Covid-19 Impact on Commercial and Financial contracts:
China is economically known for its “Dumping trade” where they produce the duplication of the branded products and dump them into other developing nations like India. But this time, they have come up with their indigenous and original version which had created threats all over the world. Yes, the pandemic, the so-called “Coronavirus” originated in China which spread to other parts of the world at a faster rate. World Health Organization (WHO) declared the virus “Pandemic” on the 11th of March, 2020 and took necessary steps to curb and eliminate the virus. As this virus had stalled the world economy, the impact on India is much of a great significance. Let us take a look at the impact; the virus had created on the commercial and financial contracts in India.
Indian Contract Act, 1872:
The legal form of making an agreement is called “Contract” and Indian Contract law had been crafted to regulate the agreements and their process in a legal and precise manner. The Contract Act is based upon English principles with 266 sections of two parts. Any contract may be considered null and void if it breaches the principles of the Contract Act. The commercial and financial contract comes under Part A of the Indian Contract Act.
1. The commercial contract includes agreements relating to Purchase, Manufacturing and Production, Sale, Distribution, and Services. Along with the 1872 Act, the Special Relief Act of 1963 looks over the enforcement of commercial contracts in India.
2. The financial contract includes Derivatives that are dependent on the underlying asset or group of assets where the agreement had been set upon.
The contract Act was updated on the 17th of December 2018 by the Ministry of Law and Justice on legislative importance.
Force Majeure Clause in India:
According to the Indian Contract Act, 1872; the contract works on the principle of “Pacta Sunt Servanda” which means “Agreements should be kept”. But certain circumstances can deteriorate such principle and can lead to “Force Majeure”. Derived from the French civil law, ‘Force majeure’ is the condition where the legal agreement cannot be moved further due to some supernatural occurrence which can eventually lead to the discontinuance of the contractual obligation. Force majeure is enshrined in Section 32 and 56 of the Indian Contract Act, 1872, where any contract that faces disruption due to irrecoverable events may be declared void.
Covid-19 Impact on Commercial Contracts:
The pandemic had created an impact on the social and economic factors of the world. Right from the supply chain contracts to the management contract, all commercial activities had been greatly hit due to this virus.
1. Demand-supply mechanism — The transport of goods and service contracts are being in price renegotiation for undergoing the risk of transportation. Further, contracts ought to be extended or terminated according to the will of the parties.
2. Contract Viability during the force majeure: Force majeure stalls the contract for a particular amount of time, say, until the impact of Covid-19 is being subsided. In that case, some contracts can adjust the deadline of their contract after which the agreement can be terminalized on either side.
3. Dispute resolution Mechanism — The contract which is stalled due to Covid-19, which is not necessarily to be stalled, can be resolved through dispute resolution. The affected party can call the other for dispute resolution to resolve the false implication of stalling as the particular business activity does not come into the ambit of the halting category.
4. Other adjustments: Some commercial contracts can be adjusted based on Price, Limitation, Material adverse changes, etc. to maintain the legality of the contract.
Covid-19 Impact on Financial Contract:
As the pandemic is constantly creating unwarranted inflation, the financial contracts are also affected by those high prices. The renegotiation of the prices of the derivatives creates shambles in the financial contract leading to its withdrawal or termination.
1. Impact on Bonds and Securities — The short term bonds and securities have a mixed variability of impact on creditors and debtors leading to the terminalization or renegotiation in the contract.
2. Impact on Stock Market — The stock market of various countries had crashed to the ground and in India, NSE and BSE are at challenging levels.
3. Impact on Market Indices — Commodities face a diverted variability in prices where the self- preventive commodities are sold at higher prices and essential commodities and services are being sold below affordable prices.
1. Force Majeure can be the best action being taken, which might delay timely delivery, but it should not always end in the terminalization of the contract.
2. Commercial and Financial contracts are risk induced and proper risk management measures to be notified while signing the contract.
To conclude, the Covid-19 pandemic is not a new challenge as this world has seen many pandemics more harmful than this. The best thing is to learn from the past and act accordingly to preserve the legality of the agreement.
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