-Richa Saraf


With the outbreak of COVID pandemic, there have been several instances wherein parties are running to court for various reliefs, whether to obtain injunction from invocation of bank guarantee or to seek extension of letter of credit, but mostly to seek declaration that COVID is a force majeure event and therefore, there is an impossibility of performance of the obligations. While some regulatory relief has been provided by regulators such as RBI, by allowing moratorium on loan repayments/ asset deterioration[1], and SEBI has provided relaxation on disclosure requirements[2], for other matters, the judiciary has been quite proactive in delivering judgments. Below we discuss the impact of COVID-19 on financial contracts.

Impact on lease transactions:

While the Ministry of Home Affairs vide its order dated March 29, 2020[3], in exercise of its powers conferred under Section 10(2)(l) of the Disaster Management Act, 2005, directed all State/Union Territory Governments and State/Union Territory Authorities to take necessary actions and issue necessary orders, inter alia, for waiver of rent for workers by landlords for a period of one month, however, no notification/ order has been issued w.r.t. suspension or waiver of lease rentals for commercial lease contracts entered into by businesses. In the absence of any relief or clarity by the Government on the performance of obligation to pay lease rentals under commercial lease agreements, business entities and retail outlets are struggling with no sales and revenue but still saddled with ongoing rent and employee payment obligations and are vigorously evaluating the ‘force majeure’ clause under their respective agreements.


To understand the impact of COVID-19 on a lease transaction, it will, thus, be pertinent to peruse the relevant documents. Usually, the lease agreements do not favour the lessee, and do not provide them with a right to seek waiver or suspension of lease rentals, even in case of a force majeure event. In fact the following clauses favouring the lessors are typical to a lease agreement:

  • once the equipment have been given on lease, irrespective of the usage of the equipment, the lessee shall make timely payment of the lease rentals as per the rental schedule till the expiry of the lease period. Such absolute and unconditional obligation on the lessee prevents the lessee from invoking the doctrine of frustration.
  • upon delivery of the equipment to the lessee, all risks relating to the equipment shall pass to the lessee.
  • The lease agreements also contain “margin protection” provisions that might be triggered by COVID-19 related events. For example, if a lessor’s funding costs in a relevant financial market rose as a result of COVID-19, the same may result in increase in the lessee’s payment obligations. Similarly, a COVID-19 related tax change might in some circumstances trigger a tax indemnity under the agreement.


For now, the only tenable option available with the lessees may be to request the lessors to waive or suspend the lease rentals.


Impact on loan transactions:

Some of the events which are generally listed as an event of default under a loan agreement are as follows:

  • Failure in performance of financial covenants: Breach by the borrower of any covenant, including financial covenants by the borrower. Non- payment of instalment on the due date being the most relevant one.
  • Cessation of business: COVID-19 is causing some businesses to suspend part of their operations or close offices. When a borrower suspends or ceases to carry on, or threatens to suspend or carry on, all or a material part of its business, the same may be regarded as an event of default.
  • Act of Insolvency: Amongst other insolvency related events, the agreements generally include an event when the borrower makes a general assignment, arrangement or compromise with or for the benefit of its creditors.
  • Material Adverse Effect: While the pandemic by itself may not be an event of default, however, the impact of the pandemic on the borrower and its operations could be an event of default. The loan agreements generally provide that in case of occurrence of any event or situation, such as and including but not limited to such events or situations having or likely to have any material adverse effect, as determined by the lender, or the financial or other condition or operations or prospects of the borrower, which in the opinion of lender is prejudicial to the interests of lender or in the opinion of lender likely to materially affect the financial condition of the borrower and/or its ability to perform all or any of its obligations under the agreement and/or otherwise in respect of any portion of the loan and to comply with any of the terms of the agreement and/or for the loan, the same may be regarded as an event of default.


To determine whether an event may be regarded as an event of default or not, it will be critical to review the clauses of the agreement. For example, with reference to the material adverse effect clause, if the agreement provides that an event will be regarded as an event of default “as per lender’s sole opinion”, then it will be easier for the lender to invoke the provision, however, if the clause states that “in accordance with lender’s reasonable opinion”, there may still be room for the parties to contest whether a material adverse effect has occurred or not.


While historically, lenders have been reluctant to call an event of default based solely on a material adverse effect clause, since a lender may also be wary of incurring reputational damage if it is perceived as too hasty or too harsh in invoking a material adverse effect clause, particularly during a global pandemic. Nevertheless, there may a few cases where lenders may invoke the said provision following the global financial crisis.


Demand call loans are even more risky as the lender retains the complete discretion whether or not to call for repayment.


In such circumstances, it is important for the borrower to peruse the agreement to check if any cure rights are available.


While the loan agreements may provide for grace period of a few days to cover technical issues with payment systems, however, this will not help a borrower who has missed payment of an instalment due to liquidity crunch. Therefore, it is required that the borrower plans ahead, be aware of the payment schedule and if necessary, requests the lender to defer the due dates in line with the RBI notification.


Impact on bank guarantee, letter of credit, etc:

Unless suitable force majeure circumstances are expressly referred to and included in the transaction documents (which they are generally not) it is very unlikely that the outbreak of COVID-19 will itself relieve or postpone a party’s obligation. In this regard, the following rulings are relevant:


  • In the case of M/s Halliburton Offshore Services Inc v. Vedanta Limited & Anr.[4], the Hon’ble Delhi High Court restrained the respondent from invoking the bank guarantees extended by the petitioner in connection with a development contract for certain blocks in Rajasthan. The High Court observed as follows:


“The countrywide lockdown, which came into place on 24th March, 2020 was, in my opinion, prima facie in the nature of force majeure. Such a lockdown is unprecedented, and was incapable of having been predicted either by the respondent or by the petitioner. Mr. Sethi has submitted, categorically, that, till the date of clamping of the lockdown, on 22nd March, 2020, his client was in the process of proceeding with the project, and that, had the lockdown not be imposed, the project might have been completed by 31st March, 2020. Prima facie, in my view, special equities do exist, as would justify grant of the prayer, of the petitioner, to injunct the respondent from invoking the bank guarantees of the petitioner, forming subject matter of these proceedings, till the expiry of a period of one week from 3rd May, 2020, till which date the lockdown has been imposed.”


  • In Standard Retail Pvt. Ltd. v. M/s. G. S. Global Corp & Ors.[5], the petitioner sought an ad interim relief from the Bombay High Court in view of COVID- 19 pandemic and the lock down declared by the Central Government. The petitioner prayed that the respondent bank be restrained from negotiating/ encashing the letters of credit, however, the petition was dismissed by the Hon’ble Court.


Global Provisions:

By way of an Executive Order No. 202.9[6], the Governor of State of New York has declared continuing temporary suspension and modification of laws relating to the disaster emergency. The relevant extract of the Executive Order is as follows:


“Subdivision two of Section 39 of the Banking Law is hereby modified to provide that it shall be deemed an unsafe and unsound business practice if, in response to the COVID-19 pandemic, any bank which is subject to the jurisdiction of the Department shall not grant a forbearance to any person or business who has a financial hardship as a result of the COVID-19 pandemic for a period of ninety days.


The Superintendent of the Department of Financial Services shall ensure under reasonable and prudent circumstances that any licensed or regulated entities provide to any consumer in the State of New York an opportunity for a forbearance of payments for a mortgage for any person or entity facing a financial hardship due to the COVID-19 pandemic. The Superintendent shall promulgate emergency regulations to require that the application for such forbearance be made widely available for consumers, and such application shall be granted in all reasonable and prudent circumstances solely for the period of such emergency.”


Part 2 of the Singapore COVID-19 (Temporary Measures) Act, 2020[7] provides temporary relief from actions for inability to perform certain contracts listed in the schedule, which includes a contract for the grant of a loan facility by bank or finance company, a hire‑purchase agreement, where the good hired or conditionally sold under the agreement is any plant, machinery or fixed asset located in Singapore, where such plant, machinery or fixed asset is used for manufacturing, production or other business purposes or a commercial vehicle. Section 5(1) stipulates that where-

  • a party to a scheduled contract is unable to perform an obligation in the contract, being an obligation that is to be performed on or after 1 February 2020;
  • the inability is to a material extent caused by a COVID-19 event (called in this Division the subject inability);
  • despite any law or anything in the contract, another party to the contract may not take any of the following actions in relation to the subject inability until the withdrawal of notification for relief:
  1. i) commencement or continuation of an action in a court against the party or guarantor or surety;
  2. ii) commencement or continuation of arbitral proceedings under the Arbitration Act against the party or guarantor or surety;
  • iii) enforcement of any security over any immovable property;
  1. iv) enforcement of any security over any movable property used for the purpose of a trade, business or profession;
  2. v) making of an application under section 210(1) of the Companies Act for a meeting of creditors to be summoned to approve a compromise or an arrangement in relation to the party or guarantor or surety;
  3. vi) making of an application for a judicial management order in relation to the party or guarantor or surety;
  • vii) making of an application for the winding up of the party or guarantor or surety;
  • viii) making of a bankruptcy application against the party or guarantor or surety;
  1. ix) appointment of a receiver or manager over any property or undertaking of the party or guarantor or surety;
  2. x) commencement or levying of execution, distress or other legal process against any property of the party or guarantor or surety, except with the leave of the court and subject to such terms as the court imposes;
  3. xi) repossession of any goods under any chattels leasing agreement, hire-purchase agreement or retention of title agreement, being goods used for the purpose of a trade, business or profession;
  • xii) termination of a scheduled contract (being a lease or licence of immovable property) where the subject inability is the non-payment of rent or other moneys;
  • xiii) exercise of a right of re-entry or forfeiture under a scheduled contract (being a lease or licence of immovable property), or the exercise of any other right that has a similar outcome;
  • xiv) the enforcement against the party or guarantor or surety of a judgment of a court, an award made by an arbitral tribunal in arbitral proceedings conducted under the Arbitration Act; and
  1. xv) such other action as may be prescribed.


The International Chamber of Commerce Rules provide for the impact of a force majeure event on various instruments. For instance, for a letter of credit, Uniform Customs and Practice for Documentary Credits (USP600) or International Standby Practices (ISP98) may be relevant, and for demand guarantees, Uniform Rules for Demand Guarantees (URDG 278) applies.


Article 36 UCP600[8] deals with force majeure. It stipulates that a bank assumes no liability or responsibility for the consequences arising out of the interruption of its business by Acts of God, riots, civil commotions, insurrections, wars, acts of terrorism, or by any strikes or lockouts or any other causes beyond its control. Further, a bank will not, upon resumption of its business, honour or negotiate under a credit that expired during such interruptions of its business.


Speaking of closure on a business day and authorization of another reasonable place for presentation, Article 3.14 ISP98[9] provides that- “(a) If on the last business day for presentation the place for presentation stated in a standby is for any reason closed and presentation is not timely made because of the closure, then the last day for presentation is automatically extended to the day occurring thirty calendar days after the place for presentation re-opens for business, unless the standby otherwise provides.”


Article 26 URDG deals with force majeure in a broadly similar way to ISP98, but in much greater detail. The Article provides that should a guarantee or counter- guarantee expire at a time when presentation or payment under that guarantee is prevented by force majeure:

  • each of the guarantee and any counter-guarantee shall be extended for a period of 30 calendar days from the date on which it would otherwise have expired, and the guarantor shall as soon as practicable inform the instructing party or, in the case of a counter-guarantee, the counter-guarantor of the force majeure and the extension, and the counter-guarantor shall so inform the instructing party;
  • the running of the time for examination of a presentation made but not yet examined before the force majeure shall be suspended until the resumption of the guarantor’s or counter guarantor’s business; and
  • a complying demand under the guarantee or counter guarantee presented before the force majeure but not paid because of the force majeure shall be paid when the force majeure ceases even if that guarantee or counter guarantee has expired, and in this situation the guarantor or counter guarantor’s shall be entitled to present a demand under the guarantee or counter-guarantee within 30 calendar days after cessation of the force majeure even if the counter-guarantee has expired.
  • Also, the guarantor and the counter-guarantor shall assume no further liability for the consequences of the force majeure.

[1]Our articles and FAQs on regulatory package announced by RBI can be accessed from

[2]Our articles and FAQs on various relaxations granted by SEBI can be accessed from








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