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Understanding Contracts

Updated: Sep 22, 2020

- Aditya Srikanth

Background overview and objectives:

  1. Due to the outbreak of Covid-19 and the resultant lockdown there has been a disruption of supply chain and availability of labour.

  2. Every business is facing some difficulty and it is advisable to -

  • address the key stakeholders – employees, supplier network, customer network and vendor network on the outlook of your business and what steps you are taking to protect the stakeholders and their interests.

  • review key contracts with suppliers and customers with a focus on performance standards, liability provisions, termination provisions and force majeure provisions.

  • identify contracts where you will be able to meet the obligations and the ones where you will not.

  • identify if you would be able to seek shelter under the force majeure clause in your contracts or the doctrine of the frustration.

  • identify notice requirements under various contracts and take appropriate action after consulting a lawyer.

  • be proactive in reaching out to stakeholders and arriving at a settlement before the situation escalates.

  • plan your response in case you receive a legal notice.

1. Many of my contracts are not in written form. What should I do? Do I have remedies under law?

  • There is no requirement under Indian law that a contract should be written. The Supreme court has held that even oral agreements are valid.

  • Section 92 of the Evidence act excludes evidence of oral agreement for those documents which are required by law to be in writing.

  • You can enforce an oral agreement. However, you will need to provide sufficient evidence for the purpose of proving the existence of a valid contract. This evidence can be in the form of a witness who has seen the contract being formed, a purchase order, whatsapp messages regarding the contract, SMS, call logs and emails communication between the parties.

2. What are the remedies available to me if I am not able to perform the terms of the contract?

  • Each contract is different. The circumstances surrounding a contract are different. It is important to take a nuanced approach to each situation.

  • In case you are not able to perform the terms of your contract, you can seek to

    • renegotiate your contract

    • avoid/defer performance of the contract under a force majeure clause in your contract.

    • avoid/defer performance of the contract under the doctrine of frustration.

    • terminate your contract

    • settle the issue by mediation or lok-adalat

3. How do I renegotiate my contracts?

  • Approach the other party, state your reasons for seeking renegotiation and propose alternative means of performance under the current contract.

  • You can also suggest you want to temporarily suspend the contract/agreement or extend its performance period and reiterate that you want to resolve amicably.

  • Once you have arrived at a new set of terms to be followed, enter into a new contract. In the new contract make it clear that in light of the ongoing lockdown and pandemic, you have mutually decided to amend the terms of the contract.

4. What if my supplier and vendor do not agree to modify the terms of my contract with them?

  • Try again, inform your stakeholders that initiating litigation against your business associates will only increase the amount of disruption for your business and it will adversely affect the business relationship between both of you. Inform your stakeholders that the Indian courts are burdened with a lot of cases and that it could take 10+ years for the dispute to be resolved by the courts.

  • Talk to your stakeholders and discuss how you can amicably terminate the contracts.

  • Explore potential for dispute resolution via mediation, lok-adalat or out of court settlement.

  • If the above steps do not work then you may have to send out a legal notice to terminate the contract, invoke the force majeure clause.

5. What is force majeure?

  • In general terms, the concept of “Force Majeure” means the occurrence of an event or circumstance that prevents or impedes you from performing one or more of its contractual obligations under the contract.

  • The Indian contract, 1872 act does not define the term ‘Force Majeure’.

  • You could use the force majeure clause to defer your obligations under the contract or terminate the contract, depending on your unique circumstances.

6. How and when do I invoke a force majeure clause?

  • Check your contracts to see if there is a force majeure clause.

  • If you are required to invoke the force majeure clause by communicating it in a timely manner, send out a communication to the other party that you would be invoking the force majeure clause. Ensure that your communication is in line with your contract. Try to keep the notice simple, the goal here is not to cause harm to your business relationship.

  • If your stakeholder does not accept your notice, you may have to be ready for a litigation in case the stakeholders decides to pursue legal action.

  • You will need to prove before the court that -

    • You are not able to perform your obligations due to the lockdown and/or Covid - 19 as contemplated in the force majeure clause.

    • That you have taken all reasonable steps to avoid or mitigate the event or its consequences.

    • That you had informed the other party at the earliest opportunity.

You can check this post by a law firm which has sought to map the reaction of the courts to covid and force majeure.

7. What is the frustration of a contract? How and when can I invoke it?

  • In general terms, a contract is frustrated when the nature of performance of the contract has radically changed since it was agreed, and it has become impossible to perform. Section 56 of the Contract Act incorporates the doctrine of frustration. It allows you to render a contract void as it becomes impossible or unlawful to perform by virtue of an event which could not be prevented by the affected party.

  • The Supreme Court has held that the word ‘impossibility’ used in Section 56 of the Contract Act must be interpreted in a practical form and not in its literal sense. Thus, a contract would come under the purview of Section 56 of the Contract Act even if it is not an absolute impossibility, but the contract has fundamentally changed, which the parties had not contemplated at the time of the agreement.

  • The concept of restitution as per Section 65 is also relevant when you invoke the doctrine of frustration. Section 65 states that when an agreement is discovered to be void, the person who has received any advantage under such agreement is ‘bound’ to restore it or to make compensation for it, from whom he received it.

  • To invoke the doctrine of frustration, you should send out a notice stating the reasons under which you believe that the contract is frustrated and the steps you are willing to take to return any compensation or raw material that you may have received under the frustrated contract.

8. How do I terminate my contract?

  • Each contract typically has a termination clause which determines how the parties may terminate the agreement. If your contract has a termination clause, send out a notice of termination to the other party. Make sure you follow the terms of your contract with regards to notice period and payment as per the termination clause.

  • Even if your contract does not have a termination clause, you can terminate the same in case of a breach of contract by the other party.

  • However, If your contract does not have a termination clause and you are at fault, the best way to end the contract prematurely is through a negotiated settlement or by offering a substitute to complete the work.

Aditya Srikanth is a practising lawyer in Chennai, specialising in commercial dispute litigation. He believes that technology, plain english and design is the future of law.

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