Outsourcing companies face severe operational challenges under the pandemic and understanding the impact of the force majeure clause and the doctrine of frustration is important in determining recourse for parties. Arijita Kakati and Aparna Devkar provide advice on how to manage outsourcing contracts

The consequence of COVID-19 on commercial contracts has been discussed extensively since the outbreak. The calamitous effect of the virus has crippled global supply chains, sealed site facilities, increased demands, and caused scarcity of resources and disruption of business across the world.

Companies providing information technology-enabled services (ITeS) or information technology are also facing severe operational challenges under the pandemic. Despite most governments extending their support to the sector by defining parameters for continuing operations of ITeS in different countries, service providers are unable to fully serve their customers, and are therefore unable to meet their contractual obligations, and face the risks of contractual breach and financial losses.

Lockdowns announced by most national governments have increased the complexity of 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 these 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.

Clauses in outsourcing contracts

contractsCOVID-19 and force majeure. Black’s Law Dictionary defines force majeure as, “an event or effect that can neither be anticipated nor controlled. The term includes both acts of nature (floods and hurricanes) and acts of people (riots, strikes and wars).” Considering the definition, a prima facie view could be that events like COVID-19 can be treated as an event to invoke this clause. But whether it can lead to frustration of contract, which can discharge a party of its obligations under the contract, either wholly or partly, will depend upon the terms of each contract.

No straightjacket 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:

  1. suspending the services under the contract; or
  2. terminating the contract because of frustration or impossibility to perform the contract, i.e., the doctrine of frustration of contract.

The Supreme Court, in Satyabrata Ghose v Mugneeram Bangur & Co observed that, to invoke force majeure parties have to assess if the happening of the outward event has disturbed the foundation of the contract, making it impossible for the promisor to do the act that it promised to do.

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