Covid 19 and Force Majuere

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COVID-19 AND CONTINUITY OF OUTSOURCING CONTRACTS

The consequence of COVID-19 on commercial contracts has been discussed extensively since its outbreak. The
calamitous effect of the virus has crippled global supply chains, sealed site-facilities, surged demands, scarcity of resources
and disruption of business across the world. Similarly, companies providing Information Technology Enabled Services or
Information Technology/ Information Technology (“ITeS”/”IT”) are facing severe operational challenges under the pandemic.
Despite most Governments extending their support to the sector by defining parameters for continuing operations of the ITeS
in different countries, service providers are unable to fully service customers. As a result service providers are unable to meet
their contractual obligations and thus, are facing the risks of contractual breach and financial losses.

The lockdown announced by most national governments has significantly increased the complexity in business
operations. As a result, customers relying on, and suppliers providing core outsourcing services through outsourcing
contracts are seeking legal advice to better understand the risks and remedies of outsourcing contracts. Parties are
revisiting and re-evaluating their contractual options to ensure business continuity while mitigating contractual breaches.
However, the inherent complexities associated with such contracts amplify these challenges because outsourcing contracts
are high value, technical, multi-jurisdictional and critical to business operations. This article offers some legal and practical
suggestions to the readers on how to manage their outsourcing contracts. We believe the information contained herein would
help in-house legal and corporate teams to navigate through these unprecedented times.

Important contractual clauses in Outsourcing Contracts

I. COVID-19 & Force Majeure (“Event”): defined in the Black’s Law Dictionary as “ An event or effect that can neither
be anticipated nor controlled. The term includes both acts of nature (E.g.: Floods and hurricanes) and acts of people
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(Eg: Riots, strikes, and wars). Also known as Major; superior force. ” Considering the definition of “Force Majeure”, a
prima facie view could be that events like COVID-19 can be treated as an event to invoke the Force Majeure clause.
But whether the same can lead to frustration of contract that can discharge a party of its obligations under the
contract either wholly or partly, will depend upon the terms of each contract. Thus, no straight jacket formula can be
applied, while invoking and applying the Force Majeure clause. However, once it is established that COVID-19 would
qualify as a Force Majeure event, parties would either opt for (i) suspending the services under the contract or; (ii)
terminate the contract because of frustration or impossibility to perform the contract i.e. Doctrine of Frustration of
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Contract. The Hon’ble Supreme Court of India, in Stayabrata Gosh Versus Mugneerram Bangur & Co. , observed
that to invoke Force Majeure, parties would have to assess if the happening of the outward event has disturbed the
very foundation of the contract, making it impossible for the promisor to do the act which he promised to do. It was
further observed that the dissolution of a contract, would depend upon the terms and conditions of the contract. But in
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a scenario, where Force Majeure occurs dehors the contract, Rule of Positive Law would apply. The Doctrine of
Frustration of Contract renders the performance of the obligation to become impossible as a result of the unforeseen
event or inconsistent with the object of contract sought to be accomplished by parties. The keyword here is the word
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“impossible”. In the case of Energy Watchdog & Ors. Versus Central Regulatory Electricity Commission & Ors. , The
Supreme Court of India, observed that word “impossible” has not been used in Section 56 of the Indian Contract Act,
in sense of physical or literal impossibility. In understanding the word “impossibility” in the performance of a contract,
it would be essential to mention that the performance of a contract may not be, per se physically impossible but could
be so impractical, that it disturbs the very fundamentals of the contract, making its performance “impractical”. In the
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case of Tsakiroglou & Co. Ltd. Versus Noble Throl GmbH , the English Court held that despite the closure of the
Suez Canal, which was a traditional route, the contract for the supply of groundnut was not deemed to be frustrated.
The Courts observed that an alternative route was indeed available, even if the same was more expensive. It was
further observed that the contract had become more onerous to perform but it was not fundamentally altered. In view
of the Court, the performance being otherwise possible, variation in freight charges could not allow parties to
discharge themselves from contractual obligations because the performance had become impossible.

Thus, Courts have consistently been of the view that the doctrine of frustration of contract and its applicability should
be used with caution. Courts have observed that the applicability of the doctrine should not be used to defeat the very
purpose for which the contract was entered into. It should be invoked and applied cautiously, to discourage parties
from absolving themselves from the contractual performance as the principle of contractual law is the performance of
the contract.
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The English Courts in Sea Angle Case , observed that mere incident of expense or delay or onerousness is not
sufficient to claim the benefits of Force Majeure. Similarly, in India in M/s Alopi Parshad & Sons Ltd. Versus Union of
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India the Hon’ble Supreme Court observed that at the time of executing the contract, parties are often faced, with
events, which they would not anticipate. This, shall not enable either party to get rid of the bargain they have made.
For a Force Majeure clause to be successful parties need to build a case to establish (i) the parties never agreed to
be bound under such unexpected circumstances (ii) the unexpected event fundamentally altered the core of the
contract, ceasing to bind the parties.

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Black’s Law Dictionary.
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(1954) SCR 310
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Section 56-Indian Contract Act, 1872
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(2017) 14 SCC 80
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1961 (2) ALL ER 179
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2013 (1) Llyods Law Report 569
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1960 2 (SCR) 793

Published in Articles section of www.manupatra.com


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On 8 April 2020, Hon’ble High Court of Bombay , passed an order in a group of petitions seeking relief on the basis that,
the outbreak of COVID-19 and the following lockdown, is a Force Majeure event, as a result, the Respondent Banks
should be restrained from enchasing the Letters of Credit in favor of the Respondents. The Petitioners were buyers of
steel from the Respondent No.1. Under the contract between the Petitioners and Respondent No.1, Respondent No.1
was to supply steel, which was to be shipped from South Korea. Thus, the Respondent No.1 had performed their
obligation. The petitioners contended that with the outbreak of COVID-19, the petitioner’s contract with Respondent No.1
stood terminated as the same became unenforceable on account of frustration, impossibility, and impracticability.

The Hon’ble High Court, Bombay rejected the ad-interim relief and held that the principles of Force Majeure and Doctrine
of Frustration of Contracts could not be invoked and made applicable to the case in hand. The Hon’ble High Court
passed the order, taking into account the following principles:

a. Procedure to invoke Force Majeure as provided in the contract: In the given case, the right to
invoke the Force Majeure clause was the sole discretion of the Respondent No.1 and therefore, the
Court observed that the Petitioner could in any case not have invoked the same.

b. Invocation of Force Majeure clause needs to be contract-specific: The contract between the
Petitioners and Respondent No.1 was independent of the contract, which the Petitioner had with their
bankers. Therefore, the Court observed that the Bank was not concerned with the underlying dispute
between the petitioners.

c. “Frustration”, “impossibility”, “impracticability” and obligation to perform: The Respondent


No.1 had already complied with its obligation and performed its part of the contracts, by shipping the
goods to South Korea. The Respondents having performed their end of the contractual obligation,
the Petitioners’ failure to perform further its obligations towards its purchasers could not be held
against the Respondent No.1.

The court was further observed that the distribution of steel, which was the Petitioner’s primary
business activity, was declared as an essential service. In-fact the Notification of the Director-
General Of Shipping, Mumbai stated that there would be no container detention charges on import
and export shipments during the lockdown period. Thus, it was neither a case of frustration,
impossibility nor impractical to perform the contract.

d. Suspension of contract and business continuity: The court observed that in any event, the
lockdown was for a limited period, therefore, it could not come to the rescue of the petitioners so as
to resile from its contractual obligations to make payments to Respondent no.1.

Apart from the Force Majeure clause, parties would need to make a holistic assessment of the risks, legal rights,
remedies and duties enumerated in the other clauses of the outsourcing agreement. Though outsourcing contracts differ from
one another, the clauses discussed below are incorporated in most outsourcing contracts. Thus, understanding the impact of
these clauses will be important in determining the recourse of the parties.

I. Clause of Business continuity and Disaster Management Plans: most outsourcing contracts include a business
continuity plan (“Plan”). The Plan defines the ability of the supplier to continue the services in a “business as usual” or
“undisrupted manner” in the event of a Disaster. Thus, most business continuity plans would consider measures to
work from alternate or remote facilities to ensure the continuity of services. However, with the social distancing
restrictions imposed, the ITeS services providers are facing significant challenges in ensuring the continuity of
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services to their customer base . As a result, while invoking their business continuity plans, service providers are
seeking relief from the performance of certain contractual obligations, readjustment of service levels, adjustment of
payments, permissions on data transfers, etc. to mitigate liability and risks of contractual breaches. In order to seek
relief and appropriate remedies under the contract, parties need to understand their rights and obligations within the
agreed framework prescribed in the continuity plan. To this effect, the parties first need to examine the interplay
between the continuity plan and the Force Majeure Clause discussed in point 1 above. Whether invoking the Force
Majeure would excuse the supplier from the measures agreed in the continuity plan? Assuming the continuity plan
overrides the Force Majeure clause, parties would need to invoke the continuity plan according to the procedure
prescribed in the continuity plan, unless the contrary is agreed mutually. A practicable plan would incorporate (i) the
express definition of “Disaster”, to include a pandemic/epidemic, as per which the parties can trigger the continuity
plan (ii) a clear provision and procedure for declaration of Disaster (iii) identifying critical functions that need to be
operational during a Disaster (iv) spelling out parties rights and obligations (v) regularly testing and confirming the
Plan (vi) unexpected constraints of the supplier and practical alternatives and (vii) seeking preferential treatment
during a Disaster, to ensure that suppliers do not recuse themselves from their contractual obligations and direct their
limited resources to other preferred customers . As mentioned, due to the unprecedented circumstances, incase the
suppliers are unable to provide services agreed under continuity plans, parties would need to determine any
applicable waivers in the contract. Further, parties would need to assess whether the non-performance of the
continuity plan would fall under material or wilful default and the liabilities that may arise thereof.
II. Change to Service Level: the quality and output of services undertaken in an outsourcing contract are measured
through Service levels. All charges and payments towards the services are computed basis the targets achieved in
the service levels. As a result of the strict lockdown and social distancing restrictions alternate delivery sites, travel
restrictions, work facilities, work from home advisories, implementation of disaster recovery and business continuity
plans are being significantly challenged. Service providers are negotiating to suspend or relax the agreed service
level measures. The adjustments made to the Service levels impact payments and charges and the scope of the
contract. Parties would need to meticulously discuss and document the changes to the service levels, develop a
road-map to restore the services within specific timelines. They would also need to offset costs and adjust service
credits on the resumption of service.

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Standard Retail Pvt. Ltd. Versus M/s G.S.Global Corp & Ors. , Commercial Arbitration Petition (L) No. 4040 OF 2020
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https://economictimes.indiatimes.com/tech/ites/no-outsourcing-for-these-business-processes/articleshow/74901302.cms

Published in Articles section of www.manupatra.com


III. Excusing Clause: this clause defines a contractual parties’ failure to perform an obligation under the contract, their
rights and the duties arising thereof. The clause should demonstrate the intent of the parties to invoke the safeguards
(if any) defined in the clause in case of a Disaster. The excusing clause would require the parties to inform through
notice, details on the exact nature of the failure to perform, the potential impact of the failure, expected time of
resolution and whether the failure will discharge a party from the performance of the contract or amount to a breach.
If performance under the clause depends on “best efforts”, “reasonable endeavors”, a challenge to non-performance
would be open to the textual and contextual interpretation of the phrases developed in judicial precedents.
IV. Change in service Clause: most outsourcing contracts provide for express change and modification to service and
costs requests and a procedure thereof. In most instances, documents provide for modifications in event of
“Disaster”. Therefore, any change to the service, dehors the contract will be considered unauthorized and attract
liability of costs, on the party making the unauthorized change.
V. Data protection: confidentiality is a critical clause in outsourcing agreements. Due to the nature of the contract and
the associated risks (i.e. client’s breach of customer data) most outsourcing clients are overtly cautious of the
confidentiality provisions. Parties safeguard the risks associated with data loss and breach of confidentiality by most
often defining these breaches as “material breach”, often excluding them from liability caps. Therefore service
providers are seeking liability waivers from their clients for employees working from home and dealing with personal
data. However, in addition to a waiver depending on the governing law, both parties are bound by the applicable data
protection principles of the jurisdiction. Data security obligations cannot be compromised while executing business
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continuity plans. On March 19, 2020 The European Board of Data Protection released a statement directing Data
Controllers to take necessary steps to ensure the principles of data processing are complied with to protect personal
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data during COVID-19. Though the statement focuses on processing personal data in the context of employment
and mobile data. However, these guidelines are applicable to all companies processing data and are required to be
compliant with the core data protection principles under the law. With most governments restricting access to sites
and delivery locations and imposing social distancing norms, compliance with data security principles could be
severely challenging but, is equally pertinent. If companies fail to comply with data security principles of the relevant
jurisdiction they will be subject to litigation and unliquidated damages.
VI. Replacement services Clause: if either party is unable to perform its obligations or a part thereof agreed in the
contract, it would be imperative for the affected party to consider alternate services. It is important to note, if the
contract permits a party to seek alternate services from a non-contracting party in the event of a Force Majeure or
Disaster then it would also need to provide for terms of payment , obligations of the parties for the replacement
services and data protection.
VII. Communication: keeping every line of communication open will be the key to ensure business continuity and
recovery of operations after the resumption of business. Legal teams have to advise the business to follow all
requirements of notice and duty to inform as prescribed in the agreement. Times as these, call for collaboration,
respect and, interest- negotiations to work out practicable solutions with their business partners as well as the
management and the employees. On March 21, 2020 The National Association of Software and Service
Companies (“NASSCOM”) which is the apex association representing the $180 billion ITeS sector in India issued an
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operational advisory for the industry . The recommendations emphasize the need of the companies to develop
communication channels between employees and management. Companies have been suggested to ensure their
employees supporting mission-critical services under the “essential services” are clearly informed of their purpose,
requirement and safety obligations.

Conclusion

COVID-19 will change all set patterns, however, adversity of this nature can bring an opportunity. It will be difficult to
predict the exact changes however, we are certain to expect exponential transformations across industry verticals. From the
legal perspective, we believe the understanding and strategy of contractual law would stand materially altered. Until the
breakout of the pandemic, the clause of “Force Majeure” itself was neglected. The pandemic has been critical in throwing
light on the legal concept of Force Majeure and the doctrine of frustration of contracts. The invocation of Force Majeure would
largely depend on the interpretation of the clause in each contract. The courts have also been rather cautious in applying the
doctrine of frustration of contracts. The aim is to ensure that as much as possible, parties hold good and perform their end of
the obligation. One cannot lose sight of the fact that the pandemic has also caused an economic strain and therefore, it will
be only prudent to ensure business continuity and not attempt to frustrate the contract per se.

Further, the pandemic will change the way the ITeS sector operates going forward. There will be an increase in digital
transformation, system adaptations, automation, etc. Service providers will need to develop stronger business continuity
plans, allocate risks and costs, strengthen third party contracts which are consistent with the business continuity and disaster
recovery plans. Further, considering the social distancing norms all communications, amendments, and agreements would
take place electronically in the form of electronic records. These unprecedented times also call for the need for clear
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recognition of electronic contracts especially in jurisdictions like India.

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Jelinek A, ' Statement on the processing of personal data in the context of the COVID-19 outbreak. Adopted on 19 March 2020, ' edpb.europa.eu [Web
document] (2020), https://edpb.europa.eu/sites/edpb/files/files/news/edpb_statement_2020_processingpersonaldataandcovid-19_en.pdf , accessed April
12, 2020.

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Nasscom ., ' Business Continuity and Ensuring Employee Safety: NASSCOM Advisory, ' www.nasscom.in [Web
document] (2020), https://www.nasscom.in/sites/default/files/uploads/corona/NASSCOM_Advisories_Coronavirus_March_2020.pdf , accessed April 14,
2020.

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Written by Adv. Arijita Kakati, Independent Legal Consultant, Information Technology and Data Security & Adv.
Aparna Devkar, Advocate High Court of Bombay.

Published in Articles section of www.manupatra.com


Published in Articles section of www.manupatra.com

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