Covid-19: The Storm In The Commercial Contracts World
Within one week of the Covid-19 lockdown, commercial disputes were already knocking at justice’s door. Another week and webinars, editorials, advisories by the government on force majeure were all the rage. By the fourth week, businesses across sectors were either defaulting on commercial contracts or renegotiating them.
Rajendra Barot, senior partner at law firm AZB & Partners, describes the goings on in the commercial contracts world using a short story —
Seeing that her husband isn’t being able to sleep, the wife asks, what happened? The husband says, I have to pay Rs 5,000 to the neighbour tomorrow and I don’t have the money. The wife goes to the neighbour’s house and tells him, “my husband can’t pay you the money tomorrow. You do what you have to”. She comes back and tells the husband, now you sleep. It’s his turn to be awake.
On a more legal note, Barot pointed out, a lot of parties are just refusing to adhere to contractual terms even in the absence of a legal basis. In others, while there may be force majeure clauses, their invocation is subject to language and facts, he said.
Unless there is an imminent irreparable financial harm, for instance pledge invocation or NPA classification, parties are choosing negotiation over litigation, experts told BloombergQuint.
“Companies are asking themselves – ‘do I really want to pick a fight with someone I’ve been doing business with for a long term or can I just renegotiate the terms because I may not even find someone new in the market on the same terms’,” Barot explained.
Where Battle Lines Are Drawn…
On March 18, Halliburton Offshore Services invoked the force majeure clause in its contract with Vedanta Ltd. Vedanta moved to encash eight bank guarantees provided by Halliburton on grounds that it had the right to terminate the contract and have the pending project work completed at latter’s cost. But on Monday, the Delhi High Court granted Halliburton interim relief and barred invocation of guarantees for a period of one week after the lockdown.
So far, courts have shown more empathy towards those who have failed to deliver, than those collecting. For instance –
- Pledge invocations against Future Retail Ltd. and MEP Infrastructure Developers Ltd. were stayed by the Bombay High Court.
- Real estate companies Anant Raj, Transcon Skycity Pvt. Ltd. and Transcon Iconica Pvt. Ltd. were granted relief against banks who sought to classify their loans as NPAs.
- Indiabulls Housing Finance Ltd. was granted interim relief by the Delhi High Court from any coercive action if it fails to make payments to its debenture holders.
Though when importers of steel products attempted to use the force majeure argument to prevent banks from encashing the letters of credit, their argument was dismissed by the Bombay High Court.
Where Parties Are Choosing Dialogue...
Caught between Halliburton and Vedanta are vendors, say, those who provide rig mobilisation services. They’ve been asked to lower prices by 15 percent hereon. Some have also been asked to supply credit notes for up to 15 percent of payments made in the previous financial year, according to communication reviewed by BloombergQuint.
Next door, in the paints industry, one top player has also sought extended credit terms from suppliers. Asian Paints Ltd. has written to suppliers seeking a 30-day extension in payment period, according to a a letter reviewed by BloombergQuint. The ongoing nationwide lockdown has hurt cash flows at the country’s largest paints company. This is a proactive measure to conserve cash, its spokesperson said.
The economic disruption caused by Covid-19 prompted Singapore to introduce the (Temporary Measures) Act 2020. Among other things, this law has put a temporary freeze on legal rights and obligations of parties to scheduled contracts.
To name a few, the relief extends to certain loan or finance contracts, a performance bond or equivalent for construction and supply contracts, hire-purchase agreements for commercial vehicles, plant, machinery, etc, contract for the provision of a venue, tourism contracts, lease or licence of non-residential immovable property, etc.
In the absence of any such statutory approach in India, businesses often have no option but to renegotiate terms of their agreements.
According to legal experts, commercial contracts that businesses are presently anxious about fall under three buckets -
1. Commercial Real Estate: Lease Agreements
It may be inappropriate to say that tenants shouldn’t pay rent at all, because they are continuing to use the commercial premises as their belongings are still lying there, that is, they have not vacated the premises, Anand Desai, partner at DSK Legal, said. Having said that, through this lockdown period neither party is benefiting from the premises in the manner contemplated, he said.
We have advised certain clients that an equitable solution should be found – the landlords shouldn’t be adversely affected as they may have maintenance, debt servicing etc on the premises, but equally they should consider not profiting off tenants during this period. My understanding is that many tenants aren’t paying rent in view of the lockdown.Anand Desai, Managing Partner, DSK Legal
So, we’re advising clients to not take any strong positions at this point and renegotiate contracts once the lockdown is lifted, he added.
Also in wait and watch mode is Virtuous Retail that runs shopping centres in Bengaluru, Chennai, Surat and Chandigarh and rents space to brands like Adidas, Calvin Klein, Hamleys, Forever 21, Hush Puppies, Marks & Spencer.
At this stage, we’re getting requests from various tenants for rebates and deferment but are yet to take a decision on it, Pankaj Renjhen, chief operating officer at Virtuous Retail, told BloombergQuint. Until shopping centres are allowed to reopen, it will be difficult to assess the situation, he added.
Brands have come to us with varied requests. Some are basing their requests relating to the force majeure clause. The factual understanding on force majeure may not necessarily apply in this situation and it will need to be legally reviewed.Pankaj Renjhen, COO, Virtuous Retail
Renjhen pointed out that for retailers, rental is probably 8-20 percent of their cost but for his company, 95 percent of the revenue comes from rent. Majority of it goes in servicing the banks by way of lease rent discounting on the assets and add to that substantial fixed costs. So, the final decision on lease payments will be done after a discussion with the retailers at an appropriate stage.
2. M&A Agreements
Covid-19 has adversely impacted most ongoing deal negotiations, Atul Pandey, partner at law firm Khaitan & Co., said. Acquirers want to either revisit valuations or buy more time, he said. A deal in the e-commerce sector is being renegotiated on concerns that demand may get impacted post the lockdown, he added.
A litigation lawyer pointed to a deal where a large hospital chain was supposed to be acquired by another healthcare company. The over Rs 2,000 crore deal was supposed to be signed before March 31. Now, no one knows how the property value and the business of the target will get impacted, this lawyer said on the condition of anonymity.
In one of the deals we are advising on, Desai pointed out, one shareholder sought to buyout the other using funds raised from a foreign private equity fund. The fund was to invest in the purchaser’s joint venture company. Now it has backed out whilst seeking to renegotiate the price, he explained to illustrate the types of issues in focus.
3. Supply Contracts
“What we are observing is that a lot of supplier contracts are one sided – the force majeure clause is applicable only to the supplier and not the buyer,” Ameya Gokhale, partner at law firm Shardul Amarchand Mangaldas & Co., said. The buyer’s only obligation is to pick up the goods and pay, and so the only party who can claim protection under force majeure is the supplier, he explained.
Ordinarily, therefore, the suppliers are ones who’ll be able to invoke force majeure clause of the contract. Whether force majeure condition actually exists will depend a lot on the facts and circumstances of each case and this is what the courts will have to determine.Ameya Gokhale, Partner, Shardul Amarchand Mangaldas & Co.
Desai said often where goods are perishable, supply contracts are likely to be frustrated. Where the contract specifies the time for delivery of goods and that has passed, then too the buyer may be entitled to walk out, he explained.
“The most problematic ones are where orders have been placed in anticipation of a certain demand continuing, for instance steel, cement by a real estate developer. For these, the chances of buyers not showing up or reneging on contracts are very high.” — Anand Desai, Managing Partner, DSK Legal
So there could be a string of bankruptcies working backwards along the supply chain, he said.
Finally, disputes in concession agreements with port or airport authorities are likely to surface soon as well, Barot pointed out. The PPP operator is supposed to pay a minimum amount — revenue share/royalty — to the authority, which they’ll be unable to, he said.