The World Health Organisation (WHO) declared COVID-19 as a “pandemic” on March 11, 2020.
The outbreak and the rapid spread of COVID-19 has sent shock waves across global markets. It has disrupted supply chains, leading to the closure of several manufacturing facilities globally; serious disruption of air and sea traffic and closure of vital air routes, like the one between the US and Europe. This is turn has led to the collapse of stock markets around the world, leading to the loss of billions of dollars, which got wiped out in a matter of days. A combination of all these factors has led to a decline in the overall volume of global economic activity, forcing the world economy towards a possible recession. It is forcing Boards across the globe to confront a host of difficult questions on how business should be conducted during a global public health crisis.
We have received several queries regarding the impact of COVID-19 outbreak on businesses. CAM’s crisis management team is closely monitoring this global pandemic and its impact. Our legal professionals are well equipped to provide guidance to clients in this urgent and rapidly developing situation. To provide preliminary assistance to Indian businesses, we have prepared these FAQs to highlight some of the COVID-19 pandemic related key legal issues that companies should be thinking about in the current environment. You may refer to our earlier publication providing high-level analysis of the COVID-19 impact on India Inc.
- How has WHO defined a “pandemic”?
A pandemic is defined by WHO as “an epidemic occurring worldwide, or over a very wide area, crossing international boundaries and usually affecting a large number of people.” This means a disease outbreak will be labelled as a pandemic when it is widespread, over several countries or continents, usually affecting a large number of people. The disease must also be infectious – cancer affects many people around the world, but it is not infectious and hence it is not defined as a pandemic.
- Why did WHO call COVID-19 a pandemic?
Until recently, WHO had stopped short of calling the outbreak a pandemic because local spread was limited, and most cases had a connection to China or other emerging hotspots – for instance Iran or Italy. But now, evidently, local transmission is widespread, with over 115 countries detecting the virus and more than 10 confirming at least 500 cases.
- When was the last time WHO declared a pandemic?
WHO declared a pandemic last in 2009 for the H1N1 influenza outbreak. At the time, the decision was criticised by some countries, which felt that it caused unnecessary panic. It also led to many nations wasting money on vaccines for a strain of flu that proved to be mild and relatively easy to contain.
A. Government Advisories & State Actions:
COVID-19 has affected all three organs of the State, namely, the Legislature, Executive and Judiciary.
- Have courts issued any directions in light of the COVID 19 outbreak?
The Supreme Court of India (SC) has announced that from March 16, 2020, the SC will be hearing only urgent matters. The SC has also directed that only the lawyers acting on the matter, i.e., either for arguments or making oral arguments or to assist, along with one litigant only, will be permitted in the court room. The SC has also reserved the right to require thermal-screening at all entrants, and to deny entry to persons found to have high body temperature.
Similar restrictions have been announced by various courts, including the Bombay High Court, Delhi High Court, Karnataka High Court, NCLT, district courts in Karnataka and other tribunals. The restrictions include hearing of only urgent matters, requiring parties to show urgency on matters, which may thereafter be heard only upon the court’s satisfaction of the urgency, limiting the presence of litigants in matters to only those cases where it is mandatory/ unavoidable (such as in cases of anticipatory bail), closure of cafeterias, and potential thermal-screening of visitors to the courts.
- Has the Indian Government issued any travel related advisory?
The Government of India has issued several advisories pertaining to travel restrictions on account of COVID-19. Some of the key advisories issued as on [March 13, 2020] are:
- All existing visas (except diplomatic, official, UN/International Organizations, employment, project visas) stand suspended till April 15, 2020. This came into effect from March 13, 2020, at the port of departure.
- Visa free travel facility granted to OCI card holders is kept in abeyance till April 15, 2020. This, too, came into effect on March 13, 2020, at the port of departure.
- OCI card holders already in India can stay in India as long as they want.
- Visas of all foreigners already in India remain valid and they may contact the nearest FRRO/FRO through e-FRRO module for extension/conversion, etc., of their visa or grant of any consular service, if they choose to do so.
- Any foreign national who intends to travel to India for any compelling reason may contact the nearest Indian Mission.
- In addition to visa restrictions already in place, passengers traveling from/having visited Italy or Republic of Korea and desirous of entering India will need certificate of having tested negative for COVID-19 from the designated laboratories authorised by the health authorities of these countries. This was enforced from March 10, 2020, and is a temporary measure till COVID-19 cases subside.
- All incoming travelers, including Indian nationals, arriving from or having visited China, Italy, Iran, Republic of Korea, France, Spain and Germany after February 15, 2020, shall be quarantined for a minimum period of 14 days. This came into effect on March 13, 2020, at the port of departure.
- Incoming travelers, including Indian nationals, are advised to avoid non-essential travel and are informed that they can be quarantined for a minimum of 14 days on their arrival in India.
- Indian nationals are further strongly advised to refrain from travelling to China, Italy, Iran, Republic of Korea, France, Spain and Germany.
- All incoming international passengers returning to India should self-monitor their health and follow required do’s and don’ts as detailed by the Government.
- International traffic through land borders will be restricted to designated check posts with robust screening facilities. These will be notified separately by M/o Home Affairs.
- All international passengers entering India are required to furnish duly filled self-declaration forms in duplicate (including personal particulars i.e. phone no. and address in India) ( as annexed) to Health Officials and Immigration officials and undergo Universal Health Screening at the designated health counters at all Points of Entry.
- Has the Government issued any other advisories related to COVID-19?
The Government of India and State Governments have issued several advisories related to the COVID-19 pandemic. Some of the key advisories as on [March 13, 2020] are:
- On March 11, 2020, the Indian Government issued an order under Section 69 of the Disaster Management Act, 2005 (“Act”) delegating its power under Section 10 of the Act to Secretary, Ministry of Health and Family Welfare, Government of India, to enhance the preparedness and containment of COVID-19 and other ancillary connected matters. The Order is deemed to have come into effect from January 17, 2020.
- On March 5, 2020, the Ministry of Health & Family Welfare advised that mass gatherings may be avoided or possibly postponed till the disease spread is contained. In case any such mass gatherings are organised, states may take necessary action to guide the organisers on precautions to be taken as per the risk communication material already sent in order to avoid any Severe Acute Respiratory Illness (SARI) and Influenza Like Illness (ILIs), including COVID-19.
- For more information on advisories & precautionary measures provided by the Government of India, please access https://www.mohfw.gov.in/
- For more information on advisories & precautionary measures provided by the Government of India, please access https://www.mohfw.gov.in/
- What actions are State Governments taking to contain COVID-19?
Under the Epidemic Diseases Act, 1897, which was enacted to provide for the better prevention of the spread of dangerous epidemic diseases, the Central and State Governments are empowered to undertake certain actions when they are satisfied that the State, country or any part thereof is visited by, or threatened with an outbreak of any dangerous epidemic disease and the ordinary provisions of law for the time being in force are insufficient for the purpose.
While the Central Government’s power is limited to ships/vessels and ports, the State Government is empowered to take, or require any person to take any measures, and by public notice, to prescribe temporary regulations to be observed by the public, or any class(es) of the public.
Several States have issued advisories on management and containment of COVID-19, invoking the provisions of the Epidemic Diseases Act, 1897. For instance, the Karnataka Epidemic Diseases, COVID-19 Regulations, 2020, and Haryana Epidemic Diseases, COVID-19 Regulations, 2020, were notified on March 11, 2020, the Delhi Epidemic Diseases, COVID-19 Regulations, 2020 notified on March 12, 2020; and the Maharashtra COVID-19 Regulations, 2020, was notified on March 14, 2020, (collectively, the “COVID-19 Regulations”).
Issued with immediate effect and for a period of 1 (one) year from its notification, some of the key features of these COVID Regulations are as follows:
- All hospitals (Government & private) should have separate corners for screening of suspected cases of COVID-19.
- All hospitals (Government and private) during screening of such cases shall record the history of travel of the person if he/she has travelled to any country or area where COVID-19 has been reported. In addition, the history of contact with a suspected or confirmed case of COVID-19 shall be recorded. Information of all such cases must be given to state integrated disease surveillance unit and collector of the district/local municipal commissioner immediately.
- Specific quarantine measures have also been provided under the COVID-19 Regulations, such as self-quarantine for 14 days in case a person has travelled to any of the affected countries and is asymptomatic. Any person with a travel history to any of the affected countries and symptoms of COVID-19 is required to be isolated in a hospital as per protocol.
- No person/institution/organisation will use any print or electronic media for information regarding COVID-19 without prior permission from the Department of Health & Family Welfare. In case any person/institution/organisation is found indulging in such activity, it will be treated as a punishable offence under the COVID-19 Regulations.
- Only laboratories authorised to test COVID-19 samples will collect them as per the guidelines of the Government of India. Such samples shall be sent to designated laboratories as authorised by the Government of Maharashtra/ Government of India.
- All persons with travel history in the last 14 days to a country or area where COVID-19 has been reported must voluntarily report to the prescribed authorities in accordance with the COVID-19 Regulations.
- Specifically under the Maharashtra COVID-19 Regulations, 2020, empowered officers are authorised to isolate and/or admit a person who develops symptoms simulating that of the COVID-19 infection, and may even initiate action under Section 188 of the Indian Penal Code, 1860, against any person who refuses to comply with the same.
- If cases of COVID-19 are reported from a specific geography, the relevant authorities empowered under the respective COVID-19 Regulations have been authorised to implement containment measures such as, sealing of the geographical area, banning entry or exit of people from the containment area, closure of schools, offices, gyms, cinema halls, swimming pools and banning public gatherings, banning vehicular movement, initiating active and passive surveillance, hospital isolation of all suspected cases, designating government buildings as containment unit, etc.
- If any person, institution or organisation is found violating any provisions of the COVID-19 Regulations, it would be deemed as an offence under Section 188 of the Indian Penal Code, 1860, which penalises disobedience of an order duly promulgated by a public servant.
Some state governments including Maharashtra, Karnataka, Delhi and Haryana have also issued directions to close places of mass gatherings, such as cinema halls, theatres, malls, schools, universities, swimming pools, conferences, workshops, etc., to contain the spread of COVID-19.
B. Employment & Workplace:
- What are the obligations of an employer during the COVID-19 pandemic?
Employers are generally obligated to ensure a safe and healthy work environment for their workforce, and must do ‘everything reasonably possible’ to ensure prevention of COVID-19 outbreak at the worklpace. Employers may consider the following actions:
- Stay updated with notifications, orders, directives from official sources (g. websites of the Ministry of Health and Family Welfare, Government of India and State Governments, official sources such as the World Health Organization) for all official directives/ recommendations/ guidelines and implement them.
- Take proactive steps such as promoting good workplace hygiene by placing instructions such as the need for regular hand washing, ensuring that keyboards and phones are regularly wiped clean, etc., and by undertaking other measures such as disabling biometric access, ensuring availability of tissues, masks, hand gloves, sanitisers and adequate disposal mechanisms, encouraging employees to stay at home if they develop even mild symptoms, etc.
- Inform employees unambiguously about preventive and precautionary steps, including measures to be taken. Issue guidelines and conduct regular awareness training to prevent and avoid infections.
- Keep lines of communication open. Educate the staff without causing panic by keeping them up to date with factual and accurate COVID-19 related information from reliable sources.
- Are there any travel restrictions that have been imposed?
- The Indian government has issued an advisory to Indian travelers to refrain from all non-essential travel to other COVID-I9-affected countries.
- The Government has also decided to start universal screening of all passengers flying into the country from abroad at the airports, besides testing people coming in through open borders, and to require all incoming travelers arriving from or having visited China, Italy, Iran, Korea, France, Spain and Germany after February 15, 2020, to be quarantined for a minimum period of 14 days.
- India has currently suspended all existing visas, except diplomatic, official, employment, project visas, from March 13, 2020, to April 15, 2020. Employers would be well advised to keep track of such restrictions and guidances, which are likely to keep changing.
- Employers should formulate and review measures to protect their staff who are travelling for business purposes, especially if they are travelling abroad, and consider issuing specific guidance and support as may be appropriate.
- Employers will also have to consider the possibility of having adequate measures in place to deal with staff being quarantined or falling ill when abroad, particularly in COVID-19 affected countries. Issues relating to their repatriation or transfer to a safer place should be kept in mind.
- The employers’ travel insurance policies should be examined to assess if they adequately cover those situations.
- Employers should review whether travel is necessary and consider conducting meetings by video link.
- It may be justified for an employee to refuse an employer’s direction to travel to such countries for business purposes.
- Can the employer forbid employees to travel privately, for example via public transport, or to an area of high risk?
Unless the Government prohibits travel via public transport or to a place or country, the employer cannot prohibit such travels on grounds of COVID-19 outbreak. The employer may inform the employee of the latest travel advisories issued by the Government of India, and invite the employee to inform himself of the risks associated with such a trip and discourage such travel. If an employee travels to a high-risk area, the employer could inform the employee that he may be refused access to the workplace if the health and safety of the other employees are at risk.
- Can an employer restrict the entry of a COVID-19 affected employee into the office premises?
An employer may prevent an employee who is suffering from communicable diseases like COVID-19 from entering the workplace for the protection of other employees.
- Do employers need to relook their leave entitlement policy?
The Karnataka State Government has issued a circular to employers requiring them to grant 28 days paid leave to employees affected by COVID-19. Therefore, employers in Karnataka would be obligated to provide such additional paid leave to their employees.
Given the communicable nature of the disease, it may be advisable for employers to allow affected employees to proceed on paid leave.
- Can employers terminate the employment of an affected employee?
It is advisable not to terminate any employee on the sole ground that he/she is a COVID-19 patient or a suspected COVID-19 patient.
- Do employers need to consider a work-from-home policy? What aspects should be kept in mind?
Since COVID-19 has been declared a pandemic, there is a likelihood that Governments may impose further restrictions on movement within the city or state, if necessary. In some states, including Karnataka, governments have advised IT/BT companies to allow their employees to work from home.
Therefore, if the nature of the work does not necessarily require employees to be physically present, the recommended course of action would be to ensure that all such employees work from home, even if this is not as per the usual policy of the establishment.
The employer should consider auditing available IT hardware and software, and close any gaps if required to ensure that the IT system is robust and functional during such remote access. It needs to be determined if there are any data security issues to consider and how best to address them. For the formulation of the work from home policy, employers may consider the following key aspects:
- How flexible will the policy be? Are employees encouraged to work from home or are they absolutely barred from coming to the office?
- Will there be exemptions for essential personnel who need to be at a certain physical location?
- Is there a need for employees to be available during working hours or will remote meetings and appointments be scheduled ahead of time?
- Will the employer prohibit employees from performing work outside their homes because of security concerns? If this kind of work is permitted, does the employer have the required security infrastructure in place (encryption, password-protection, log-out/lock requirements, etc.) and are employees aware of the employer’s requirements to prevent data breaches or other losses?
- Can employees perform work on their own devices, and if so, is there a comprehensive ‘bring your own device policy’ in place?
Another alternative that employers may explore is to ensure that half the work force comes to office for two weeks, with the other half working from home, followed by a switch for the rest of the two weeks in a month. This would also aid in implementation of the practice of ‘social distancing’ at workplace, as recommended by the World Health Organisation. This will ensure a minimum distance of a few feet is always maintained between two people.
- Do employers have the obligation to report a sick employee?
Currently, there are no obligations on an employer to report an employee to the Government. However, under the COVID-19 Regulations notified by certain State Governments (as discussed above), individuals have an obligation to self-report visits to countries or areas where COVID-19 has been reported, and the Regulations provide for isolation of individuals with such travel history in the last 14 days (for individuals who are symptomatic and asymptomatic).
- Can an employee take a leave of absence if they have had a possible exposure to COVID-19?
While there is currently no mandated special paid leave for employees who may have had a potential exposure to COVID-19, employers may be advised to provide employees who show symptoms of COVID-19 to proceed on paid leave. The employer may also ask the employee to seek appropriate medical attention for the same.
An employee who has contracted the COVID-19 virus should be asked to go on sick leave, and only return to work upon producing appropriate certification from a company-approved medical practitioner. Employers should stay updated with the Government guidelines, any orders and directives issued by the local bodies, and report suspected or confirmed cases, as necessary, while always ensuring that confidentiality and data privacy obligations towards the affected employees are maintained.
- Do employers need to establish any protocol for COVID-19 exposure and sickness?
Employers should consider developing protocols to deal with inter alia: (i) employees returning from travel (whether business or personal); (ii) employees who have been exposed to either confirmed or potential cases of COVID-19; (iii) employees who have symptoms similar to COVID-19, but have not yet been diagnosed; (iv) employees who have tested positive for COVID-19; and (v) consequences and implications of breach of protocols (specifically, of breach of those measures mandated by Government regulations/guidelines). Protocols should cover whether self-quarantine should be requested or required, what reporting is mandated (under law and under company policy), what leave policies will apply and the work-from-home norms and guidelines.
Specific self-quarantine and self-reporting measures as set out in the regulations framed by the State Governments may be included in such protocols.
- What are the privacy obligations in relation to COVID related data?
In case an employee refuses to divulge any such information, or refuses to let collection or processing of such information, the employer may take such measures as permitted under the terms of employment to the extent such measures are required to protect the health and safety of other employees at the workplace. Please note that information can be collected, disclosed or processed independently of the above constraints where a legal requirement to do so exists, pursuant to specific directions of State or Central Government or under applicable law.
- What additional aspects should be considered with respect to employees working abroad?
The impact of COVID-19 is currently varying from country to country. Employers with expats or other employees working abroad should consider reviewing the relevant employment agreements to assess any risks, especially provisions relating to travel, leave, compensation, medical and insurance policy coverage. Employers should consider insisting expat employees to regularly report on the prevailing conditions at their workplace related to COVID-19. If an expat or employee is quarantined abroad, employers should seek legal help to obtain specific advice. The applicable laws vary from jurisdiction to jurisdiction and some countries impose stricter obligations relating to employers’ duty of care.
C. Impact on Commercial Contracts:
- What legal implications could arise due to supply chain disruptions caused by COVID-19?
Given the supply chain disruption caused by the COVID-19 pandemic, it is likely that performances under many contracts will be delayed, interrupted, or even cancelled. Counterparties (especially suppliers) to such contracts may seek to delay and/or avoid performance (or non-performance liability) of their contractual obligations and/or terminate contracts, either because COVID-19 has legitimately prevented them from performing their contractual obligations, or because they are seeking to use it as an excuse to extricate themselves from an unfavorable deal. Further, companies may not be able to perform their obligations under their customer agreements because of their suppliers’ non-performance and may in turn seek to delay and/or avoid performance (or liability for non-performance) of their contractual obligations and/or terminate contracts. Parties may also cite COVID-19 as a basis for renegotiation of price or other key contractual provisions (e.g. volume of materials exported from or imported into affected areas due to shifts in supply and demand). In this context, it is important to determine if COVID-19 will be considered as a ‘force majeure’ event.
- What is force majeure?
The law relating to Force Majeure (a French phrase that means a ‘superior force’) is embodied under Sections 32 and 56 of the Indian Contract Act, 1872. It is a contractual provision agreed upon between parties. The occurrence of a force majeure event protects a party from liability for its failure to perform a contractual obligation. Typically, force majeure events include an Act of God or natural disasters, war or war-like situations, labour unrest or strikes, epidemics, pandemics, etc. The intention of a force majeure clause is to save the performing party from consequences of something over which it has no control. Force Majeure is an exception to what would otherwise amount to a breach of contract. Whether a contractual obligation can be avoided on the grounds of force majeure is a factual determination based on the specific terms of the contract. The courts would examine, whether in each case, impact of COVID-19 pandemic prevented the party from performing its contractual obligation. Indian courts have generally recognised this concept and have enforced it where appropriate. The law in India has been laid down in the seminal decision of the Supreme Court in the case of Satyabrata Ghose vs Mugneeram Bangur & Co. (AIR 1954 SC 44). The entire jurisprudence on the subject has been well summarised by Justice R.F. Nariman of the Supreme Court in a recent decision in the case of Energy Watchdog vs CERC (2017) 14 SCC 80.
- How is a force majeure clause defined under a contract?
Force majeure related language used in most contracts vary widely and, therefore, it is important to review these clauses carefully. Some contracts list specific examples of force majeure events that automatically meet the standard upon the happening of such event, while others rely on generic language usually included in such force majeure clauses.
- Can a force majeure clause be implied under the contract?
A force majeure clause cannot be implied under Indian law. It must be expressly provided for under the contract and protection afforded will depend on the language of the clause. In the event of a dispute as to the scope of the clause, the courts are likely to apply the usual principles of contractual interpretation.
- Can a force majeure clause be successfully invoked in light of COVID-19 being declared a pandemic?
A COVID-19 pandemic could make it more difficult for parties to perform their contractual obligations. There are two possible instances, which may suggest that a force majeure clause covers a pandemic: (a) if the contractual definition of a force majeure event expressly includes a pandemic. Inclusion of pandemic to the list of force majeure events will provide clarity as to whether COVID-19 outbreak would trigger a force majeure clause in a contract; or (b) if the force majeure clause covers extraordinary events or circumstances beyond the reasonable control of the parties. Such general, catch-all wording may be invoked if it is determined that the factual circumstances caused by the pandemic are beyond reasonable control of the affected party. Having said that, whether a party can be excused from a contract on account of COVID-19 being declared a pandemic is a fact-specific determination that will depend on the nature of the party’s obligations and the specific terms of the contract.
- Does the party invoking force majeure have a duty to mitigate?
The party claiming force majeure is usually under a duty to show that it has taken all reasonable endeavors to avoid or mitigate the event and its effects. This is a subjective standard and will be interpreted on a case-to-case basis. The force majeure event or circumstance must be causative to the contractual breach and a party claiming force majeure is typically required to establish that it was the force majeure event (and not some other factor) that caused the party to be unable to fulfil its contractual obligations.
- Does the force majeure event have to be unforeseeable?
Most contracts provide that for an event to qualify as force majeure, it must be unforeseeable or not reasonably foreseeable at the time of execution of the contract.
- Are there any notification requirements prior to invoking a force majeure clause?
Force majeure clauses commonly contain a prompt and time bound notification requirement, which can operate as a contractual condition precedent to relief or not. Such provisions are generally enforceable, and so complying fully with all notice requirements will be important for parties seeking to invoke force majeure.
- Who has the burden of proof to establish a force majeure event?
Courts place the burden on the party asserting force majeure defense to demonstrate the existence of force majeure. Such clauses are construed strictly by the courts.
- What are the remedies available as a consequence of a force majeure event?
The language of the force majeure clause will determine the remedies available to the parties.
Some contracts may provide for immediate termination of the contract upon the happening of the force majeure event. Others may provide that the contract will be put on hold until the force majeure event is resolved. Some contracts may provide for limitations in time after which either party may terminate the agreement with written notice to the other (i.e. if non-performance caused by the event is prolonged or permanent). Others may require the contract to remain in effect until the force majeure event is resolved. Some contracts will only allow for certain obligations to be suspended.
- What are the implications of force majeure certificates issued by Governmental departments of various countries?
On February 17, 2020, the China Council for the Promotion of International Trade (CCPIT), revealed that it had already issued over 1,600 ‘Force Majeure certificates’ to firms in 30 sectors, covering contracts worth over USD 15 billion. In India, the Department of Expenditure, Procurement Policy Division, Ministry of Finance issued an Office Memorandum on February 19, 2020, in relation to the Government’s ‘Manual for Procurement of Goods, 2017’, which serves as a guideline for procurement by the Government. The Office Memorandum effectively states that the COVID-19 outbreak could be covered by a force majeure clause on the basis that it is a ‘natural calamity’, caveating that ‘due procedure’ should be followed by any Government department seeking to invoke it.
However, while such a certificate may be used to argue that a contract cannot be performed, COVID-19 is unlikely to give rise to a valid force majeure defense under every contract and in every circumstance, as different contracts and governing laws stipulate different requirements for different situations. Companies are, therefore, well advised to proactively manage the related legal risk and carefully assess which party must ultimately bear the financial losses caused by COVID-19.
- What happens if the contract does not have a force majeure clause?
If the contract does not include a force majeure clause, the affected party could claim relief under the doctrine of frustration under Section 56 of the Indian Contract Act, 1872. However, in order to claim that the contract is frustrated, it must be established that the performance of the contractual obligations has become impossible by reason of some event which the claiming party could not prevent and that the impossibility is not self-induced by the claiming party or due to his negligence.
- Other than force majeure, what are the other possible consequences for contracts?
Counterparties may also attempt to invoke other contractual clauses like price adjustment clauses, material adverse change (MAC) clauses, limitation or exclusion clauses, to limit or exclude liability for non-performance. The ability to invoke such other grounds will depend on the wording of the relevant clause, and how the clause is construed by courts. Further, companies should also consider the ramification of non-performance clauses under the contracts, such as liquidated damages clauses, under which the amount of compensation for non-performance has been predetermined and agreed by the parties.
- What risk managements measures should be considered in the context of non-performance or breach of contract?
Companies may consider the following curative actions in connection with their commercial contracts:
- Key contracts should be analysed to assess the parties’ rights and obligations, including with respect to termination, force majeure, governing law and dispute resolution.
- Copies of critical correspondence and other communications should be maintained if disputes arise later. This can be particularly important in establishing that the company has done all that was reasonably possible to mitigate the losses.
- Detailed review of supply chains should be conducted to understand geographic scope of operations, dependencies and business risks and legal rights.
- Legal views should be obtained on whether the force majeure clause in key contracts is open-ended or exhaustive in relation to the list of force majeure events and whether the COVID-19 outbreak is covered or excluded.
- Legal views should be obtained on whether the force majeure clause in key contracts is open-ended or exhaustive in relation to the list of force majeure events and whether the COVID-19 outbreak is covered or excluded.
D. Board of Directors:
- How should the Board liaise with the management team during the COVID-19 crisis?
The Board has an obligation to be reasonably informed and use good faith efforts in overseeing a company’s operations. A critical responsibility of the Board in this regard is its oversight of material risks to the company. Management should keep the Board sufficiently well informed and engaged to enable the Board to consider and understand material risks posed by the COVID-19 outbreak and their potential magnitude, as well as managements’ plans to mitigate and address those risks.
- In what ways can the Board oversee and monitor COVID-19 related risks and the company’s response to the risk?
Each company, depending on the nature of its business, is likely to experience a unique impact caused directly or indirectly by COVID-19. The Board should ensure that: (i) the appropriate senior management team report to the Board on key risks arising out of COVID-19 pandemic; (ii) the Board understands those key risks; (iii) professional advisers assist, if necessary and appropriate, in identifying, managing and mitigating the risk; (iv) a contingency plan is put in place for foreseeable scenarios; and (v) it monitors the ongoing implementation of its decisions and guidance and remains sufficiently flexible to respond to the evolving situation. Specifically, the following aspects and their implications should be considered by the Board:
- Workplace health and safety;
- Supply chain interruption and potential alternative sources of supply;
- Revenue earning impact and measures to address reduced revenue;
- Impact on liquidity and measures to address and manage liquidity;
- Insurance coverage;
- Key contract terms such as force majeure and material adverse change clauses, and possible negotiated changes for new contracts going forward;
- Potential impact on financial compliance for regulated businesses;
- Whether, and how, the location or date of a shareholder meeting should be changed;
- Public disclosure and filing obligations under SEBI laws;
- Stock market volatility.
- How should the Board assess business continuity risk?
The Board needs to engage with the management team to evaluate business continuity risk, in case supply chain is disrupted for any critical raw material and empower the management team to take quick decisions in such situations, requiring immediate and prompt action.
- How can fast-action plans be put in place?
The Boards should ensure that the management teams put in place fast-action plans in order to deal with the COVID-19 pandemic. The management team should contemplate situations where supply could be disrupted for prolonged periods and should liaise with suppliers to understand the extent to which their ability may be hampered. At the same time, the Board should empower the management team to commence negotiations with alternate suppliers in different countries to mitigate all possible risks.
- How can the Board secure the interest of the shareholders?
It is vital for the Board to communicate with shareholders regarding the company’s assessment of potential impact of the COVID-19 pandemic and the company’s action plan to tackle the situation. Re-assessment of revenue and profitability projections may be required. It is of utmost importance to maintain confidence of shareholders, particularly for companies that have suffered disproportionate impact of this epidemic.
- What can the Board do to ensure that customers are aware of the impact of COVID-19 pandemic on the company?
A constant communication with consumers should be maintained in order to keep them abreast of any disruption of services and allow them the opportunity to secure alternate sources of supply. The company may also consider the possibility of offering an alternate supply link to the customer. If the company is engaged in providing vital products or services, it should also be prepared to deal with possible litigations, if the company is not able to meet orders or experiences significant delays.
- Does the Board need to address issues regarding regulatory disclosures?
Listed entities would need to ensure that if there is a material effect on the business or operations of the company, whether arising directly or indirectly on account of the COVID-19 pandemic (e.g. closure of an important manufacturing facility due to supply chain disruptions), the required intimation needs to be sent to the Stock Exchanges where the company’s shares are listed. Disclosures and communication about the current and potential impact of the COVID-19 outbreak on the business and operation should be carefully planned and coordinated with the legal teams to ensure compliance with applicable law.
- What is the possible impact of COVID-19 on AGM and EGMS?
It is expected that the MCA and SEBI may announce relaxation in the rules and permit companies to hold an Extraordinary General Meeting (EGM) and Annual General Meeting (AGM) of shareholders virtually to avoid physical congregation of shareholders and the possible spread of COVID-19. No official announcement has been made so far. However, there is every likelihood that such an announcement may be made if containment measures for COVID-19 fail beyond April 30, 2020.
E. Mergers & Acquisitions:
- Would the COVID-19 pandemic amount to “material adverse change (MAC)”?
Whether a MAC has or has not been triggered would need to be assessed on a case by case basis, depending on the impact of the event on the target company and would depend heavily on the specific wording of the MAC clause. Factors to be considered to assess whether a MAC has been triggered would include:
- the sector and market within which an entity is operating, since the COVID 19 pandemic may not have the same effect across industries/companies/ geographies;
- the governing law of a MAC clause, to assess enforceability.
- whether any outbreak, pandemic or other similar events is specifically excluded from the applicable MAC definition (which is likely in a seller-favorable MAC definition). Such language could imply that COVID-19 will not constitute a MAC.
- other typical exclusions in the MAC definition (e.g. general economic conditions, force majeure) that could arguably exclude the outbreak, even if pandemics are not specifically excluded. However, many MAC definitions contain an exception to the exclusions to account for situations where the event in question has a disproportionate effect on the target company compared to others in its industry, and in such cases, the specific circumstances of the target company in question will be relevant to the analysis.
All in all, unless the COVID-19 pandemic clearly fits into an exception to the applicable MAC definition, it will be based on the judgement of the courts/ tribunal as to whether a MAC has occurred. While Indian courts have historically been reluctant to excuse buyers from their obligations to consummate a transaction on the basis that a MAC has occurred, it will be interesting to watch how the jurisprudence evolves given the current situation.
- What aspects should be considered while negotiating a MAC clause in light of COVID–19?
With respect to M&A transactions that are currently under negotiation, parties should consider specifically addressing how the COVID-19 pandemic should be treated in the agreement. This will provide clarity about the risk that could impact the transaction. Sellers are likely to suggest that any negative effects from the COVID-19 pandemic cannot impact the transaction. Buyers may not be willing to take risks arising from the COVID-19 pandemic. Given the courts’ approach to strictly interpret MAC clauses, buyers should not rely on general terms and they should negotiate a specific closing condition, if commercially required, regarding the spread of the COVID-19 outbreak. Sellers are unlikely to take deal execution risks relating to COVID-19 and are likely to push back on the buyers seeking specific closing conditions or pause the transaction to allow the COVID-19 pandemic and its consequences to play out. As in any other case of a known risk, parties will need to find a mutually agreeable position and document the same clearly.
- What could be the impact of COVID-19 on the due diligence process?
The COVID-19 pandemic may significantly reduce accessibility, communication and physical meetings. Sellers should consider including information in the virtual data room about the possible impact of the pandemic on the target including, relevant, appropriate mitigation and contingency plans. Buyers should consider conducting due diligence on the level of risk to business continuity and on the target’s scenario planning. Further, COVID-19 pandemic may cause delays to due diligence activities, including the impossibility to conduct on-site audits and inspections, and exercising the relevant access rights. For all these reasons, the opportunity to negotiate a later long-stop date, allowing extra time to complete the due diligence, should also be explored. From the buyers’ perspective, the following aspects should be considered while conducting due diligence:
- The ability of the target to perform under the existing material agreements.
- Whether any legal or contractual protections have been provided for non-performance or non-compliance of contractual obligations. Buyers should also check under what circumstances can material agreements be terminated and whether any force majeure clauses may be invoked.
- Possible impact of supply chain disruption, impact on the target’s revenues or risk of insolvency.
- Change in law risk (impact of travel restrictions, quarantine measures, and government mandated closures).
- Target’s existing insurance and need for any future insurance for business and employees.
- Target’s capability to ensure precautionary measures and crisis management capabilities.
- Would compliance of condition precedents and standstill related covenants be affected?
Sellers should consider whether standstill covenants – i.e. obligation to operate the business of the target in the ordinary course of the business and to refrain from taking certain actions without buyer’s approval – may conflict with a target’s need to respond to the COVID-19 pandemic, and whether any carve outs are required. Sellers should assess ways to limit interactions or potential exposure to COVID-19 across their supply chains. They will also have to look at how it might be construed and whether a buyer’s consent would be needed to undertake such actions. Parties should also evaluate whether to extend closing deadlines where delay is likely to be caused by the COVID-19 outbreak. Additionally, if a possible impact of COVID-19 on the target is identified during due diligence, buyers should consider including a condition precedent to protect themselves from its impact.
- What warranties should buyers consider? What considerations should sellers keep in mind in this context?
Buyers should consider requesting warranties around risk assessments, scenario planning, adequate insurance and adverse impact of COVID-19. Sellers conceding these should seek knowledge and materiality qualifiers.
Sellers should consider a general COVID-19-related exclusion of liability. Ring-fencing of such clauses may be explored such that COVID-19-related claims can only be made under specific warranties and not under general warranties. Buyer’s knowledge, changes in law and other limitations may also be relevant in this context. Where warranty insurance is being considered, the COVID-19 outbreak could also impact exclusions in the policy.
- What disclosures should be considered?
Sellers should carefully evaluate the need for COVID-19-related disclosures (for example against material contracts warranties), being as specific as possible to satisfy any requirement for fair disclosure.
- Could COVID-19 pandemic result in any breach of representations and warranties?
The disruption brought by the COVID-19 outbreak may also result in certain representations and warranties given by a seller and target no longer being true when repeated at closing. All parties should conduct a comprehensive assessment of the impact that the COVID-19 outbreak may have on the representations and warranties.
- Could COVID-19 outbreak result in delayed closing or termination event?
The challenges posed by the COVID-19 outbreak may cause delays in closing of M&A transactions – for instance, if conditions precedent require a court order or regulatory approval to be obtained, the same may be delayed on account of various emergency measures, which have been put in place. The parties required to satisfy any closing conditions that may be delayed should consult with their counterparties to manage expectations and negotiate the appropriate waivers. Parties may consider moving certain closing conditions to the post-completion covenants or extending the long-stop date. The persistence of the COVID-19 pandemic may also lead to the occurrence of a range of termination events. The parties should evaluate carefully if a termination event has occurred or is likely to occur, due to the present COVID-19 situation and its foreseeable impact.
- Would the ability to hold physical meetings be hampered?
With exceptional travel restrictions and safety measures being imposed by various governments, it may not be possible (or advisable) for in-person meetings to be held, which may impact negotiations, signing and internal management of both parties. Parties should consider re-arranging their schedules accordingly and ensuring a secure access to support remote and virtual communications.
- What could be the impact of COVID-19 crisis on financing documents?
Parties should conduct a careful review of the financing documents to analyse actual and potential default(s), which could be caused by the COVID-19 outbreak including, but not limited to, material adverse effect, financial covenants, cessation of business covenant, litigation-related provisions. Borrowers should also review the following aspects under the financing documents:
- lender consent rights in relation to decision-making.
- if representations given by the borrower have become untrue and the borrower’s ability to give repeated representations.
- adverse changes in financial covenant ratios and collateral package.
- information obligations.
It is also likely that borrowers may in the short-term face liquidity mismatches, rendering them unable to repay their debts as and when they fall due. From a governance perspective, where the management and/ or boards of borrowers are of the view that there is a clear likelihood of the borrower not being able to discharge all its debts, there should be greater care to ensure that there is no preferential treatment of a creditor (or class of creditors) over another.
It is also worth noting that unlike some contracts, there are typically no defences or mitigating factors under financing transactions (such as force majeure or frustration of contracts) when it comes to the obligation of borrowers to repay their debt.
- Are borrowers required to make any COVID-19 specific disclosures under financing documents?
Borrowers will be required to assess if the changes to the business environment in the foreseeable future on account of COVID-19 are likely to adversely impact their ability to discharge their obligations under the financing documents or trigger other provisions, such as having to provide additional security on account of a deterioration in the collateral cover, or mandatory prepayment obligations, which may get attracted on account of such provisions. Some of these may, in the first instance, necessitate disclosure obligations under the financing documents, which borrowers and obligors should do promptly. Care should also be taken to assess whether any part of such information could be classified as price-sensitive information and whether (in addition to its lenders) a public disclosure would also be required.
- What aspects should lenders keep in mind during the COVID-19 crisis?
Lenders should have a clear understanding of the rights afforded to them under the financing documents. In doing so, however (and assessing which of these rights they may want to exercise), lenders are also likely to be mindful of the anticipated liquidity challenges and related impact, which COVID-19 may have on the ability of the borrower to continue operating in the ordinary course, at least in the short term. Given the uncertainty regarding the extent and duration of COVID-19, lenders may also instead focus on short-term arrangements, which would balance the need to stabilise the affected businesses and protect their own interests, which may range from limited waivers to additional/ short-term financing, depending on the requirements of the businesses.
- What aspects should be considered while claiming insurance under existing policies on account of the COVID-19 outbreak?
Every company impacted by the COVID-19 outbreak would need to consider if adverse financial consequences of business interruption resulting from COVID-19 can be claimed under the insurance policy. Companies should review their existing business interruption insurance policies to protect themselves against any losses sustained from exposure to the epidemic. The extent of insurance cover available to a company will depend on the specific terms of each policy. However, the following aspects should be considered:
- Check if there is any general exclusion for epidemic or pandemic outbreak.
- Analyse if the policy covers insurance arrangements where part performance has been done by a company.
- Notify the insurance company any material event, which may result in the company being required to make an insurance claim and such notification requirement under the insurance policy needs to be strictly adhered to, including details of the actual and potential losses, if required.
- Stay up to date with clarifications and guidelines with respect to claims process issued by insurance companies.
It may also be advisable for the company to contact the insurance company and obtain a written confirmation regarding the specific coverage of the policy. Specific clarification should be obtained as to when COVID-19 will become a notifiable event for claiming insurance and determining the relevant loss period.
- What are the steps taken by Insurance Regulators during the pandemic outbreak of COVID-19?
Insurance Regulatory and Development Authority (IRDAI) on March 04, 2020, issued a circular stating that where hospitalisation is covered in a health insurance product, insurers should ensure that the cases related to COVID-19 are expeditiously handled and all expenses incurred during the course of treatment, including during the quarantine period, must be covered by all the insurers subject to the terms of the policy contract and extant regulatory framework. IRDAI has also asked insurers to offer need-based health insurance plans to cover the cost of treatment for coronavirus. Also, all claims reported under COVID-19 shall be thoroughly reviewed by the claims review committee before repudiation. This is relevant in the context of employee-related insurance obtained by companies.
- What are the consequences of COVID-19 being declared as a pandemic on insurers?
Post COVID-19 being termed as a pandemic by WHO, insurers may deny claims if pandemic and outbreaks are expressly excluded under the terms and conditions of the policy. Most standard insurance policy contracts exclude pandemics from coverage because they are considered a high-risk item with unnaturally higher level of claims. Actuaries are also unable to calculate the risks related to possible pandemics as the situation is very different each time and depends on the underlying disease each time. Some policies exclude epidemics and pandemics altogether, whereas some policies cover medical costs overseas in relation to pandemics and epidemics, but not cancellation costs or loss of bookings.
- Whether insurance claims can be denied if one travels to a country affected by COVID-19?
In such a scenario, several factors will determine whether one’s claim will be covered:
- Whether the terms and conditions of insurance policy provides for exclusion of epidemic and pandemic outbreak of disease.
- Whether there was any governmental notification/ circular/ advisory prohibiting travelling to the said country. If the insured has disregarded a travel advisory and has travelled to the country where they are not supposed to travel, the insurer may have the right to deny a claim of insurance. Further, terms and conditions of the policy can be reviewed to check whether the policy covers refund in case the insured cancels the trip on account of such advisory.
- Whether the claim is arising out of an event unrelated to COVID-19, even though the person has travelled to a country prohibited by the advisory issued by the government or WHO.
- Whether the terms and conditions of the policy include any travel restriction built into the insurance plan.
- Can the COVID-19 pandemic lead certain companies to insolvency?
The spread of COVID-19 has already resulted in an increase in companies experiencing financial distress as they try to mitigate the financial impact of supply chain issues coupled with lower customer demand. The impact of COVID-19 has been substantial on certain industries, such as civil aviation, ports & airports, hospitality, tours & travels, and retail to name a few. There has also been a signification impact on the manufacturing industry due to disruption in supply change, unavailability of raw material and a drop in demand. If the current situation continues (or worsens), there may very well be some cases of insolvency filings, which are necessitated.
While larger companies (or those forming part of a large group) may be better placed to deal with working capital requirements (which are likely to be exacerbated on account of the COVID-19 outbreak), Small to Medium Enterprises (SMEs) are likely to face a more challenging scenario. Therefore, a disruption in the operating capability of SMEs (which is also dependent on their respective counterparties – both on the demand and supply side) may result in them being disproportionately affected by the COVID-19 pandemic, specifically on operational and solvency concerns.
- Is insolvency the only solution to address solvency issues caused by COVID-19?
In the context of payment defaults, creditors – both operational as well as financial – will need to evaluate and assess their respective options, specifically under the current circumstances. Lenders are also likely to assess whether enforcing security (where available) or initiating insolvency proceedings is the most feasible outcome. Therefore, while insolvency is a legal option available to creditors, it is unlikely that they will resort to it in the first instance.
Companies suffering or anticipating solvency issues should consider proactively engaging with their lenders and other stakeholders to negotiate waivers or restructuring (where required) to ensure continuity of business. Contractual waivers and forbearance options may be explored in this regard. The available options and the conditions to any financial support will depend on the severity of the company’s financial crisis, the terms of its financing arrangements, and other factors that may be unique to the stakeholders of the relevant entity. A careful analysis of the facts would be required in order to chart the best course.
I . Conclusion:
While the full impact of the COVID-19 outbreak on businesses is not clear at the moment, and the outbreak is likely to spread in the coming days, and it is seemingly becoming critical by the week. If you would like to discuss any of the issues highlighted in this paper or any other legal implication in relation to the COVID-19 impact, please feel free to reach out to us.
*The author would like to thank Nivedita Rao, Rashmi Pradeep, Shaneen Parikh, Arun Prabhu and Abhijeet Das for their valuable suggestions.