Coronavirus or COVID-19 is an infectious disease caused by a new virus. This disease is widespread over the entire world so much that the World Health Organization (WHO) declared the same as a ‘pandemic’. The word ‘pandemic’ here means that the epidemic is affecting beyond a country’s border i.e. it has spread to various countries altogether. This outbreak has left the entire world in a turmoil where people are fighting for their lives and has played havoc with the economy of the greatest nations of the world. It has resulted in adverse legal issues across the world since everything has come to a standstill in order to practice social distancing which is the only method to prevent the spread of this deadly virus. This article briefly discusses the different legal complexities that have arisen due to this extraordinary situation.
The pandemic situation has rendered many commercial contracts either suspended or cancelled. The parties to the contract are facing issues in supply chains, fulfilling contractual liabilities etc. In such a case, parties may be either genuinely incapable of performing their part of the contract or may be just escaping their responsibility using it as an excuse. Therefore, it is important to understand the application of ‘force majeure’ to the current COVID-19 situation.
The French term, ‘force majeure’ literally means ‘superior force’. This term is used in the law of contract to govern such cases in the legal contract where either or both parties are disabled to perform their part of the contract due to an unforeseen extraordinary event. Such an event may be natural or nan-natural. Natural events include natural calamities which are acts of God. Non-natural events include wars, strikes, riots and the like. The current scenario of COVID-19 falls under the non-natural force majeure event. The issue whether non-performance due to COVID-19 will be excused under force majeure clause is to be judged on the basis of the facts and specific terms of each contract and each party’s obligations. The Apex Court has explained the concept of force majeure clearly in the current case of Energy Watchdog v CERC.The following points must be considered by the court while deciding on force majeure clause in the current situation:
- The language of contracts is wide and therefore, each clause must be construed carefully.
- There may be cases where the force majeure clause in the contract specifies a ‘duty to mitigate’. Under such case, it must be ensured that the defaulting party had exercised reasonable diligence to mitigate the effects of the event.
- Most contracts require that the event must be unforeseeable. In the current case, the COVID-19 situation was undoubtedly unforeseeable.
- Most contracts necessitate the notice to the other party for invoking the force majeure clause.
- The burden of proof usually lies on the party relying on the force majeure clause.
The Latin maxim of ‘lex non cogitadimpossibilia’ or ‘impotentiaexcusatlegem’ also applies in this case if the contract does not specify the force majeure clause. It means that the law does not compel a man to do which is not possible to be performed. This clause is found in Section 56 of the Indian Contract Act, 1872. In India, it is referred to as the doctrine of frustration.The Supreme Court applied this doctrine in the case of SatyabrataGhose v. MugneeramBangur& Co. In the case of Kesari Chand v. Governor-General-in-Council,the Nagpur High Court observed that the doctrine of frustration is applied in cases where the performance of the contract becomes impossible due to circumstance beyond the control of either party. The court held that the statutory provision provided under Section 56 of the Indian Contract Act, 1872 comes into play in such a case.
The Government of India has stepped up to protect the interest of the parties to commercial contracts in the COVID-19 situation.Recently, the Ministry of Finance has clarified with respect to ‘Manual for Procurement of Goods, 2017’, and announced that in the case of any disruption in the supply chains due to the outbreak of COVID-19 in China or any other country, such case will be dealt in the Force majeure Clause (FMC) in the contract.
Issues in M&A Transactions:
The M&A transactions will also be affected in the following ways:-
- The valuation of the companies based on expected future capital assets worth will be affected adversely due to the uncertainty of the future.
- Usually, a Material Adverse Change (MAC) Clause is inserted in the M&A contract. This clause enables either party to rescind the contract if it faces an event that adversely affects the economic capability of the company. Such a clause can be invoked in the current situation.
- General warranties of the agreement would not cover the current situation. Buyers must request for a specific guarantee to protect their interest.
- Buyers must undergo an in-depth due diligence to assess the level of risk and the target’s future planning. However, on-site due diligence, audits and inspection will be impossible due to the current lockdown situation, making this exercise somewhat futile.
- The closing of the M&A transactions will also be delayed due to the COVID-19 pandemic.Both the parties to the transaction should negotiate the closing conditions and the possible waivers and they may choose to extend the closing date.
Impact on FDI Policy:
On 18th April,2020 the Central Government amended the Consolidated FDI Policy 2017 to prevent opportunistic takeover/ acquisitions of Indian Companies due to Covid-19.
The following two new restrictions (while leaving prior restrictions intact) were imposed:
1. An entity of a country, which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the Government route.
2. Government approval will also be required where subsequent changes in beneficial ownership (by way of direct or indirect transfers) of any existing or future FDI would result in such beneficial ownership falling within the purview of the first restriction.
This development is also expected to have a big impact on the following:
- fundraising efforts of start-ups and other companies;
- exits for financial investors;
- holders of rights of pre-emption in Indian companies against other shareholders;
- foreign entities, who have subsidiaries, group companies or investee companies in India, and who are seeking to raise funds in their own offshore jurisdictions, or whose shareholders are looking to sell their stakes, or who are looking to further capitalise their Indian interests.
Issues in Competition Law:
The current pandemic has left concerns about issues which may arise in the field of competition law. It is believed that the businesses expecting losses may join hands with competitors to deal with the situation. It is also feared that the entities selling essential commodities may take undue advantage of the situation and may affect supply or prices in the market.
In an effort to prevent spread of Covid-19 and considering the resource constraints being faced amid a complete lockdown of all establishments/offices (except government offices involved in essential functions such as defence, police and basic utilities) across India, the CCI has announced that it would not accept any filings/submissions until March 31, 2020 including:
(a) any fresh merger filing (including ‘green channel’ filings) and/or submissions in respect of any existing filing that is in the process of being reviewed;
(b) any pre-filing consultation request;
(c) any fresh complaint in respect of anti-competitive (such as cartel and bid rigging) and/or abusive practices; and
(d) any filings/submissions in respect of existing antitrust proceedings. Even the investigative wing of the CCI i.e., the Office of the Director General, would not accept any filings/submissions in respect of ongoing investigations until March 31, 2020. In view of the complete lockdown for 21 days announced by the Prime Minister on March 24, now extended till May 3, it appears that the above suspension may be also extended unless the CCI finds a way to dispose some of its more urgent obligations electronically.
Impact on Indian Banking Sector:
The Indian banking sector has already faced a major hit in the recent past and the COVID-19 situation has made it even worse where there is a need to protect the banks and its customers. The lockdown has resulted in closing all the major sectors resulting in a need to stringent steps by the government. RBI directed all existing banks to grant moratorium of three months on payment of all installments falling due between March 1,2020 and May 31,2020 vide notification dated March 27,2020.Moreover on April 17,2020 various other reforms related to banking sector like the reverse repo rate, special refinance facilities etc. were announced by RBI via a press release.
Measures are being taken in India as well as globally, in order to combat the adverse effect of the current COVID-19 crisis on the market. In India, various relaxations have been announced under the Companies Act, The Insolvency and Bankruptcy Code as well as SEBI has also announced various guidelines to tackle the situation. Schemes like PradhanMantriGaribKalyanYojana have been introduced to support low wage earning employees. The Department of Housing in Maharashtra has ordered the landlords of residential properties to delay rent collection by at least 3 months without eviction. Moreover, the Ministry of Corporate Affairs has announced that the aid by companies for COVID-19 will be considered as a part of Corporate Social Responsibility (CSR). There is a need for greater involvement of the government in providing relief to the people to tackle this extraordinary situation and come out as a strong nation globally. NDFC’s should be provided assistance and the need of small business owners should be taken care of. It can be said that post this pandemic huge investment will be made in development of heath care infrastructure in the country and the insurance sector specially in health is expected to experience a boom as many Indians do not have health insurance.
About the authors
(LEFT IMG)Roshni Kapur is a 5th year law student at Amity Law School, Noida. She aspires to become a corporate lawyer post her graduation.
(RIGHT IMG)Sonakshi Singh is a 4th-year law student from Amity Law School, Amity University, Noida. She currently holds 9.07 CGPA and is a recipient of 100% scholarship for 4 years. She has published a research paper on ‘Nikah Halala’ in International Journal of Socio-Legal Research (IJSLR), a research paper on ‘Obscenity Laws in India’ in Legal Messenger, published Case Commentary on “Women’s Entry on Sabrimala Temple”. She is highly engaged in research work and definitely recognized.