CORONAVIRUS AND ITS IMPACT ON CONTRACTS
As the COVID-19 also known as Coronavirus is on rise and its impact is not limited to human lives but also to operation of business eventually affecting the economy. The stock valuations are going down and various supply chain disruption, performances under various contracts are in question. In such a scenario, force majeure clause and Material Adverse Change (MAC) clause may come to help the parties to a contract.
Material Adverse Change (MAC) Clause
- In an M&A transactions the time between signing of the agreement and closure of the transaction is very crucial. It is when the MAC clause comes into operation. MAC clause confers the parties to a contract with a right to terminate the contract upon occurrence of any event which affects materially on the viability of the transaction.
- But on the other hand to agree upon the materiality of an event by both parties of a contract is not easy because the seller keep the scope of materiality in a narrow way but on the other side the buyer prefer to keep it open and as board as may be possible so that it would be easy for them to walk out of the transaction.
- The Indian laws do not define any systematic guidelines for determining the materiality of the events and provide that any event which will restrict or make it impossible for any reasonable party to enter into such contracts will be a material adverse change.
Regulation 23(1)(c) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, prescribes that “any open offer can be withdrawn in circumstances where any condition stipulated in the agreement for acquisition attracting the obligation to make the open offer is not met for reasons outside the reasonable control of the acquirer, and such agreement is rescinded, subject to such conditions having been specifically disclosed in the detailed public statement and the letter of offer”, which means that parties can withdraw themselves from the obligations under the contract if it becomes impossible to meet the conditions for reasons which are beyond the reasonable control of the parties.
Under Section 56 of the Indian Contract Act, 1872 which deals with the doctrine of frustration of contract states that any act which by reason of some event if occurs after the contract is made and such an event is something which the promisor could not prevent then such a contract becomes void due to coronavirus.
Therefore, the parties to a contract may resort to avoidance of performance of their contractual obligations by invoking MAC clause. But the party invoking this clause have a burden of proof that the pandemic COVID-19 has affected materially to the transaction. Also it is important to double check prior to invoking the MAC clause if any alternate means of performance of the contract is available.
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Force Majeure & CORONAVIRUS Impact
Force Majeure clause specifies the conditions or events which will excuse the performance of the contract whereas the MAC clause is vague and do not specify the triggering events. Also MAC clauses intend to allocate risk between the parties that may arise during the signing and closing of the transaction. Whereas force Majeure can be claimed at any time if a force majeure event arises.
So the question arises whether the pandemic COVID-19 will fall under the concept of force majeure? The Ministry of Finance has issued an office memorandum on February 19, 2020 which declares that COVID-19 can be treated as natural calamity and hence a force majeure. It can be invoked with due procedure.
Force majeure means events which are beyond human control and hence extra ordinary. It is by and large believed that force majeure includes an act of god, natural disaster, war, labour unrest, epidemics and strikes, etc. It is an exception which may be claimed by the performing party to a contract.
In one of the leading case Energy Watchdog vs. Central Electricity Regulatory Commission & Others on April 11, 2017 the Supreme Court of India laid down following guidelines:
- If the events are beyond the reasonable control of the parties and in such conditions parties cannot be held liable for non- performance of obligations under the contract.
- Considering the analysis of force majeure clause it is also necessary to analyse if best endeavours have been taken to mitigate force majeure event.
- For an event to qualify as a force majeure, it is necessary that the same is unforeseeable by the parties.
- The event has actually rendered the performance impossible or illegal.