lockdown on services and businesses.
What impact it has on your contractual obligations becomes important. While in the absence of a well-defined contract you might be liable for damages in case the end client and contract seeks damages because of non-supply, even when it was for a reason beyond your reasonable control. This will have to be seen in light of governing law and other terms like the Indemnification and Limitation of Liability.
Exceptions to Force majeure
Now, think of a scenario where you work for a Client who is an essential services provider as per applicable law. As per your contract you are obligated to service your client even in an epidemic situation, however, one of your vendors on whom you are dependant for services, as per the entered contract invokes a force majeure clause for pausing the services of deliverables. You may end up with litigation, liabilities, or losses. To avoid such a scenario it becomes important to cover exceptions i.e. when can force majeure to be invoked and when it cannot be invoked. You must analyze and document, what extent of obligations should be suspended during the period of suspension or if specific obligations, such as payment, should continue in any event.
Moreover, the issues of severe price hike or decline should also be defined and covered in the contracts. Another aspect to be seriously considered is the notification mechanism as per the clause. Even a minor overlook now can invite a major dispute in the future.
In case of a dispute, chose an arbitration jurisdiction and adopt the rules which can cater to providing interim reliefs.
Penalty and Liability Clauses
Similarly, it would be important to reassess various clauses such as indemnity obligations, warranties, and limitation of liabilities . You must assess your indemnity obligations in light of post-COVID -19 times, as to what all losses or liabilities suffered by the other party because of your acts or ommissions you intend to cover as we don’t know, how many such lockdowns we might have to face. Even your teams and staff working for a client are at greater risks of getting infected, and such scenarios ought to be considered now in terms of a safe work environment, insurance obligations and liabilities, etc. Similarly, capping your liabilities with a well-thought limitation of liability clause itself becomes very important to avoid grave financial exposures.
Lastly, it’s natural and human that we cannot foresee beyond what is reasonable and normal. But since we have a new normal now so it becomes important to secure ourselves in the best way we can. And in business transactions, this preparation starts with a comprehensive contract.