Grappling with an unforeseen pandemic event, many Indian businesses are reviewing old contracts to see whether force majeure clause can be invoked and allow them to walk out of agreements that they feel were unequitable and one-sided, said legal experts.
COVID-19 has triggered a shortage of raw material, hit consumption and impacted pre-agreed deadlines, leading to a situation where companies are now exploring a route to cancel contracts.
Lawyers and consultants said while many of the cases that are coming up for review are genuine in nature, a few companies are seeking refuge in the current situation to escape from bad contracts that are now perceived as one-sided and weighed against them in view of the general downtrend in the economy.
Typically, companies put the force majeure clause in long-term contracts which is triggered when unforeseeable circumstances, such as natural calamities, prevent either of the parties from fulfilling their contractual obligations and also absolves them from penalties.
Chandubhai Mehta, managing partner of law firm Dhruve Liladhar & Co, said the firm had received several queries in the past two weeks where the parties, mostly in the manufacturing and construction sectors, sought legal guidance to review old contracts and asked whether they could invoke the force majeure clause.
“The economy is not doing well and payment as well as recovery cycles are already stretched. In circumstances like this those who are facing trouble see the current situation as an opportunity to renegotiate old terms or totally scrap the contract,” said Mehta.
Several manufacturing sectors, particularly those relying heavily on China for raw materials, such as pharmaceutical firms for their active pharmaceutical ingredients, conventional and renewable energy equipment manufacturers and suppliers, electronics and chemical companies, are witnessing unprecedented delay or uncertainty in the supply chain.
A Mumbai-based renewable energy firm has sought legal assistance as it depends on Chinese solar panels for local contracts. With China under lockdown, the Indian company failed to meet the deadline and is now seeking legal assistance to see if the force majeure clause can be invoked.
Similarly, a Hyderabad-based biotech firm is seeking legal help to see if it can invoke the clause against a Chinese company, which has delayed supply of certain crucial raw materials.
Consultants refrained from providing specific details due to non-disclosure agreements and client-confidentiality agreements.
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