COVID19 – It Ain’t Over Yet! A GC’s Checklist.

In-House Counsel

COVID19 – It Ain’t Over Yet! A GC’s Checklist.

Tagore Yaragorla | August 2021

During the second wave, Covid-19 crisis hit India, and the infrastructure sector in specific, unexpectedly with considerable strength at all levels of the value chain. The unavoidable outcome has been that the equity markets’ investors are starting to notice, displaying volatility reminiscent of the Covid crisis.

Perhaps, in general, what has emerged from COVID-19 is that times of great uncertainty require the General Counsel (GC) of the group/company/developer to step forward. During a pandemic with significant employee health implications, legislated restrictions and local ordinances on the movement of materials/labor, curfew timings, etc., the GC has proved central to corporate decision-making. Looking forward and learning from this ongoing crisis, in a world of changing social expectations, an ever-shifting regulatory environment, and the increasing role of legal, the GC will remain central to corporate strategy. As cost optimization efforts continue into FY 2021-22, GC must safeguard the strategic investments that enable the strategic goals of the Group while supporting the execution of ongoing projects. GCs, with their experience, are built with more resilience and are better prepared for the new risks that undoubtedly lie ahead.

The outbreak of Covid-19 brought social and economic life to a standstill. Oil plummeted to 18-year low; Foreign Portfolio Investors (FPIs) have withdrawn huge amounts from India. While lower oil prices will shrink the current account deficit, reverse capital flows will expand it. Rupee is continuously depreciating. It’s time to rethink about development paradigm and make it more inclusive. Covid-19 has also provided some unique opportunities to India. There is an opportunity to participate in global supply chains.

Having said the above, it is equally essential to protect each party’s rights on account of Covid and here, needless to say, documentation plays vital role to ensure to get the entitlements realised in true letter and spirit. The story of claims and their handling must be verifiable, without the “knower” being present in this context, as nobody knows the time period it will take and where such a claim may end up. It can be one of the many ways that countries recover from the crisis stronger, more resilient, and better prepared for future disruptive events like pandemics and well prepared for executing the projects, even if there are any constraints, and GCs play a vital role in strategizing.

A few critical areas, where GC’s advise would help choose the direction;

THE FRUSTRATION OF CONTRACTS VS FORCE MAJEURE

It is evident that if the circumstances, post signing of the contract, make such contract’s performance more onerous, this reason, irrespective of the circumstance leading to it, including financial hardship, is not sufficient to invoke the doctrine of frustration. There are exceptions but the situation brought about by Covid-19 will not fall under such exception. Covid-19 or the spread of Corona Virus was declared as a pandemic. It led to lockdowns almost throughout the world, including India, and financial slowdown across India in all sectors. The impact on the businesses has been severe, and the force majeure clauses will play a crucial role if the businesses cannot perform their contractual obligations amidst this crisis.
In the aftermath of the lockdown, many suppliers could not perform their contractual obligations and, to say the least, the performance of their obligations was delayed. The suppliers are seeking to delay and/ or avoid contractual obligations/ performance. They wish not to be held liable for their contractual non-performance. As a result, the companies might not be able to honour their customer agreements. The same is true for the consideration, which either of the party to a contract might not be able to fulfil under the terms of the contract. Under such scenarios, the force majeure clause would be a determining factor in understanding these events’ implications.

But this implication arising out of FM clause due to Covid-19 cannot be upheld for every contract, and the FM clause in each such contract needs to be interpreted based on the circumstances specific to such contract. It is advisable not to consider a general approach while assessing the implications under contract including similarly placed contracts.

Force Majeure and the doctrine of frustration: “Frustration is an English contract law doctrine that acts as a device to set aside contracts where an unforeseen event either renders contractual obligations impossible, or radically changes the party’s principal purpose for entering into the contract.”
Force Majeure (S.56 of the Indian Contract Act, 1872.): A force majeure clause relieves one or both parties from liability to perform contract obligations when performance is prevented by an event or circumstance beyond the parties’ control. The doctrine of frustration (S.56 of the Indian Contract Act, 1872.): The essential idea upon which the doctrine of frustration of contract is based is that of the impossibility of performance of the contract; in fact, ‘impossibility’ and ‘frustration’ are often used as interchangeable expressions. The changed circumstances, it is said, make the performance of the contract impossible, and the parties are absolved from the further performance of it as they did not promise to perform an impossibility. The entire jurisprudence on the subject has been stated by Justice RF Nariman of the Supreme Court in the case of Energy Watchdog vs. CERC (2017). In the instant case, the Supreme Court rightly reiterated that the ambit of force majeure cannot be stretched to a probable difficulty or loss caused to the entity obligated to perform the contract.
FM clause again gained attention from all quarters vis-à-vis so-called legal clause. In the absence of a force majeure clause, any party could also invoke the doctrine of frustration under Section 56 of the Indian Contract Act, 1872. In order to invoke the same, parties must show that the performance of a contract has become impossible, and the arrangements and conditions have become fundamentally different from those envisaged in the contract. The parties also can invoke several clauses such as price adjustment clauses, limitation or exclusion clauses, material adverse change clauses, and many others such clauses to limit the liabilities arising from non-performance or the partial performance of the contractual obligations. The ability to invoke such grounds would depend on the wording of the contracts and such wording decides the course of action.

ADDITIONAL CLAIMS

Whether our priority is preserving a commercial relationship, achieving an advantageous commercial outcome or just limiting financial damage to our business, our experience shows that businesses are most successful when they put in place a structured mechanism. In-house legal team supports in documentation and ensures that the decision is being taken basis the complete and accurate information and communication among the parties.

DEMOBILISATION AND REMOBILISATION

Covid witnessed mass exodus of such floating population of migrants on foot, amidst lockdown/curfew. Non availability of labour escalated to suspension of the works, although the authorities are permitting the companies to commence the construction activities.

Documentation:- It’s equally important to notify the details of migrant labour from time to time, though compliance is little extra, in case of migrant labour, but such reporting would protect the contractual rights, if required to enforce. Unfortunately, many of the requests got shot off because of not having substantial documentation, although such delays were solely attributable to COVID.

EXTENSION OF TIMELINES & STRESS ON PIPELINE PROJECTS

It goes without saying that COVID-19 is affecting infrastructure, for both commissioned projects and projects in planning. Instinctively, we can imagine that demand disruptions yield revenue losses for PPPs; construction is affected; and future planning while sands are still shifting is extremely challenging.
What are the implications of the affected infrastructure is taking on crisis recovery, once we get there? On the one hand, a downturn in infrastructure balance sheets, creation, and the algorithm allows us to visualise the impact of COVID-19 in real-time, but also the major reasons behind cancellations and delays reported in different languages across the developing world— at minimum cost.
Most disruptions were due to movement restrictions i.e. travel limitations and disrupted supply chains. Projects sponsored by foreign entities were severely affected as they often need foreign engineers and technicians at construction sites. With respect to supply-chain delays, the construction industry is heavily reliant on manufacturers in China, where operations were strongly affected by Covid-19 early on. The global solar PV value chain was particularly hard-hit because manufacturing capacity is concentrated in a few major markets, including China.

It’s noteworthy that the major reasons for delays or cancellations like travel limitations, supply changes, and labor availability are temporary issues. Unfortunately, we must pay strict attention to fresh spikes in COVID-19 cases. Travel restrictions hinder many aspects across the project cycle, we need to pay particular attention here—as this can affect the strong due diligence that ensures projects are well-executed, necessary, and sustainable.

AI and digitalisation are accelerating research progress by processing large volumes of data, enabling policymakers and the medical community to understand the virus faster and more cheaply.

We strongly believe that there are more ways to support policymakers and society to manage different stages of the crisis and its aftermath with the support of digitalisation.

IMPACT ON ECONOMY

Implications on Capital Markets, Global Oil Market and its Impact on India Coronavirus fears have sent shock waves across global financial markets. Foreign Portfolio Investors (FPIs) have withdrawn huge amounts from India. There will be a lot of volatility in the capital markets in the coming months, owing to rapid flow of capital from one market to another in the world
In India, the unorganised sector mainly comprising of microeconomic activities, and the migrant labourers have taken the maximum toll. The agriculture sector has faced a significant loss due to COVID-19 as the primary consumers, and bulk buyers, demands from hotels and restaurants have reduced drastically due to lockdown. The manufacturing industry, which contributes 20 per cent of the GDP, is now reeling down. Tourism and hospitality industry have Cascading Effects of COVID-19 Pandemic Across Economic and Social Sectors of India been affected severely, and it is not wrong to say that it is the most hardhit sector due to COVID-19 pandemic. Air operations were closed, and they have opened with a lot of restrictions leading to lay off and salty cuts in these industries. Although the government is hesitant to consider education as an essential service, the growth of the nation and future depends on skill enhancement of the youth. The uncertainty of when the pandemic would end made people save money rather than investing in real estate. prolonged home stay and uncertainties have created Impact on Social, Political & Ecological too.
In-house lawyers are therefore required to act upon to amend the financing deals, project contracts, realignment of policies & customising the ESG’s to suit the changed requirements of the society.
The experience on the cascading effects of the pandemic can help humanity deal with such crises better with a collaborative effort in future. Let us all review all the existing contracts and have a better response mechanism to implement the inclusive targets. The resilient leadership and collaboration across industry would help to recover all areas steadily.

GROWTH OF BUSINESS AND VALUATION OF THE ASSETS

The effects of COVID-19 are manifested in unpaid rents, unused office space, business closures and unprecedented unemployment. General Counsels must start reviewing their businesses and engaging valuation professionals to assist in measuring the impairments, valuing their businesses and planning for the transfer of interests.

JUST DOCUMENT IT!

As there are several ways to survive from this pandemic, documentation is one of the essentials to enforce the rights and entitlement under the contracts and for effective management of claims. In addition, the related correspondence with the contract partners must be seamless and structured, not least to enable contractual time limits for claim handling to be met.

“Man invented writing to enable him to pass on knowledge without the “knower” having to be present. In terms of claims management, the story of how additional claims arise and their handling must be verifiable, without the “knower” having to be present in this context”

Contract Managers shall keep three basic rules in mind:

“Know exactly what the contract requires of you”.
“Don’t do anything above, below and beyond the provisions of the contract without keeping seamless and appropriate documentation of your actions” and;
“Do exactly what the contract requires but without having any adverse effects on others”.

About Author

Tagore Yaragorla

Tagore Yaragorla is currently working as Head-Legal with SB Energy (SoftBank Group) and part of its Leadership team. He has diverse experience of around 20 years in all areas of legal, Project Development, Financing, M&A, Compliance, Regulatory, Governance, Risk management and Leading teams in India and abroad. He has considerable experience in Renewable Energy, Infrastructure, Telecom, Banking & IT. He also represented in high-profile commercial litigation, dispute resolution, class action suits and Arbitration matters.