LEGAL CHALLENGES TO BUSINESS AMID COVID-19

LEGAL CHALLENGES TO BUSINESS AMID COVID-19

On March 06, 2020 the level of risk globally has been raised to very high by WHO, and this comes in just over a month after its formal declaration on January 30, 2020 calling the outbreak of novel Coronavirus a ‘public health emergency’ of international concern.

The novel coronavirus which led to the spread of disease provisionally called Covid-19 has caused almost 3500 deaths after infecting more than 100,000 in over 90 countries by the end of first week of March 2020.

Farhat Ali Khan

  March 10, 2020
  by Farhat Ali Khan

Farhat Ali Khan

  March 10, 2020
  by Farhat Ali Khan

The WHO has not yet proclaimed Covid-19 as a pandemic, nevertheless many major cities around the world starting from Wuhan, Hubei in China (which is the epicenter of Covid-19), Lodi in Italy, Daegu in South Korea, Qom in Iran, etc. are under Government lockdown(s) with authorities having imposed travel bans and restriction thus affecting many industries in their daily conduct of business. Such restrictions and lock downs are having a major impact on the interlinked business industries be it, shipping, hospitality/hotel, tourism, aviation, international trade, wholesale & retail, electronics, and most importantly, manufacturing i.e. halting of factories.

Such extreme situations as being witnessed will have unimaginable consequences to both public life and businesses. For a businessman facing circumstances of such intense magnitude, the very first thought is to seek or to get compensated for non-performances, failure in delivery, unsold stocks, and other businesses related loss/failures; the question arises on source of such losses getting compensated?

In a business/trade, will any of the following be a rescue point?

  • Law/Government
  • Supplier/Customer
  • Force Majeure
Law/Government:

The General Assembly of United Nations on 10 December 1948, issued a ‘The Universal Declaration of Human Rights’ (UDHR), Article 25 of the UDHR declares that everyone has a right to a standard of living adequate for the health and well-being of himself and his family; thus making it a universal rule of law. Likewise, Article 12 of International Covenant on Economic, Social and Cultural rights recognize the right of everyone to the enjoyment of the highest attainable standard of physical and mental health. The Covenant in the year 2000 explained that there are three obligations of the states with respect to right to health: to respect, to protect and to fulfill. Further, the preamble of the WHO’s Constitution declares that the enjoyment of the highest attainable standard of health is one of the fundamental rights of every human being. Various international and domestic laws outline a punishment if one does an act which causes a health threat or a dangerous disease for instance S. 269 and 270 of the India Penal Code makes it a criminal offence in a person commits an act which in manner can cause a health threat or may lead to spread of a disease. But in general, does not outline a right to bail-out or a compensation. Law has the provisions to punish a person who commits an act which may lead to spread of a disease, the law further punishes a ‘disobedience to quarantine rule’ where movements are restricted in a quarantined zone to prevent any further spread of an infectious disease.

While, the usual in such situations is to expect the Government to support the business community with a bail-out, boost liquidity, reduction of repo rates, subsidies, price controls on supplies, waiver in duties, tax exemptions, free trades zones, etc. but claiming compensation to losses of business may not pass the test of a legal right.

Supplier/Customer:

A supplier-customer relationship is a non-emotional accommodation based on commercially benefiting terms. The terms of the contract as may have been agreed outline the legal obligations of a party, based on such business arrangements compensation may be claimed by a party where a default is attributed to the other party. However, in a situation where the breach of the contract results from the non-performance due to the pandemic or epidemic or a spread of disease and this non-performance is beyond the control of a party, unless the parties have agreed to such exemption a violation could be claimed. The aggrieved party can take the defense of a Force Majeure as the contract may not provide so it could lead to a dispute for the Court to decide. The concept of Force Majeure and its legal interpretations are discussed in detailed in the following paragraph.

Force Majeure in a Contract:

Force Majeure ‘FM’ keeps the contract active if there is a situation which affects the performance of a party for reasons related to: an act of god (earthquake, flood, storm, etc.), strike, war, act of terrorism, civil/domestic conflicts, action of government, or causes which can be reasonably justified to be beyond the control of a party.

However, in a commercial contract, such unforeseen circumstances which constitute events of force majeure would not mention a ‘pandemic’ or ‘epidemic’ or ‘spread of a disease’ as an event of a FM.

Currently in the Covid-19 chaos, limitations and impositions seems to be slowly paralyzing the businesses, trades and the ultimately economies spread across the world. Parties affected from these impediments might not be able to fulfill their contractual obligation and it could be challenging for a party to invoke force majeure as even though the global supply chain is paralyzed the country in which the parties are situated do not face lockdowns.

FM is the most common clause in a commercial contract but due to their boilerplate language they are also the most overlooked clauses in the drafting stage. The concept of FM has evolved from physical impossibility to frustration of purpose to commercial impracticability. The most tailor-made definition of the FM which is civil law concept can be found in International Chamber of Commerce (ICC) clause 2003 which also prescribes conditions which the courts can use as a test for the claims of FM. ICC lists dozens of FM events, including, but not limited to, war, armed conflict, hostilities, terrorism, act of God, plague, natural disaster (including violent storm, volcanic activity, and tsunami), explosion, fire, and general labor disturbances such as strike or boycott, however a party relying on the ICC Clause must prove that firstly, its failure to perform was caused by an impediment beyond its reasonable control secondly, it could not reasonably have been expected to have taken the occurrence of the impediment into account at the time of the conclusion of the contract, and thirdly, it could not reasonably have avoided or overcome the effects of the impediment.

Considering the above law and the recent coronavirus outbreak, if such epidemic or plagues have been included in the definition of FM clause in the contract then the situation can easily be claimed under such clause for the non-performance. However, if the FM clause does not include such plagues and pandemic then also it is prospective that the courts will consider the situation to be covered under the clause subject to the above mentioned conditions of FM and taking into account the period of the epidemic or pandemic, the provisions of the contract and the extent of the restrictions imposed by the government authorities. Taking the example of SARS-CoV, a similar epidemic situation that outbroke in 2002 in China, the courts and tribunal of the affected countries had assessed such epidemic situations could be considered as a FM. However, some courts also rejected the claims saying that the non-performance of the party was only partially affected by the Government restrictions and did not directly trigger the non-performance . During the SARS outbreak the Canadian court in Atlantic Paper Stock Ltd. v. St. Anne-Nackawic Pulp and Paper Co had suggested three grounds that a case should evidence in order to claim relief in the non-performance; Firstly, the events and its effects are immediate, secondly, performance is commercially impractical, unreasonable or fundamentally at variance with business of the party and thirdly, the loss of a control by a party is related to one fundamental event and not to a variety of market conditions as exacerbated by one unexpected event. Further, it should be noted that the court usually allows the defense of FM for a limited period of time and does not excuse the performance infinitely.

The world will get through it, as it has in all the previous pandemics. The challenge is that in commercial contracts parties to a contract generally overlook the consequences if a default arises due to such pandemic crisis. In fact, many a times the local court will not understand dependability of a supplier on sourcing of raw materials from an international market. It is very important that commercial contracts take into consideration situations when there is a spread of infectious disease beyond a territory and may not only directly but indirectly impact business, the parties must consider exit plans in advance or exemption from a non-performance liability to avoid entering into a dispute.

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