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Sonam Chandwani

Failed to perform your contractual duties? May the Force (Majeure) be with you!

By Corporate Law One Comment

Failed to Perform Your Contractual Duties?

The lockdown due to COVID-19 has brought business activity to a grinding halt, prompting companies to declare force majeure. But, from a legal standpoint, how important is it to include this clause when you enter into a contract with several parties?

The world has hit the pause button. But contractual obligations must be fulfilled unless something extraordinary happens. Given the unexpected nature of the pandemic, businesses are asking whether that “something” is COVID-19? The answer lies in the language of contracts.

The concept of force majeure — a ‘superior force’ — was derived from French civil law and later embodied under Sections 32 and 56 of the Indian Contract Act, 1872. This provision provides for relief to parties when a contract becomes impossible or onerous to perform due to circumstances beyond the control of parties.

Common force majeure events include floods, fire, an act of God or natural disasters, war, labour strikes, epidemics, pandemics, or simply an event beyond the control of parties. However, the extent to which it saves you from consequences of non-performance is contingent upon the language of the contract. Whether a force majeure clause covers a pandemic depends on the language of contracts, which may be broad or restrictive as agreeable to the parties of a contract.

Now, a contract may specify all events that would trigger a force majeure clause, or may loosely define force majeure event as “an event beyond the parties’ control”, leaving room for interpretation. Given the extraordinary circumstances of the emergence of COVID-19, most contracts may not have it listed directly as a force majeure event. In such a scenario, companies must look for relevant language such as ‘disease,’ ‘epidemic,’ ‘pandemic,’ ‘quarantine,’ or ‘acts of government,’ which may be interpreted to include the COVID-19 outbreak.

However, the provision does not provide comprehensive, absolute protection against any non-fulfillment of contractual obligations. So, when public health crises or pandemic events such as the COVID-19 are not explicitly included in the agreements — as is most commonly observed — creative arguments and legal advocacy will be critical in creating the best interpretation of the provision to support a force majeure defence.

Other key pointers while invoking the force majeure clause are as follows: Companies also have the ‘duty to mitigate’ effects arising from such events by taking proactive steps and exercising reasonable diligence. The Indian courts have held, time and again, that the burden of proof for a force majeure defence lies with the party asserting it.

Furthermore, if other factors lead to the party’s non-performance, then a force majeure clause may not be applicable. Alternate remedies to force majeure In contrast to force majeure clauses, parties may invoke other terms such as limitation or exclusion clauses, material adverse change clauses, escalation or price adjustment clauses and study its implications as stipulated under liquidated damages or predetermined compensation clauses in the event of non-performance of contractual terms.

However, a party’s ability to invoke other defences is contingent upon the language of the contract and interpretation of the courts. Further, a party can claim relief under Section 56 of the Indian Contract Act, 1872, commonly referred to as the Doctrine of Frustration.

The doctrine is applicable in cases where the occurrence of an event has made the performance of the contract to be impossible and beyond the control of the promisor — typically, death or incapacity of a party, a frustration by virtue of legislation, or material change of circumstances leads to frustration of a contract. In the present scenario, unprecedented government orders arising from the COVID-19 pandemic —like the prohibition on public gatherings, curfews and travel restrictions — may give rise to a valid impossibility defence.

However, mere government regulation does not excuse non-performance by a party. Parties seeking an impossibility defence must exhaust all reasonable steps for performance before asserting impossibility under a contract.

What now?

Businesses must, in such unprecedented times, collaboratively work with counter-parties to reach a mutually beneficial solution before going down the adversarial route of litigation, arbitration and adjudication. However, if amicable discussions fail companies should assess their rights and liabilities in regards to force majeure, termination and dispute resolution under a fine lens and in due course renegotiate contractual terms to mitigate damages to avoid suffocation of monies involved in these commercial contracts.

Further, parties should assemble and retain all correspondences to insulate themselves from disputes arising in near future.

The pandemic has engulfed over 200 countries and restoration of normalcy appears to be a distant dream in India. Therefore, in a jurisdiction where words of a contract are sacrosanct with little to no intervention by the courts, a deep collaboration between parties to a contract with a shared objective of contractual performance, may be the way forward.

 


Tags: contractual duties, force majeure, language of contracts, force majeure clause, majeure, force majeure clause in contract, majeure clause, force majeure legal definition

Coronavirus Effect: SEBI Clamps Down on Companies! Promoters, Insiders Can’t Buy Shares Until June 30

By Banking No Comments

SEBI Clamps Down on Companies, Promoters, and Insiders

The COVID-19 pandemic has reduced highway traffic to a bare minimum. People obsessively washing their hands every hour and not to forget the remarkable stock market crashes. The pandemic has brought catastrophic consequences both physically and financially.

Next in line are the promoters and insiders of companies. The Securities and Exchange Board of India (SEBI) reportedly prohibited promoters and insiders from buying company shares from April 1, 2020, to June 30, 2020. This prohibition may have been a direct effect of the additional time given to companies to report their financial results.

On March 19, the SEBI released a circular providing relaxation from compliance to certain provisions of the SEBI’s (Listing Obligations and Disclosure Requirements) Regulations, 2015.

This included an extension of quarterly and annual financial results reporting by one month, from May 30 to June 30, 2020.  The beneficiaries of such relaxation are listed entities, stock exchanges, and depositories.

Customarily, the trading window is subject to closure for a certain period after the financials of a company are published. The period for restriction on trading can be made applicable for 48 hours from the end of every quarter.

This would mean a closure of the trading window for insiders and promoters for 48 hours from May 30, 2020. However, in light of the ongoing lockdown, SEBI has reportedly prohibited promoters and insiders from trading between April 1, 2020, and June 30, 2020.

The rationale behind the decision is clear. Numerous companies may have reached a stage where financial results may be suggestive of the ultimate outcome, although not entirely accurate.

Such information is considered Price Sensitive Information (PSI). Relaxation of filing deadlines suggests a higher possibility of misuse by insiders, promoters, and management if the trading window is left open from April 1 to June 30, 2020.

What appeared to be just another WhatsApp forward disclosed the financial results of top companies in 2019. People remember this and so does the regulator. In light of past and current circumstances, SEBI rejected requests for exemption from this trading restriction.

Knowledge of PSI and acting upon such information amounts to insider trading and may subject a person to penalties under Section 15H of the Securities and Exchange Board of India Act, 1992. A person found guilty of insider trading will be liable to the following penalty: –

1.    Rs 10 lakh or more, subject to a maximum of Rs 25 crore, or

2.    Three times the amount of profits made from insider trading, whichever is higher.

Further, all connected persons and insiders will fall under the purview of this restriction. Connected persons include directors, deemed directors, employees, professionals having access to unpublished PSI and also include connected persons six months prior to the act of insider trading.

Promoters and insiders of companies are regularly exposed to PSI, thereby favourably positioning them to cushion a bear run especially in turbulent times where capital markets have hit rock bottom.

This is a welcome move by the regulator in its attempt to disarm holders of price-sensitive information from further wreaking havoc in the markets and penalizing them if found to be in violation of this trading restriction.


Tags: sebi companies, sebi promoters, SEBI clamps down on companies, relaxation in timelines for compliance with regulatory requirements

Section 144: A Need of the Hour amid COVID-19 Crisis

By Others No Comments

Section 144: A Need of The Hour Amid COVID-19 Crisis

The World Health Organization (WHO) recently declared the novel corona virus (COVID-19) — a worldwide pandemic.

With over 2,00,000 confirmed cases and 8,000 deaths panic levels are on a rise around the globe. Flight cancellations, shutdown of public places and remote functioning of offices have caused unprecedented disruption across industries worldwide. In many instances, people seem to be prepping as if it’s the end of the world.

But what does it really mean?

Countries severely hit by COVID-19 such as Italy, Germany, China, United States are preparing to the greatest extent possible. While they may not resort to building 10 new hospitals in 2 weeks like China, but surge capacity is being evaluated, coordinated within their healthcare system coupled with several isolation policies and orders.

Similarly in India, the preliminary concerns for the government and its officials would revolve around the health and safety of all citizens disguised as an employee, customer, or neighbour. On these lines, Dy. Commissioner of Police Pranay Ashok imposed Section 144 over the Greater Mumbai region. 

Section 144 of Criminal Procedure Code (CrPC) imposes power to executive magistrate to restrict particular or a group of person residing in a particular area while visiting a certain place or area. This move was implemented to prevent a danger to human life health and safety and to ultimately slow down the spread of COVID-19. 

The outbreak of Novel Corona Virus aka COVID-19 was the reason for such threat to human life perceived by the Magistrate. This order created confusion among the general public who assumed this to be an imposition of Section 144 of Indian Penal Code (IPC) pertaining to Unlawful Assembly.

The same was later clarified by the Mumbai Police that the order was specific in nature, applicable to ‘Tour Operators’ and not the public in general. This was done so that travel groups comprising of domestic or foreign nationals in the area may be curtailed. The question that now lingers around is whether imposition of Section 144 the need of the hour amid this crisis?

We must know that Section 144 is there to dispose urgent cases of nuisance or apprehended danger by a competent magistrate so empowered to take such action. Although in India the cases of reported cases is still very low as compared to other nations across the globe. This is not to forget the harm already caused by the virus due to its quick growth rate and the potential to further aggravate the situation.

The present order or any such order within the legal dictum would be a necessary tool to impose certain restriction on public gathering and movement and such order could not be challenged on the ground of infringing the Fundamental Right enshrined in Article 19(1)(b) or (d) of the Constitution as same was found to be well within the limit of reasonable restriction of 19 (2) and (5).

However, there are certain restriction on the Magistrate exercising these power as he have to follow certain guiding principles laid down in the provision itself or that of Section 134. One peculiar instance in this regard is that this order under 144 cannot exceed more than 2 months but there is a proviso in the same clause granting the power with State Government to exceed such time period to 6 months on satisfying itself for the need of such act.

Given the situation of present case where no cure has been found these sections would need to be interpreted leniently it being a procedural law.

However, the role of CrPC would be much less when it comes to a situation which we are foreseeing as spread of COVID-19 to such a large extent. In India, we have Indian Epidemic Disease Act, 1897 which not only grants the State and Central governments to take any temporary measure for controlling and prevent the outbreak of a disease but also punish the individual not complying with such orders through Section 188 of IPC (Disobedience to order duly promulgated by Public Servant).

A recent case has been lodged in this regard invoking this section of Epidemic Act and even Visas are being called cancelled under the ambit of this Act.

In a recent poll, pharmaceutical companies and scientists acknowledged that it may take at least a year for a COVID-19 vaccine to be approved and made available to patients. So for the time being, Section 144 CrPC seems adequate to control the specific movement of targeted groups that are either more prone to the outbreak or are a major threat to spreading the virus.

This Section can also be invoked to prevent any situation of panic among the general public when it comes to shopping for essential commodities as we observe in different nations across the globe. Thus, we can rightly conclude that imposition of Section 144 is very well within its legal competency and can be effectively imposed to tackle this pandemic as the world impatiently awaits a magic COVID-19 vaccine.


Tags: section 144 rules, 144 ipc, sec 144 crpc, sec 144 ipc, Section 144, sec 144, article 144, section 144 crpc, 144 crpc, 144 section rules, section 144 ipc

Does Your Business Contract Recognize Coronavirus?

By Others No Comments

Does Your Business Contract Recognize Coronavirus?

The novel coronavirus (COVID-19) is now a global pandemic. Numerous deaths are reported worldwide and catastrophic consequences for businesses and the economy are on the rise as well. Cancellation of flights, shutdown of public places, and remote offices has caused unprecedented disruption to businesses across the globe. Our preliminary concerns would revolve around the health and safety of our loved ones, employees, customers, and neighbours.

But when the dust settles, business leaders from the C-suite to owners of convenience stores would be left wondering how the pandemic will affect their business contracts. The answer to which is particularly important for small and medium businesses, who may not have a robust cash flow or necessary resources to deal with such a crisis.

As a result of this outbreak, several companies are examining their contracts to understand the extent of their rights, remedies, and obligations with respect to their business associates. Suppliers of goods and services unable to deliver on contractual obligations are looking to see what provisions, if any, may protect them from default. One such provision of particular concern is the ‘Force Majeure’ clause.

What is the ‘Force Majeure’ clause?

Fundamentally, a force majeure is an unforeseen or unavoidable event beyond the reasonable control of the parties to an agreement that serves as an excuse or delay in the affected party’s performance of its obligations under the agreement. Common force majeure events include floods, fires, earthquakes, wars, terrorist attacks, and government orders.

But this is not an exhaustive list of events and there lies the problem. The Force Majeure clause excuses non-performance of contractual obligations for events specified under the clause. But if an event not specified under the force majeure provision occurs, then the impacted party may not be excused from performance. Simply put, if the impacted party is unable to perform, it is likely in breach of the contract.

If the contract does not specify events such as “epidemics and quarantines” or “pandemics” in its Force Majeure clause, a party may have a difficult time claiming they are excused from contractual obligations because COVID-19 has rendered a party unable to perform the contractual duties. But, is their failure to perform excused under the Force Majeure clause? Ultimately, it comes down to what the contract says and how a court of law interprets the clause.

Challenges in the Force Majeure defense

Part of the challenge lies with the fact that there is no universal standard definition for force majeure, and they often vary across agreement types and industries. The performance of one party might be completely excused by one force majeure provision, while under another, the contract might defer performance of the obligation until the force majeure event ceases, and yet another may require strict performance of the obligations or face penalty.

Ultimately, and most importantly, the issue depends on an assessment of: the nature and context of your particular contract; the words in the relevant Force Majeure clause; and the general terms of the contract, including the substantive law / governing law clause.

To assess a business’s rights, obligations, and remedies, whether the business is the party unable to perform or such counterparty, the following should be considered:

What contract provisions are relevant? Firstly, companies should determine whether their contracts include a force majeure clause, and whether there any other relevant provisions to further examine. Provisions concerning any violation, termination, cancellation, and/or repudiation may be applicable under the given situation.

How does the contract define a force majeure event? The language in contracts may be as broad or restricted as agreeable to parties to the contract. A contract may either explicitly list all qualifying events, or generally define a force majeure event as “an event beyond the parties’ control”, leaving room for interpretation.

Considering the extraordinary circumstances of its emergence, most of our contracts may not have it listed directly as a force majeure event. In the latter scenario, companies must look for examples of relevant language such as “disease,” “epidemic,” “pandemic,” “quarantine,” or “acts of government,” which may be interpreted to include the COVID-19 outbreak.

Is the coronavirus outbreak the cause of the party’s nonperformance? The mere existence of COVID-19 in the city does not exempt a company from the performance of its contractual obligations. Also, if other factors lead to the party’s non-performance, then a force majeure clause may not be applicable. For example, to the extent, a company takes proactive steps to curb the spread of the virus, by, say, advising workers to stay home, does the resulting failure to perform constitute a force majeure event?

Practical tips

Here are some brief tips in dealing with COVID-19 relative to contracts: Carefully review your contracts to determine your rights and obligations under these agreements, as well as any risks associated with the consequences and potential for recovery of additional costs or a price adjustment as a result of a work delay or stoppage.

Contractors should also carefully review their subcontracts to determine their rights, obligations and potential for recovery. If a long list of force majeure events is included, it is likely to be helpful (where you are seeking to rely on the clause) if pertinent wording is included such as “pandemic”, “epidemic”, “outbreak”, “crisis” or “governmental action”.

Watch out for wording in new contracts that require that the event of force majeure is “unforeseeable”. Communicate and properly document the incurrence of such additional costs to include any potential mitigation of such costs. The point here is to document, document, document, and communicate, communicate, communicate.

 


Tags: business contract, sales contract, simple contract, business agreement, draft contract, legal contract, commercial contract, investment contract

COVID-19’s Impact on The Execution of Contracts, and How to Mitigate It

By Others No Comments

COVID-19’s Impact on The Execution of Contracts & Mitigation

COVID-19 has posed a threat to human life across the globe so much so that it has now been termed a ‘pandemic’ by the World Health Organization (WHO). Apart from the rising deaths, stock markets across the globe have plummeted with Sensex crashing over 3,000 points in a span of two hours. The concern is not only limited to stocks and reduced production across the globe causing massive losses to the world GDP but also toward the performance of commercial contracts.

A contract is an enforceable agreement. This term ‘enforceable’ simply means a contract having the force of law (ie, it fulfils all other criteria essentials for it to be deemed a contract) must be performed by all the parties to it, and in event of failure to do so the party aggrieved may bring a civil suit in a court of law or refer it for adjudication or arbitration as the case may be.

But with the recent development of such a disease, which is forcing individuals to remain in a designated place for the time being or even bringing cities to standstill, what will be the legal status of contract to be executed by that person or in that area?

In the event of impossibility of a contract we may immediately refer to Section 56 of Indian Contract Act, 1852, which says that any act that was to be performed after the contract is made becomes unlawful or impossible to perform, and which the promisor could not prevent, then such an act which becomes impossible or unlawful will become void. Section 56 is based on a common law principle known as ‘Doctrine of Frustration’ propounded by English judges through a series of case.

As per this Doctrine there can be two grounds upon which even a legal contract can be termed ‘frustrated’ or, in other words, absolving all the parties from the liability of performance on account of certain intervening factors: (1) performance of contract is physically impossible, and (2) the object of contract has failed.

These principles have been upheld by the Supreme Court to be well within the ambit of Section 56 and thus we conclude that frustration as a result of COVID-19 will be safeguarded by the present contractual law. When in situations where it would be physically impossible to perform a contract owing to restrictions imposed on individual or an area, say, delivery of goods in a locality where all movement of people are restricted will fall within the present law, and both promisor and promise would be relieved from any contractual duty and liability in case of non-performance.

Similarly, where although it is physically possible to perform contract but such performance has lost the power to fulfil the very object of the contract itself would again call for application of Section 56 and Doctrine of Frustration. For example, decoration of an auditorium for a music concert although may be possible physically but without fulfilment of object to secure the required audience or even in some cases unlawful as per the orders of government.

In this regard we must also take note of Section 65 of the Act, which talk about the obligation of any person to revert back any benefit he may have received on account of any void contract. Thus, even though a contract ‘becomes’ frustrated at a later stage where at the time of its inception it was indeed possible to execute, if at all any benefit or advantage is derived by any party through this contract which became void due to frustration must be reverted back to the other party to bring everything back in its place.

Therefore, no one needs to worry about any liability arising out of contractual relationship when such relationship is tainted by an intervening impossibility like COVID-19 and also about any right he had over any amount, which is now with the other party to a contract where contract is now frustrated. A significant light in this regard must be thrown on the concept of ‘Force Majeure’, which is a French term for “superior force”.

If there is a force majeure clause present in a contract agreement then doctrine of frustration would not be applicable as far as such clause is applicable in a given situation.

The concept is simple, wherein parties to a contract agree beforehand about how to deal with or execute a contract under certain specified circumstances that might prevent execution of a contract. These circumstances could be anything such as natural calamity or unforeseeable circumstances that may be mentioned exclusively in the contract.

The clauses dealing with these circumstances and duties imposed on parties when such situation occurs and their liability, or what is to be done by the parties in such event, is termed as Force Majeure clause.

Force Majeure provision or clause is left for the parties to define within the contract itself and no such application are a matter of law and in common law no inference of such clause are decided by the courts. Any such clause in common law countries like ours are read strictly.

Onus to prove that the COVID-19 outbreak is within the force majeure clause mentioned in the contract and any such delay or failure to perform the contract on the account of such force majeure will lie on the party seeking such relief. In absence of these clauses, the doctrine of frustration would be applicable to make the contract void.

In conclusion, it can be said that COVID-19 has indeed impacted and will affect the execution of commercial contracts significantly in the near future, but such impacts can be mitigated by the provision within contract agreement itself and also by the law being in force.

 


Tags: execution of contracts, contract mitigation, execution of agreement, executed lease agreement, mitigation contract law, mitigation of loss contract law, execution of this agreement, mitigation of losses in contract law, mutual execution of contract, mitigate loss contract law, mitigation of damages contract law, force majeure mitigation

Section 144: The Need of The Hour Amid COVID-19 Crisis

By Others No Comments

Section 144

The World Health Organization (WHO) recently declared the novel coronavirus (COVID-19) a worldwide pandemic. With over 2,00,000 confirmed cases and 8,000 deaths panic levels are on a rise around the globe. Flight cancellations, shutdown of public places, and remote functioning of offices have caused unprecedented disruption across industries worldwide. In many instances, people seem to be prepping as if it’s the end of the world.

But what does it really mean? Countries severely hit by COVID-19 such as Italy, Germany, China, and the US are preparing to the greatest extent possible. While they may not resort to building 10 new hospitals in two weeks like China, surge capacity is being evaluated, coordinated within their healthcare system coupled with several isolation policies and orders.

Similarly, in India, the preliminary concerns for the government and its officials would revolve around the health and safety of all citizens disguised as an employee, customer, or neighbour. On these lines, Deputy Commissioner of Police Pranay Ashok imposed Section 144 over the Greater Mumbai region. Section 144 of Criminal Procedure Code (CrPC) imposes power to executive magistrate to restrict particular or a group of persons residing in a particular area while visiting a certain place or area.

This move was implemented to prevent a danger to human life health and safety and to ultimately slow down the spread of COVID-19. The outbreak of novel coronavirus aka COVID-19 was the reason for such threat to human life perceived by the Magistrate. This order created confusion among the general public who assumed this to be an imposition of Section 144 of Indian Penal Code (IPC) pertaining to Unlawful Assembly.

The same was later clarified by the Mumbai Police that the order was specific in nature, applicable to ‘Tour Operators’ and not the public in general. This was done so that travel groups comprising domestic or foreign nationals in the area may be curtailed.

The question that now lingers around is whether the imposition of Section 144 is the need of the hour amid this crisis. We must know that Section 144 is there to dispose of urgent cases of nuisance or apprehended danger by a competent magistrate so empowered to take such action.

Although in India the number of reported cases is still low compared to other nations across the globe, one cannot ignore the harm already caused by the coronavirus due to its quick growth rate and the potential to further aggravate the situation.

The present order or any such order within the legal dictum would be a necessary tool to impose certain restrictions on public gatherings and movement and such order could not be challenged on the ground of infringing the Fundamental Right enshrined in Article 19(1)(b) or (d) of the Constitution as same was found to be well within the limit of reasonable restriction of 19(2) and (5).

However, there are certain restrictions on the Magistrate exercising this power as he has to follow certain guiding principles laid down in the provision itself or that of Section 134. One peculiar instance in this regard is that this order under 144 cannot exceed more than two months but there is a proviso in the same clause granting the power with the State government to exceed such a time period to six months on satisfying itself for the need of such act.

Given the situation where no cure has been found, these sections would need to be interpreted leniently it being a procedural law. However, the role of the Code of Criminal Procedure would be much less when it comes to a situation that we are foreseeing as the spread of COVID-19 to such a large extent.

In India, we have the Indian Epidemic Disease Act, 1897 which not only grants the State and Central governments to take any temporary measure for controlling and prevent the outbreak of a disease but also punish the individual not complying with such orders through Section 188 of IPC (disobedience to order duly promulgated by Public Servant). A recent case has been lodged in this regard invoking this section of the Epidemic Act and even visas are being canceled under the ambit of this Act.

In a recent poll, pharmaceutical companies and scientists acknowledged that it may take at least a year for a COVID-19 vaccine to be approved and made available to patients. So, for the time being, Section 144 Criminal Procedure Code seems adequate to control the specific movement of targeted groups that are either more prone to the outbreak or are a major threat to spreading the virus.

This Section can also be invoked to prevent any situation of panic among the general public when it comes to shopping for essential commodities as we observe in different nations across the globe. Thus, we can rightly conclude that imposition of Section 144 is very well within its legal competency and can be effectively imposed to tackle this pandemic as the world impatiently awaits a COVID-19 vaccine.

 


Tags: section 144, section 144 rules, 144 ipc, sec 144 crpc, sec 144 ipc, section 144 crpc, 144 crpc, 144 section rules, section 144 ipc, sec 144, article 144

Coronavirus – An ‘Act of God’ or Not?

By Others No Comments

Coronavirus – An ‘Act of God’ or not?

Oh my God! was a movie based on a middle-class atheist whose shop was destroyed in an earthquake. The movie revolves around the atheist’s struggle to claim his insurance money and learns that the disaster claim does not cover any damage caused by natural calamities classified under “Act of God”. Running out of options, he decides to sue God but fails to find a lawyer for such a lawsuit.

Similarly, the world today is struggling owing to the outbreak of COVID-19. The human cost of the novel coronavirus outbreak has been widely reported and the tragic consequences continue. But beyond the human toll of the current global health crisis, the coronavirus outbreak is having serious economic repercussions to the global economy and the supply chains on which it depends. 

As a result of this outbreak, several companies are examining their contracts to understand the extent of their rights, remedies and obligations with respect to their business associates. Suppliers of goods and services unable to deliver on contractual obligations are looking to see what provisions, if any, may protect them from a default.

What is the Force Majeure clause?

Force majeure clauses are contract provisions that excuse a party’s nonperformance when “Acts of God” or other extraordinary events prevent a party from fulfilling its contractual obligations.

Would the outbreak of corona virus amount to an Act of God?

Many force majeure definitions include reference to Acts of God or similar wording. Avoiding philosophical arguments that everything is potentially an Act of God, from a purely legal perspective, there is no one-size-fits-all answer as to whether a particular event falls within this sort of language. 

Generally, Act of God appears to denote events due to natural causes without any human intervention. It has also been labelled as “an irresistible act of nature” and some are advising that the phrase (or other catch-all provision) may suffice to cover an outbreak such as coronavirus. 

Ultimately, and most importantly, the issue depends on an assessment of all of:

  • the nature and context of your particular contract; 
  • the words in the relevant force majeure clause; and
  • the general terms of the contract, including the substantive law / governing law clause.

To assess a business’ rights, obligations, and remedies, whether the business is the party unable to perform or such counterparty, the following should be considered:

  • What contract provisions are relevant? Determine whether the contract includes a force majeure provision, and whether there any other relevant provisions to assess. Contractual provisions to review include any breach, termination, cancellation, or repudiation terms that may be applicable under the circumstances.
  • How does the contract define a force majeure event? Is the provision broadly written? Assess whether the outbreak of the coronavirus, or the efforts to contain it, constitute a force majeure event under the contract. Examples of relevant language that may be included are “disease,” “epidemic,” “pandemic,” “quarantine,” or “acts of government.” Depending on the parties’ prior negotiation and drafting, a contract may either explicitly list all qualifying events, or generally define a force majeure event as an event beyond the parties’ control, leaving more room for interpretation. Broad, catch-all language may be interpreted differently depending on the applicable law.
  • Is the coronavirus outbreak the cause of the party’s nonperformance? Consider whether the party could have timely performed if the outbreak did not occur. If other factors contributed to the party’s nonperformance, a force majeure clause may not be applicable. For example, to the extent a company takes proactive steps to avoid further spread of the coronavirus, e.g., by advising workers to stay home, does the resulting inability to perform constitute a force majeure event?

Practical tips

  • Review the wording of force majeure clauses, paying particular attention to the list of non-exhaustive events which is often included, and the consequences of triggering a force majeure.
  • If a long list of force majeure events is included, it is likely to be helpful (where you are seeking to rely on the clause) if pertinent wording is included such as “pandemic”, “epidemic”, “outbreak”, “crisis” or “governmental action”.
  • Watch out for wording in new contracts that require that the event of force majeure is “unforeseeable”.
  • Contact counterparties of contracts which may be affected and discuss a possible renegotiation, or postponement of obligations, as appropriate.

Tags:

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Data Protection & Privacy in the Insurance Industry

By Others No Comments

Data Protection & Privacy in the Insurance Sector

The digital revolution in India has disrupted the business environment in all industries and the insurance industry is no exception. Digitization enhances efficiency and reduces the cost of transacting business however there remain several challenges to the adoption of emerging technologies such as disruption to the traditional insurance ecosystem, uncertain consumer adoption, return on investment and data privacy and security.

Emerging technologies usually deal in customer data which can be used to drive insights related to historical health issues and behavioural patterns of customers. Increasing regulations related to customer personal data around the globe and in India will continue to pose additional challenges for insurers and insurance providers alike.

The Information Technology Act, 2000 (IT Act) and the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011 (SPDI Rules) set out the general framework with respect to data protection in India.

However, given the nature of the business of insurance companies and intermediaries, the Insurance Regulatory and Development Authority of India (IRDAI) has prescribed an additional framework for the protection of policyholder information and data, which is required to be followed in addition to the general framework under the IT Act.

Regulatory Framework Governing Insurance Companies

The IRDAI has made it mandatory for all the insurance companies to ensure the protection and maintenance of confidentiality of all the information that they have collected. Below are some of the relevant data protection regulations applicable to insurance companies:  

  1. IRDAI (Maintenance of Insurance Records) Regulations, 2015 – Pursuant to Regulation 3(3)(b), 3(9) insurers are required to ensure that: The system in which the policy and claim records are maintained has adequate security features, and the records pertaining to policies issued and claims made in India (including the records held in electronic form) are held in data centres located and maintained in India.
  2. IRDAI (Health Insurance Regulations), 2016 – Pursuant to Regulation 35(c) insurers, third party administrators (TPAs) and network providers (i.e., hospitals) are required to comply with data related matters as may be specified in guidelines prescribed by the IRDAI (if any).
  3. IRDAI (Protection of Policyholders’ Interests) Regulations, 2017 – Pursuant to Regulation 19(5) insurers are required to maintain total confidentiality of policyholder information unless it is legally necessary to disclose the same to statutory authorities.
  4. IRDAI (Outsourcing of Activities by Indian Insurers) Regulations, 2017 – Pursuant to Regulation 12 insurers are required to ensure that the:
    • The outsourcing service provider has adequate security policies to protect the confidentiality and security of policyholder information;
    • Information and data parted to outsourcing service providers remain confidential; and
    • Customer data is retrieved with no further use of the same by the service provider once the outsourcing agreement is terminated.

Regulatory Framework Governing Insurance Intermediaries

Intermediaries in the insurance sector such as – brokers, individual agents, corporate agents, third party administrators (TPAs), surveyors, loss assessors, and web aggregators – serve as a bridge between customers and insurance companies, by facilitating the process for selection and purchase of insurance products and assisting in the servicing of policies and assessment of claims.

Therefore, intermediaries are also bearers of confidential information and thus are subject to obligations relating to data protection and preservation of confidentiality prescribed by the IRDAI.

Whilst each intermediary is subject to its own regulations and code of conduct as set out in the table hereinbelow, the provisions in relation to data protection of the policyholder are common for all intermediaries. Inter alia, they prescribe that insurance intermediaries – 

  • Treat all information supplied to them by prospective clients as completely confidential to themselves and to the insurer(s) to which the business is being offered
  • Take appropriate steps to maintain the security of confidential documents in their possession, including by way of restricting access to such information, execution of confidentiality undertakings, etc. 

While a similar regime has been prescribed for insurance surveyors and loss assessors, the extant regulations permit surveyors and loss assessors, as an exception, to disclose information pertaining to a client, employer or policyholder to any third party, only where necessary consent has been obtained from the interested party.

It is however clear that the surveyors and loss assessors are prohibited from using (or appearing to use) any confidential information to their personal advantage or to the advantage of a third party.

Specifically, in relation to TPAs, the IRDAI (Third Party Administrators – Health Services) Regulations, 2016 (TPA Regulations) requires the TPAs to not share the data and personal information of customers received by them for servicing insurance policies or claims.

A limited exception to this rule has been carved out for disclosure of confidential information to any court of law, tribunal, government or the IRDAI in the event of any investigation being carried out (or proposed to be carried out) against the insurer, TPA or any other person or for any other reason.

The aforesaid exception is similar to the carve-out under Rule 6 of the SPDI Rules, which permits government agencies mandated under law to obtain information (including sensitive personal data or information) for specified purposes, without obtaining the prior permission of the provider of such information.

Insurance Regulatory Sandbox

A ‘Regulatory Sandbox’ is a testing environment created by the relevant regulatory authority to provide market players with an opportunity to safely and securely execute and test their innovative products, services, business models and delivery mechanisms, in an orderly manner, which aims at protecting the customers and at the same time safeguarding the interest of the stakeholders.

Shortly after the issuance of the RBI Regulatory Sandbox, on 18th May 2019, the IRDAI issued the “Draft Insurance Regulatory and Development Authority of India (Regulatory Sandbox) Regulations, 2019” (IRDAI Regulatory Sandbox).

The objective of the IRDAI Regulatory Sandbox is to create a balance between the orderly development of the insurance sector on one hand and protection of interests of policyholders on the other, while at the same time facilitating technological innovation by way of relaxing provisions of any existing regulations framed by the IRDAI, for a limited scope and limited duration.

On approval of an application, the IRDAI chair may relax the applicability of one or more provisions of any regulations, guidelines or circulars requested in the application, subject to the conditions for approving the application or any other conditions which the chair deems necessary.

The Regulatory Sandbox Regulations expressly state that no relaxation will be granted in relation to the Insurance Act 1938 or the Insurance Regulatory and Development Authority (IRDA) Act 1999.

Conclusion

The underlying objective of the regulation is to encourage good data practices and retain customer trust in the insurance businesses. Instead of treating it as a mere compliance task, companies should welcome the newly introduced regulations as a great opportunity for them to win customer trust and gain competitive advantages.

Though insurers may be acutely impacted by the regulation, their path to compliance is similar to any other impacted sector: revisiting systems and processes to assess readiness for this regulation and investing in filling gaps.


Tags: Data Protection, information technology act 2000, insurance industry, personal data protection, data protection act india, information technology act, sensitive personal data, data subject rights, insurance sector, data protection act, data privacy act, personal data protection act, data protection law, data privacy, data security

Policy | SEBI’s Innovation Sandbox Offers a Right Balance Between Innovation and Regulation

By Corporate Law No Comments

SEBI Sandbox Policy – SEBI’s Innovation Sandbox Offers

British writer Arthur C Clarke once said, “Any sufficiently advanced technology is indistinguishable from magic.”

Since the advent of technology, human life has undergone considerable changes that may be perceived as nothing short of magic. We saw a transition from a barter system to a cash-dependent economy where citizens have further moved online for gold, savings, gift cards, loans, investments, etc.

This change can be attributed to the confluence of finance and technology, also known as FinTech, a term used to describe new technology that seeks to improve and automate the delivery and use of financial-services.

However, with the advent of technological innovations comes an array of problems, such as determining the legal liability of robo-advisors that provide automated, algorithm-driven financial planning services with little to no human supervision, enforceability issues of smart-contracts, ambiguous and loosely-worded data protection laws, etc.

It is in this backdrop that we need to look at the concept of a regulatory sandbox, and more importantly, at the SEBI Innovation Sandbox. This regulatory sandbox is intended to serve as a testing ground for new business models and technologies that benefit investors, markets and the economy at large.

The emergence of the first regulatory sandbox concept was in the United Kingdom in 2015. By 2018, the concept was adopted in many countries such as Australia, Malaysia and Singapore.

Rapid, unchecked growth in the FinTech industry necessitates the need for regulation while promoting innovation. Realizing this, the Securities and Exchange Board of India (SEBI) announced its approval of a regulatory sandbox for live testing of new products, services and business models by market players on select customers for a specified period of time, to ensure that the sandboxing environment has the minimum regulatory burden.

That said, no exemptions will be granted from existing principles of investor protection framework, know-your-customer (KYC) and anti-money laundering (AML) prescribed by SEBI.

Further, the SEBI lays down several eligibility criteria for testing a project, including a genuine need to test, direct benefits to customers, no risks to the financial system, to name a few. However, testing may not be permitted if the proposed FinTech solution is similar to those already being offered in the markets, or if the applicant has no intention to deploy the FinTech solution in India.

Once the eligibility criteria is met, the FinTech applicants are then given a testing ground for their new business models and are required to submit reports as prescribed by SEBI. Thereafter, concerned departments of SEBI may perform an initial evaluation of the sandbox applications and present their findings to a committee for final evaluation and confirmation. This process enables SEBI to gauge the readiness of the FinTech solution for the market.

While the Indian capital market participants have been early adopters of technology, the SEBI is of the view that adoption and usage of emerging financial technology can be a key instrument to further develop and maintain an efficient, fair and transparent ecosystem.

In fact, this new framework is likely to open a plethora of opportunities for the FinTech players in the securities and exchange market. SEBI’s Innovation Sandbox will help FinTech participants to test their solutions, foresee any hindrances and yet make a difference with innovative technologies. Hence, it allows the FinTech firms to bring their best to the table.

SEBI’s Innovation Sandbox might strike the right balance between encouraging emerging technological advancements and governing them accordingly. It is a step in the right direction by providing an environment of balanced innovation and regulation, which will enable India to emerge as a startup haven.

However, it is important to note that mere existence of a regulatory sandbox is not sufficient for multi-dimensional growth; implementation is the key. Although this appears to be a welcoming step towards encouraging innovation and technology in the financial sector, its effectiveness and success is largely dependent on its execution.

As rightly said by American author Simon Sinek: “What good is an idea if it remains and idea? Try. Experiment. Iterate. Fail. Try again. Change the world.”


Tags: innovation and regulation, sebi innovation sandbox offers, sandbox offers, sebi sandbox policy

A Homebuyer’s Tri-lemma: An Analysis of Provisions under CPA, RERA and IBC, 2016

By Real Estate No Comments

A Homebuyer’s Tri-lemma: An Analysis of Provisions

If we look into the remedies available under the Consumer Protection Act, 1986 (CPA) and the Real Estate (Regulation and Development) Act, 2016 (RERA) along with IBC, 2016. 

Real Estate (Regulation and Development) Act, 2016 (RERA) seeks to provide uniform laws throughout the country, for protecting the interest of home buyers and seeks to increase transparency in the functioning of construction companies and reduce the chances of default or misappropriation of funds by Builders.

Consumer Protection Act, 1986 (CPA) was enacted to provide speedy Redressal mechanism to “CONSUMERS” who alleged Unfair Trade Practice or Deficiency with respect to Goods or Services – home buyers were also included within the purview of the Act by interpreting the word “Services” under the Act to include construction. 

Further, the Insolvency and Bankruptcy Code, 2016 (IBC) – one of the most effective mechanisms for timely recovery of monies and revival of sick companies – also included the Allottees of a project and deemed them as Financial Creditors within the meaning of the Act thereby providing an alternative remedy to victimized homebuyers in India.

RERA, CPA and IBC – friend or foe?

In the M/s M3M India Pvt. Ltd. vs. Dr Dinesh Sharma and Anr. case, judgment was passed by Delhi High Court while deciding a batch of petitions moved by several real estate companies against an order passed by the National Consumer Disputes Redressal Commission (NCDRC). The question for consideration was whether proceedings under the CPA 1986 can be commenced by homebuyers against developers after the commencement of RERA 2016.

While passing the judgment, the High Court placed reliance on the recent Supreme Court judgment in Pioneer Urban Land and Infrastructure Ltd & Anr vs. Union of India & Ors, (2019) – also known as the Flat Buyer’s case – wherein it was held that that remedies given to allottees of flats are concurrent and they are in a position to avail remedies under the CPA, RERA as well trigger the IBC. 

It was observed that the provisions of RERA were not intended to be exclusive, but to run parallel with other remedies and the High Court followed suit in the M3M India case.

While dismissing a large number writ petitions filed by the developers, the Court in Pioneer upheld the following:

  • The IBC amendment is constitutionally valid by virtue of which ‘Allottees’ were brought within the ambit of Financial Creditors 
  • The amendment act does not infringe Articles 14, 19(1)(g) read with Article 19(6)  or 300-A of the Constitution of India.
  • Remedies to the Allottees under various statutes such as the RERA, the Consumer protection act, and the IBA are concurrent.
  • In case of conflict between the RERA and the IBC, the IBC would prevail.
  • Allottees were always subsumed within the definition of Section 5(8)(f) and the explanation and deeming fiction added by the Amendment act was only explanatory in nature.

Looking at the aforesaid it appears like a clear knockout punch for errant Real Estate developers and a massive victory for the consumers at large. Having said that, here is a snapshot of the various remedies a homebuyer has and some pointers for consideration:

Particulars RERA CPA IBC
Who can file A Purchaser, Home Buyer or prospective purchaser/Home Buyer offered flat can file Complaint irrespective of the fact that such person is Corporate Entity or Individual.  A Consumer who satisfies the requirement under Section 2(d) of CPA can file a CPA complaint. Typically, an Individual who enters into agreement for purchase of Flat can file complaints when he purchases the same for his individual use and residence. Since by recent amendment in August 2018, the Allottee of Project is considered a Financial Creditor, any person whether an Individual or Corporate Entity can file an Insolvency Application under Section 7 of IBC. 
Case Timeline RERA takes a few months to years for redressal of grievances depending on the State.  Redressal of grievances or adjudication of a dispute takes an average of 5 to 6 years by Consumer Forums. IBC takes about 6 Months to a year for adjudication of Insolvency Application by Adjudicating Authority.
Accessibility  There are 1 – 2 RERA offices in each state which has constituted the Authority under the Act.Maharashtra has offices in Mumbai, Pune and Nagpur.  District Forums are established in every district of the State. The State Commission presides in the capital of each state and sometimes has benches in other parts of the State. National Commission presides at Delhi and has circuit benches in various parts of the Country which are rotating. NCLT has 16 benches all over India. NCLT is typically constituted for each state and presides at one place in the state or one NCLT is commonly empowered and is having jurisdiction over two states. 
Execution/Reliefs provided RERA typically exercise its power by way of an order to impose fine, deregister the project, include the promoter in list of defaulters, direct completion of project in manner provided in consultation with State Government and pass appropriate orders incidental thereto.
 
The Consumer Forum has the power to execute its own orders. This makes execution of orders also an expeditious affair in comparison to regular suits or execution of orders passed by various Courts/Quasi-Judicial Forums. Also since scope of Consumer Act is limited, the relief and consequently is execution is comparatively an expeditious affair. Once, NCLT admits the Insolvency Application, IRP comes into the picture to manage the affairs of the Company and in case of failure of Corporate Insolvency Resolution Process (“CIRP”) (In case of Developer being a Corporate Entity), Liquidation would be commenced. NCLT monitors the entire process and time to time, various reports are required to be filed with NCLT.

Key Observations & Analysis:

a. If a person is a consumer and seeks performance of statutory obligation or compensation in respect thereof, then Consumer Forum is a better and effective remedy especially in case where the Developer has financial ability to pay. Also he may file a complaint with RERA to blacklist developers and other reliefs which RERA can provide but consumer forum cannot.

b. If a person is not a consumer, then RERA would be a more appropriate remedy.

c. If a person is not a consumer and seeks specific performance of statutory obligations from Developer, his only remedy would be to file a regular suit. However, for compensation and other reliefs he may approach RERA.

d. If Person, whether consumer or not, is seeking only the return of his money, especially when the developer’s financial position is deteriorating, then the Insolvency Application before NCLT would be an appropriate remedy more so when its redevelopment of property that does not involve many flat in sale components.

e. Also the more the project is closer to the verge of completion, RERA would be a more effective remedy especially if Flat Purchaser/Home Buyer desires to obtain a Flat and vice-versa coupled with the consideration that RERA can also provide compensatory reliefs.

f. Insolvency can always be availed as an alternative remedy when a Flat Purchaser feels that the financial position of Developer is deteriorating and Developer will not be able to complete the project and return the money with interest to be able to prevent further deterioration. It will help to obtain recovery of the maximum amount of money invested along with Interest. Completion of the project may take several years due to various practical difficulties that may arise in the completion of the project. Also execution of order for payment of money will not have any fruitful result if Developer does not have financial ability to pay it.

g. In terms of execution, Insolvency since being processed to liquidate the assets of an entity or person will be a more lucrative remedy in case there is a high probability that Developer may not be in position to return the money invested. Consumer Forum since having power to enforce their own orders also provide great remedy in case where builder has completed construction but delayed possession or not complied with statutory obligation to obtain reliefs in respect of both.

h. The Flat Purchaser/Home Buyer can always initiate criminal proceedings against Developer against fraud or other criminal offences or acts committed by it.

Conclusion

From the recent judgments passed by the High Court, the Supreme Court and even the authorities under RERA, CPA and IBC, the judicial sentiment seems to favor the home buyer. From a conjoint reading of the judgment of the Supreme Court in the case of Pioneer (supra) or the Court in the case of Messrs M3M (supra), the judiciary has armed an aggrieved home buyer with a host of remedies to seek relief against a developer and bring you a step closer to owning your dream home!


Tags: analysis of provisions under ibc, analysis of provisions under cpa 2016, Homebuyer’s Tri-lemma, homebuyers tri lemma, analysis of provisions under cpa, analysis of provisions under rera, provisions under cpa, provisions under rera, provisions under ibc, provisions under ibc 2016