Coronavirus: Key Legal Issues For India Inc.

With Covid-19
BloombergQuintOpinion
Cyril Amarchand Mangaldas
t @cyrilamarchand

Published: Mar 14 2020, 10:46 AM

Last Updated: Mar 17 2020, 7:57 PM

The impact of coronavirus or COVID-19 on domestic and international businesses is

severe, across countries and sectors. To assist India Inc., we have prepared this note to
highlight some of the COVID-19- outbreak related key legal issues that companies
should be thinking about in the current environment.

Supply Chain Disruption

– Implications on Contracts
Considering the supply chain disruption caused by the COVID-19 outbreak, it is likely
that performances under many contracts will be delayed, interrupted, or even
cancelled.

Counterparties (especially suppliers) to contracts may seek to delay and/or avoid

performance (or liability for non-performance) of their contractual obligations and/or
terminate contracts, either because COVID-19 has legitimately prevented them from
performing their contractual obligations, or because they are seeking to use it as an
excuse to extricate themselves from an unfavorable deal.

Further, companies may not be able to perform their obligations under their customer
agreements because of their supplier’s non-performance and may in turn seek to delay
and/or avoid performance (or liability for nonperformance) of their contractual
obligations and/or terminate contracts.

Parties may also cite COVID-19 as a basis for renegotiation of price or other key
contractual provisions (example: volume of materials exported from or imported into
affected areas due to shifts in supply and demand).

In this context, it is important to determine if COVID-19 will be considered as a ‘Force

Majeure’ event.

On Feb.17, 2020, the China Council for the Promotion of International Trade (CCPIT),
revealed that it had already issued over 1,600 ‘Force Majeure certificates’ to firms in 30
sectors, covering contracts worth over $15 billion.

In India, the Department of Expenditure, Procurement Policy Division, Ministry of

Finance issued an Office Memorandum on February 19, 2020, in relation to the
government’s ‘Manual for Procurement of Goods, 2017’, which serves as a guideline for
procurement by the government.

The Office Memorandum effectively states that the COVID-19 outbreak

could be covered by a force majeure clause on the basis that it is a ‘natural
calamity’, caveating that ‘due procedure’ should be followed by any
government department seeking to invoke it.
However, COVID-19 is unlikely to give rise to a valid force majeure defense under every
contract and in every circumstance, as different contracts and governing laws stipulate
different requirements for different situations.

Companies are, therefore, well advised to proactively manage the related legal risk and
carefully assess which party must ultimately bear the financial losses caused by COVID-
19.

Force majeure – The law relating to Force Majeure (a French phrase that means a
‘superior force’) is embodied under Sections 32 and 56 of the Indian Contract Act, 1872.
It is a contractual provision agreed upon between the parties. The occurrence of a
force majeure event protects a party from liability for its failure to perform a
contractual obligation.

Typically, force majeure events include an Act of God or natural disasters, war or war-
like situations, labour unrest or strikes, epidemics etc. The intention of a force majeure
clause is to save the performing party from consequences of something over which it
has no control. Force Majeure is an exception to what would otherwise amount to a
breach of contract. Whether a particular contractual obligation can be avoided is a
factual analysis. The courts would examine, whether in a given case, impact of COVID-
19 epidemic prevented the party from performing its contractual obligation. Indian
courts have generally recognised this concept and have enforced it where appropriate.

The law in India has been laid down in the seminal decision of the Supreme Court in
the case of Satyabrata Ghose vs Mugneeram Bangur & Co. The entire jurisprudence on
the subject has been well summarised by Justice RF Nariman of the Supreme Court in a
the recent decision in the case of Energy Watchdog vs CERC (2017).

In particular, the following aspects should be kept in mind:

Outline of force majeure - The general concept means that events or conditions
beyond the reasonable control of one party should not cause them to be held liable
under the terms if that event or condition prevents the performance of the
obligations of the contract. Some contracts list examples of force majeure events
 that automatically meet the standard. Others list events that must still meet the
definition of force majeure. One may also rely on generic clauses usually included
in force majeure clauses, such that the COVID-19 is an ‘Act of God’.
Force majeure provisions vary widely - The language used in most contracts vary
widely and, therefore, it is important to review these clauses carefully.
Duty to mitigate and exercise reasonable diligence? - If a ‘duty to mitigate’
obligation is imposed under the contract, then the meaning of ‘reasonable
diligence’ becomes important. This is a subjective standard and will be interpreted
on a case-to-case basis. It also needs to be analysed if there are any obligations to
use ‘best endeavours’ to mitigate the effects of a force majeure event.
Does the event have to be foreseeable? - Most contracts provide that for an event
to qualify as force majeure, it must be unforeseeable or not reasonably foreseeable.
Notification requirements - Most contracts require notice to the other party to
invoke a force majeure provision. Some also provide deadlines for making such
notice to make the claim effective.
Can the contract be put on hold or cancelled? - Some contracts provide that it
can be put on hold until the force majeure event is resolved. Some contracts
provide for limitations in time after which either party may cancel the agreement
with written notice to the other. Others require the contract to remain in effect
until the force majeure event is resolved.
Burden of proof - The party that relies upon the force majeure event generally has
the burden of proof and such clauses are construed strictly by the courts.
Keep records - Copies of critical correspondence and other communications
should be maintained if disputes arise later. This can be particularly important in
establishing that the company has done all that was reasonably possible to mitigate
the losses.

Approach to potential dispute resolution -

The contract’s dispute resolution clause should be checked to identify which court
or tribunal would decide a dispute and how it is likely assess the situation.
If the contract does not have a force majeure clause- If the contract does not
include a force majeure clause, the affected party could be to resort to the doctrine of
frustration under Section 56 of the Indian Contract Act, 1872. However, in order to
claim that the contract is frustrated, it must be shown that performance of the
contract is entirely impossible and that it has become fundamentally different from
the arrangement contemplated at the time of executing the contract.

Other possible consequences for contracts – Counterparties may attempt to invoke

other contractual clauses like price adjustment clauses, material adverse change (MAC)
clauses, limitation or exclusion clauses, to limit or exclude liability for non-
performance. The ability to invoke such other grounds will depend on the wording of
the relevant clause, and how the clause is construed by courts or tribunals.

Impact On M&A Transactions

The outbreak of COVID-19 may impact M&A transactions. The parties to M&A
transactions should carefully examine the terms of their transaction documents and
consult with their counterparties to promptly address the challenges brought by
COVID-19 outbreak.

Some of the key issues are highlighted below.

Material adverse change - The impact of COVID-19 and whether it would trigger a
MAC (generic or specific) would need to be examined. Whether a MAC has or has
not been triggered would need to be assessed on a case by case basis, depending on
the impact of the event on the company and would depend heavily on the specific
wording of the MAC clause and the particular circumstances of the business at
issue.
Pre-completion undertakings - Sellers should check if they can comply with pre-
completion compliance of business covenants, whether general commitments
about ordinary course of business or trading, or specifically linked to contracts,
production or employees.
Warranties and repetition - Buyers should consider requesting warranties around
risk assessments, scenario planning and adverse impact of COVID-19. Sellers
conceding these should seek knowledge and materiality qualifiers.
Warranty limitations - Sellers should consider a general COVID-19-related
exclusion of liability. Ring-fencing of such clauses should be considered, such that
COVID-19-related claims can only be made under specific warranties and not under
general warranties. Buyer’s knowledge, changes in law and other limitations may
also be relevant in this context.
Disclosure - Sellers should carefully consider the need for COVID-19- related
disclosures (for example against material contracts warranties), being as specific as
possible to satisfy any requirement for ‘fair’ disclosure.
Data rooms and due diligence - Sellers should consider including information in
the data room about the possible impact of the epidemic on the target including,
where relevant, appropriate mitigation and contingency plans. Buyers should
consider conducting due diligence on the level of risk and on the target’s scenario
planning. Further, the COVID-19 outbreak may cause delays to due diligence
activities, including the impossibility to conduct on-site due diligence, audits and
inspections, and exercising the relevant access rights. The opportunity to negotiate
a later long-stop date, allowing extra time to complete the due diligence, should
also be explored.
Delayed Closing - The challenges posed by the COVID-19 outbreak may cause delay
in closing of M&A transactions. The parties required to satisfy any closing
conditions that may be delayed should consult with their counterparties to manage
expectations and negotiate the appropriate waivers, moving certain closing
conditions to the post-completion covenants, or extending the long-stop date.
Breach of reps & warranties - The disruption brought by the COVID-19 outbreak
may also result in certain representations and warranties given by a seller and
target company no longer being true when repeated at closing. All parties should
conduct a comprehensive assessment of the impact that the COVID-19 outbreak
may have on the representations and warranties.
 Termination events - The persistence of the COVID-19 outbreak may lead to the
occurrence of a range of termination events. The parties should assess carefully if a
termination event has occurred or is likely to occur, due to the present situation
and its foreseeable impact.

Insolvency
The spread of COVID-19 has already resulted in an increase in companies experiencing
financial distress as they try to mitigate the financial impacts of supply chain issues
coupled with lower customer demand.

Companies with already high debt levels are finding existing credit lines withdrawn at
a time when they are needing to pay suppliers who are able to deliver on time while
not receiving customer payments. Likewise, planned re-financing and distressed M&A
activity is being delayed (as a result of travel restrictions and other measures), with the
result that companies are finding it more challenging to execute and implement time-
critical turnaround plans.

Consequently, companies may be forced to seek formal and informal protection from
their creditors, and we expect to see, in more distressed cases, increased insolvency on
the horizon.

Corporate Governance And Disclosures

- What Should The Boards Do?

Against the backdrop of the COVID-19 outbreak, it is critical that the board of directors
understand the scope and extent of their statutory and fiduciary duties. Directors are
required to exercise reasonable care, skill and diligence, and to act in the best interest
of the company. Below are some key considerations for the board of directors:

Business Continuity Risk – The board needs to get engaged with the management
team to evaluate the business continuity risk, in case supply chain is disrupted for
any critical raw material and empower the management team to take quick
decisions in situations requiring immediate action.
Be Informed - The board has an obligation to be reasonably informed and use good
faith efforts in overseeing a company’s operations. A critical responsibility of the
board in this regard is its oversight of material risks to the company. Management
should keep the board sufficiently well informed and engaged to enable the board
to consider and understand the material risks posed by the COVID-19 outbreak and
their potential magnitude, as well as management’s plans to mitigate and address
those risks.
Fast-Action Plans - The boards should ensure that the management teams put in
place fast-action plans in order to deal with the COVID-19 outbreak. The
management team should contemplate situations where supply will be disrupted
for prolonged periods and should liaise with suppliers to understand the extent to
which their ability may be hampered. At the same time, the board should empower
the management team to commence negotiations with alternate suppliers in
different countries to mitigate all possible risks.
Consumer Connect - A constant communication with consumers should be
maintained in order to keep them abreast of any disruption of services and
allowing them the opportunity to secure alternate source of supply. The company
may also consider the possibility of offering an alternate supply link to the
customer. If the company is engaged in providing vital products or services, it
should also be prepared to deal with possible litigations, if the company is not able
to meet orders or experiences significant delays.
Shareholder’s Interest - It is vital for the board to communicate with shareholders
regarding the company’s assessment of potential impact of the COVID-19 and the
company’s action plan to tackle the same. Re-assessment of revenue and
profitability projections may be required. It is of utmost importance to maintain
confidence of shareholders particularly for companies which have suffered
disproportionate impact of this epidemic.
Regulatory Disclosures - Listed entities would need to ensure that if there is a
material effect on the business or operations of the company like closure of an
important manufacturing facility due to supply chain disruptions, the required
 intimation needs to be sent to the stock exchanges where the company’s shares are
listed. Disclosures and communication about the impact of the COVID-19 outbreak
on the business and operation should be planned and coordinated with the legal
teams to ensure compliance with applicable law.
Disclosures under financing documents – The company would need to carefully
monitor if it is in compliance with various financial covenants under the borrowing
documents and also assess the need to change or re-negotiate such terms with the
lenders. If due to material adverse impact on the company’s financial performance,
the company is unable to meet any financial covenants under the borrowing
documents, the same needs to be intimated immediately to the lenders. In the
event the security provided to the lender becomes inadequate due to any reason,
additional security may need to be provided.

Workplace Issues
The COVID-19 outbreak could begin to throw up a variety of employment law issues
relating to travel, health and safety concerns, sickness and absence. Below is a high-
level overview of the key workplace related issues that employers should consider:

Employer’s obligations - Employers are generally obligated to ensure a safe and

healthy work environment for their employees, temporary workers, trainees and staff.
To ensure a safe and healthy working environment, employers should do ‘everything
reasonably possible’ to ensure prevention. Employers may consider the following
actions:

Check with official sources (e.g. website of the Ministry of Health and Family
Welfare, Government of India, official sources such as the World Health
Organization) to see if there is an official recommendation and implement them.
Inform employees unambiguously about steps, including measures (to be) taken
including certain hygiene guidelines.
Keep the lines of communication open. Educate the staff without causing panic by
keeping them upto-date with factual and accurate information from reliable
sources.
 Make provision of specific equipment such as hand sanitisers and face masks, if the
risk becomes real.

Travel - The Indian government has issued an advisory to Indian travelers to refrain
from travelling to China, Iran, South Korea and Italy and advised to avoid non-essential
travel to other COVID-I9-affected countries. The government has also decided to start
universal screening for all passengers flying into the country from abroad for the virus
at the airports besides testing people coming in through open borders. India has
temporarily suspended visa on arrival for nationals of Japan, China, Iran, Italy and
South Korea and has cancelled all flight operations to and from China, Hong Kong and
Iran.

Employers should review how best to protect staff travelling on business, especially if
they are travelling abroad, when tailored guidance and support may be appropriate.
Further it would need to be considered whether measures are in place to deal with
staff being quarantined or falling ill when abroad. Can they be easily repatriated, or
moved to a safer place? How will the employer’s travel insurance policies respond in
those situations? Employers should review whether travel is necessary, and whether
meetings can be conducted by video link.

Leave entitlement - There is no legal requirement under Indian law to grant leave
for COVID-19 patients in excess of what is statutorily mandated or contractually
agreed upon. Given the communicable nature of the disease, it may be advisable for
the employers to allow affected employees to proceed on paid leave.
Termination - It is advisable that the employers do not terminate any employee on
the ground of he/she being a COVID-19 patient or suspected patient.
Work from home - The employer may, in principle, allow an employee to work
from home. The employer may audit available IT hardware and software, and close
any gaps if required to ensure that the IT system is robust and functional during
such remote access. It needs to be determined if there are any datasecurity issues to
consider and how best to address them.
 Entry into workplace - An employer has a legal right and an obligation to prevent
an employee who is suffering from communicable diseases like COVID-19 from
entering the workplace for the protection of other employees.
Respect Employee Privacy and Avoid Discrimination - Employers should treat
employee health information as confidential and should ensure that their policies
apply to all employees equally and not single out those of a particular nationality,
ethnicity or other protected class, or those perceived to have contracted COVID-19.

The key need for employers is to plan ahead and behave proportionately,
reasonably and consistently. A failure to do so will not only risk legal claims, it
may also impact adversely on staff morale and damage future employee
relations.

Check Your Insurance

Every company impacted by the COVID19 outbreak would need to consider if adverse
financial consequences of business interruption resulting from COVID-19 can be
claimed under the insurance policy. Companies should review their existing business
interruption insurance policies to protect themselves against any losses sustained from
exposure to the epidemic. The extent of insurance cover available to a company will
depend on the specific terms of each policy.

The company may also need to notify to the insurance company any material event
which may result in the company being required to make an insurance claim and such
notification requirement under the insurance policy needs to be strictly adhered to.

Conclusion
While the full impact of the COVID-19 outbreak on businesses is not clear at the
moment, and the outbreak is likely to spread in the coming days, this is an issue which
is seemingly becoming critical by the week.

This report has been made by teams at Cyril Amarchand Mangaldas and the original report is
attached below for reference.
The views expressed here are those of the authors, and do not necessarily represent the views of
BloombergQuint or its editorial team.

IMPACT-OF-COVID-19-Coronavirus-on-India-Inc.pdf Read Document

BloombergQuint

View Opinions From Business And Policy Experts On BloombergQuint

Recommended For You

Low In ation Is Boosting Markets for the Wrong Reasons

It's Hard to Win Against a CEO With a 300% Stock Market Return

Bond Traders Outsmart the Fed and Themselves

Sri Lanka’s Pain Fuels Ugly Debate in India

Disclaimer
Comments (0)

Write a comment

Search...

Be the first to comment

Add Vuukle Privacy

SUBSCRIBE to Bloomberg | Quint

The Daily Newsletter

Enter Email address Subscribe

I agree to the terms of the privacy policy