Ever since the COVID-19 started showing its impact on the economic activity of the entire world, there have been doubts and vulnerabilities in the minds of all business owners and their employees. The World Trade Organization (WTO) has recently developed two plausible scenarios with regards to the economic effect of the pandemic i.e. in an optimistic scenario, the volume of global merchandise trade will fall by 13% in 2020 compared to 2019, but if the pandemic is not brought under control and governments fail to implement and coordinate effective policy responses, the decline could be 32% or even more than that.
The United Nations Department of Economic and Social Affairs has also stated that the pandemic is disrupting global supply chains and international trade, with numerous countries closing their borders during the past few months. This has also been seen in India. With the Ministry of Finance issuing an Office Memorandum on February 19, 2020, recognizing the disruption of the supply chain across borders, cross-border transactions have been most severely impacted.
COVID-19 has had a crucial impact on the performance of cross-border transactions that were in the diligence/bidding stages, as due to the recent downturn in global trading markets, the procurement processes have been delayed, or even cancelled in some ongoing projects. Furthermore, there is a strong possibility of contracts being terminated due to unprecedented situations, as parties, be it suppliers or manufacturers, are not able to carry out their contractual obligations due to borders being shut down or due to self-isolation.
Prices of goods and services have also declined due to the fall in consumption. Manufacturers are even considering cutting output due to a large decline in demand globally. One such instance is the huge drop in crude oil prices. An additional complicating factor is the growing number of export prohibitions. As per the WTO's note on Export Prohibitions and Restrictions, as on 23.04.2020, 80 countries and separate customs territories have introduced export prohibitions or restrictions as a result of the pandemic. Furthermore, the restrictions initiated by one country may end-up triggering a domino effect, which in turn will have a drastic impact on cross border transactions.
In general, for those agreements that have been executed prior to the outbreak of COVID-19, an honest attempt must be made to peruse the contractual provisions thoroughly that can allow any form of relief to the affected party. One such provision is a force majeure (FM) clause. By invoking the FM clause, the affected party may be absolved from performance of its obligations without being liable to pay any liquidated damages as long as the pandemic subsists. Secondly, if Mergers and Acquisitions (M&A) form a part of cross-border transactions then such transactions would inevitably fall under a cloud of vagueness owing to a disruption in the supply chain. In such a situation, the affected party may resort to seeking shelter under the contractual provision of Material Adverse Change (MAC). In agreements for cross border transactions, conditions under a MAC are often negotiated between the parties and are subject to numerous exclusions, which might vary from case to case. It is therefore essential to carefully examine the MAC provision to determine whether it is relevant to a COVID-19-like situation or not. For it to be enforceable, the trigger for invoking the MAC clause must not be subjective, or the parties would have to engage in time-consuming and expensive litigation.
Finally, in case there still exist certain ambiguities, the affected party can resort to terminate the agreement for the cross border transaction. The right to terminate an agreement depends on how such a provision under the agreement has been worded. A party seeking to enforce a termination right in light of COVID-19 should cautiously consider whether the relevant conditions under the agreement have been met and should also look to ensure full compliance of other procedural requirements.
Furthermore, the International Chamber of Commerce (ICC) has issued certain guidelines for business entities which include –a creation of a business continuity plan to ensure that the business can keep running, the nomination of a response team to stay apprised of advisories from local authorities and revising operations accordingly, implementation of a reporting method to maintain accountability, contacting suppliers and contractors to advise them of changes in procedures and adopting a flexible and opportunistic approach to adapt business practices and to respond to new challenges that may arise.
It is therefore clear that the rampant outburst of the COVID-19 pandemic is having a crucial impact on global trade in several aspects and has left the parties to a cross border transaction in a baffled state. The pandemic has made it clear that e-commerce can be an important tool/solution for consumers in times of crisis, and that it is also an economic driver, including for small businesses. If certain measures as discussed above are taken at the earliest, the effects of this pandemic can be strongly prevented. Moreover, during the process, business entities engaged in cross-border transactions will most certainly pick up new tricks of the trade which will pave the way to conduct international business in the post-COVID-19 world.