Have your customers defaulted on payments because of the COVID-19 crisis? Have your business partners avoided contractual obligations because of the lockdown? Are you a lessor who is being asked to waive lease rentals on your premises? Do you think your business is entitled to claim the benefit of a ‘force majeure’ or ‘frustration of contract’? Courtesy of the COVID-19 crisis, these and many more such questions seem to have become common in today’s business parlance. Many businesses are even considering legal action to enforce what they believe are their legitimate legal rights. Most businesses may have already reached out to advisors to understand the options for enforcement, the applicability of the principle of ‘force majeure’ or ‘frustration of contracts’ to their situation.
However, this article is not about explaining the legal niceties around ‘force majeure’, ‘frustration of contracts’ or other complex sounding legal terms. It is an attempt to offer guidance to possibly resolving a potential COVID-19 related commercial dispute. Our advice, from an Indian context, has always been to strive for a fair settlement of any commercial dispute; and the COVID-19 situation is no different in this regard.
It would be naive for businesses to think that battling the situation in Indian courts would help anyone overcome the present challenges. There are multiple challenges that a litigant must encounter while pursuing a case in the Indian judicial system. We have discussed these challenges in detail in our article ‘Considering Litigation in India | Part – I’. With the present lockdown, the problems in the judiciary would only compound further. If anything; the overburdened judiciary will be swamped with a slew of new cases and the pending backlog of past cases that were deferred due to the pandemic. Hence, it is imperative to do a cost benefit analysis before parties decide to plunge into a full-fledged litigation for enforcing what they believe are their rightful positions. We have set out below our suggestions, to arrive at a commercial settlement, for any business that anticipates a potential COVID-19 related dispute.
Assess the merits of your claim
The first step for any party would be to assess the legal merits of its claim or position. Do you have a valid claim for demanding performance or claiming exemption from performance or payment? Essentially would one be able to avail the benefits of ‘Force Majeure’ or ‘frustration of contract’ under Indian law? Assessing the legitimacy of your position will accordingly allow you to formulate the approach. This is also helpful in determining a viable settlement option.
Thereafter one should do a logical cost benefit analysis of pursuing litigation before jumping straight into it. Even if the merits may be in your favor, it would be useful to understand the genuine difficulties faced by the counterparty. The COVID-19 has been a disruptor for almost all businesses and the very survival of a business would be dependent on concessions that they can obtain from their counterparts. Obtaining proper intelligence regarding the situation of the counterparty would be useful. If the counterparty is in a difficult situation, the litigation may not yield any favorable results even if merits are on your side. A litigant would have incurred costs of the litigation without having achieved the desired commercial objective.
The preferred approach must be to initiate dialogue by stating the reasons for your claim and seeking indulgence from the other side. The description of your merits in any such communication need not be the legal merits. If your legal position is not strong you may still want to rely upon the commercial merits of your claim given the prevailing market environment. Your advisors could also prepare a communication that could best express your legal position. As with most legal disputes, the advisors may be able to come up with innovative arguments irrespective of the correct legal position. During the communication, you would be able to assess if the other side is being reasonable. If the conversation is being stalled, you may need to use a subtle threat of possible litigation. But always broach the topic of litigation as a last resort, due to non-co-operation from the other side.
Avoid impulsive acts
Do not react impulsively by aggravating the tone of the communication exchange. In many cases, the party that believes its position to be correct, tends to react aggressively. The reason for such behavior stems from the frustration that a party feels for being deprived of their legitimate rights. However, unrestrained aggression can only complicate matters by hardening positions on all sides. It is important to maintain a civil communication by providing proper reasons to the other side.
Do not openly threaten litigation, but always prepare for one
An open threat of litigation will compel the other side to counter it with an equal threat. The better approach would be to explain your position and express a desire to amicably settle issues. The possibility of litigation should be expressed as a last resort and one that would be availed reluctantly. Further, even if you may not wish for a litigation, the other side may initiate one without adequate notice. Hence, it is always important to be prepared with the relevant facts and information to defend any potential litigation that may arise from the dispute.
Do not push anyone into a corner
Similarly, do not hope to rely on the COVID-19 as a ground to not perform. You may not start a litigation but may well be dragged into one. If all reasons stack against initiating a litigation, why would another person decide to initiate a litigation? If you push someone into a corner and the only options available are to either perish or fight back; chances are most people will fight back, even if it means fighting in court. Given the current situation, everyone is suffering, and it would be unwise to try and extract undue advantage from the other side. Irrespective of whether you are benefiting or losing from the current scenario, do not make the mistake of pushing the other side into a corner as that may inevitably lead to prolonged litigation.
Negotiating a middle ground is usually the best course for all parties in a COVID-19 like situation. You could certainly use the merits of your case to your advantage to negotiate a favorable outcome. Even if merits are weak, you would want to put forward the best commercial and legal arguments to negotiate a concession or to drive the bargain. Negotiating a settlement out of a potential dispute is an art and the nature of the settlement will be determined by the facts at play.
Nudging the balance
You can always try and nudge the balance in your favor to the extent possible without placing undue stress on the counterparty. This involves understanding the facts of the counterparty and constantly engaging with them to understand their ability to perform their end of the bargain. Well-reasoned counter arguments to any proposition put forward by the counterparty would also place the onus on them to explain their merits. Further, all communication that is exchanged can be useful in establishing a party’s claim, if the matter were to ever proceed to court. Hence, it is important to be careful in drafting communication exchanges to avoid any disadvantageous statements or to give away factual or commercial information, that could be used by the other side in litigation.
Litigate to create leverage
Litigate if you must, but always hold out the ‘olive branch’ for a settlement. Sometimes, litigation may need to be initiated to convey the seriousness of the issue to the counterparty. But, whenever back channel discussions occur, one must always make a proposal for a fair settlement. This way the other side can also continuously assess their options to avail of the settlement. In a calibrated manner, you may be able to nudge your opponent into a settlement. As litigation gets prolonged, the counterparty would always be able to fall back on the opportunity to walk away without incurring further losses. In these situations, it is usually a question of ‘who blinks first’.
Know when to settle
At any time, if the counterparty is conceding to a position in back channel discussions, do not be greedy and try to extract more. Knowing when to settle is also equally important! This takes us back to the original discussion on merits of the dispute and determining what would amount to a fair settlement. Of course, there may not be an objective criterion for a ‘fair’ settlement, but a party must have a desired range of positions around which it could proceed with negotiations. If during settlement discussions, the positions are moving towards the desired range for a party, parties must attempt to conclude the settlement by making concessions where possible. In an Indian context, the objective of commencing litigation should essentially be to arrive at a desired settlement.
Keep egos in check
In any area of disagreement, avoid confrontational language or personal attacks on people. It is important that people do not spiral the matter into an ego battle. This is not sensible commercial logic! Always maintain decency and respect in any exchange. Any signs of unwarranted aggression will most certainly derail the process of discussions. It is important to be assertive with one’s position, but one must always refrain from making personal attacks or using profanity over a communication exchange.
Logic over emotion
Commercial disputes should not be fought on emotions. It is not a human right’s matter or claim for justice of the underprivileged! It is a strategic choice between the best bargain that is available in a particular commercial situation. Sound logic trumps everything in such cases. Hence, parties should never allow their emotions to overpower a sensible settlement proposal.
The above points are not exhaustive, and the approach would always need to be customized based on the facts of a specific matter. Sometimes, it may not be prudent to settle at all or concede to a position with the counterparty for certain strategic reasons. The importance of facts and merits of a potential dispute cannot be stressed enough. Facts will ultimately determine the best strategic approach. To conclude; the COVID-19 pandemic is a ‘black swan event’ in the history of modern India and every business in the market has been impacted. Hence, it is only logical that parties must assess the situation fairly and attempt to work out reasonable commercial solutions. If the counterparty has genuine concerns, attempts must be made to address such concerns. Poorly planned or unwarranted litigation will only add to the costs and misery of all concerned!
Ajay Joseph | Partner, Veyrah Law; Anshu Bhanot | Of Counsel, Veyrah Law
Views expressed in the article are not to be considered as legal advice and are solely for informational purposes.