18 May 2020 1:53 PM GMT
Covid19 lockdown in India and across the world has already caused unforeseen effects to every industry, distinctive complications and unpredicted circumstances to the businesses, the supply and demand demography, other operational impediments are at large. It is evident that the elasticity of demand and termination of contracts already reflecting on the businesses' financials. Under...
Covid19 lockdown in India and across the world has already caused unforeseen effects to every industry, distinctive complications and unpredicted circumstances to the businesses, the supply and demand demography, other operational impediments are at large. It is evident that the elasticity of demand and termination of contracts already reflecting on the businesses' financials. Under these circumstances, this article aims to outline the lockdown situation in manufacturing businesses and remedy. While so, pre and post-pandemic notifications issued by the Governments whether binds the businesses is a question that remains to be answered, and at the same time, businesses' functional aspects needs a steadfast approach, and compliances under EDA 1897, DMA 2005, and Cr.P.C. the Factories Act, ID Act, Contact Act, Covid19 health protocols, and SOP. Therefore, the heads of the departments need to forecast short and long-term disputes of their business, so a pro-active approach is taken to resolve them. In this context, this article will try to outline on the potential impacts of lockdown; functions like production, orders, refund or recovery of payments, workman, remunerations, health protocols, and feasible legal remedies to immune the business for non-performance and non-liability.
Several weeks of lockdown has spun the world to upside down and its economy to descent, post 2nd week of March 2020 most countries went lockdown and now being partially relaxed but with stringent procedures. On the other hand lockdown impacted the businesses with two kinds of repercussions. Firstly, obligations to abide to the Government orders and notification. Secondly, to change business policies to match domestic and international markets demand scenarios. Particularly, addendums to present and future purchase orders, and business policy changes.
According to the WTO, due to the implications and impact of Covid19, and worldwide disruptions in the normal economic activity, the World trade is expected to fall by between 13% and 32% in 2020. The prediction is that nearly all regions of the World will suffer double-digit declines in trade volumes in 2020, specifically the exports from North America and Asia to hit hardest.
While these predictions of WTO may be applicable to most industries, it is pertinent to analyze B2B based businesses like the manufacturing industry and the service industry. The report points to an indication that the manufacturing sector and the service sector expected to have a large impact, and unpredictable change in business volumes, and surprising new requirements of special consumption demands due to the pandemic; unexpected surge in product requirements and difficulties in fulfilling the delayed supplies. On the other hand, the employee strength of business to see both sides of the coin, i.e. excess workers, and shortage of migrant workers, and forced pay scale variations.
Thus, implications of post lockdown first have to be analyzed based on Government notifications, followed by change in the business policies, possible disputes, and legal remedies.
The latest notifications and orders issued by the Governments and Court orders of respective jurisdictions in respect of Force majeure, exemption of limitation act, Specific Orders under the Industrial Dispute Act, Provident Fund schemes, or other Orders, each of them mitigate a new circumstance to the business. In result, compliance of them may have chain reaction between one department's functions to another department's efficiency, costs, and loss.
Thus, it has become inevitability to magnify these Orders and its effect, so to mitigate possible repercussions because of compliance; otherwise implications may evolve as long-term effects to the functioning, profits, competition, and survival. So it has become a necessity to forecast the lockdown effects and mitigate possible impacts to the overall business.
Lockdown is Universal:
Primarily, unlike the natural calamity, this lockdown is a first-time occurrence and experience to every business, which normally affects only a particular region or a specific area within a radius. Covid19 lockdown is universal epidemic in pandemic situation. Therefore, problems are unique and numbers cannot be presumed and assumed except a strategy to steadfast the situation for steady recovery.
There is severe impact on the global economy, new economic policies and restriction of trade is proposed, including travel ban, import restrictions, and domestic employment, and all such measures likely to cause de-globalization. While it is so, this analysis will now mitigate on the following possible causes with respect to post lockdown business functions, disputes, and possible resolutions
Foremost, this lockdown has already impacted the production output, raw materials stopped arriving to the factory, and the goods produced yet to be shipped. Resulting, the counterpart also lost the demand, and communications regarding orders and contract cancellations has already reached to the business heads. Now, the question remains, whether the cancellation of orders can be challenged, or the advance payment is liable to be refunded or parties should prefer addendums to contracts with non-liability.
Lockdown is universal, because of which, the demand for goods and services varying from headpins to airplanes have dropped to bottom. Most supermarkets and shops, ranging from high street London to Mumbai Fashion Street shutters are closed, and orders are already cancelled.
Whilst, either party may try to attract force majeure clause, or protection under Doctrine of Frustration; right to terminate the contract. Thus, it has become an essential aspect to relook at the existing contracts and its terms and conditions. First, whether to agree to the cancellation, or optionally negotiate for a possible addendum to the existing contract, not limiting to the variations of price and quantity. Thus, mitigating the total loss or substantial loss will chastely depend on the legal course of action that might have to taken by the department heads in search of an optimum resolution. But according to the contract terms, but upon the application of the pandemic situation.
Similarly, irrespective of the orders and payment status, either party may exercise refund or recovery through legal steps, by relying on the civil law provisions. However, how far the force majeure circumstance will impact the business remains a wait and watch scenario. On the other hand, the recovery of money suits will depend on how the Courts are going to interpret the contracts and how rational the Courts would incline to provide relief to which party will also depend on the strategic and legal approach initiated by the expected winning party.
Apart from the forecast of mitigating and magnifying the contract status, new obligations to resume the manufacturing process may require a different approach and planning. The SOP guidelines have come into force, further adding fuel to the fire, impacting the normal procedures. Secondly, health and safety guidelines have to be brought into the production line and health safety of all employees in the premises shall stand as a primary responsibility of the management.
In the process, use of Aargoya Sethu App, internal health surveys, and medical history data may have to be collected for each employee, including the family members to protect every other employee. Thus, sanitation, minimum PPE arrangements, and social distancing shall remain vital. Mantra for manufacturing will be of "Social distancing at work place" or "SOP at Workplace" and all such small factors would evolve as a health standard, for the factory manager and the administrative officers; the sole responsibility of the management.
Force Majeure (FM) and Doctrine of Frustration
The Force Majeure clause whether it already exists in the contract or Covid19 can be construed as national calamity, and whether the party who aims to take relief under the Doctrine of Frustration will all depend on the actual dispute in hand. Not every contract and its nature, and the covenants and obligations are same. Therefore, thorough understanding of the dispute in hand, mitigating the future loss should become priority of the department heads to forecast the consequences of force majeure events may include, according to the study by Joni R. Paulus and Dirk J.Meeuwig the following events are purported as triggering events
The real situation for the party who wants to exercise the force majeure condition should bear in mind the following questions.
While, the Government's order from the Department of Finance by the Procurement Policy Division, very clearly defines the applicability of Force Majeure in wake of the Corona, further the Notifications enables the parties to attract the FM clause. However, the notification points that FM clause doesn't excuse a party's performance entirely, only suspends it for the duration of the FM. The notification supports party's liberty to consider Covid19 event as Pandemic, as a national calamity, so the parties can exercise the Force Majeure Clause. However, it leaves a caveat that the existing contracts and its terms and conditions shall stand as the fundamental instrument to waive the non- performance and exclude the liability.
On the other hand, the Indian Contract Act 1872 doesn't define Doctrine of Frustration, however broad interpretation of Section 56, based on the actual circumstances of the dispute in hand, the application of non-performance and non-liability will rest depend on the eagle-eye view of the Hon'ble Courts. Further, whether parties can attract the Doctrine of Frustration due to the non- performance remains as another legal aspect that requires clarified preview. First, the contract and its terms and conditions on the one hand, and on the other hand the circumstances of when there is frustration and the dissolution of the contract shall occur automatically. The decision by the Supreme Court in the case of Satyabrata Ghose v. Mugneeram Bangur & Co., 1954 AIR 44, 1954 SCR 310, the Bench, Mukherjea, B.K. referring to the case of Vida Billington Estates Co. v. Stonfield Estate Ltd.  1 All E.R.853. Observed "It does not depend, as does rescission of a contract on the ground of repudiation or breach, or on the choice or election of either party. It depends on the effect of what has actually happened on the possibility of performing the contract (1). What happens generally in such cases and has happened here is that one party claims that the contract has been frustrated while the other party denies it. The issue has got to be decided by the court "ex post facto, on the actual circumstances of the case"(2). We will now proceed to examine the nature and terms of the contract before us and the circumstances under which it was entered into to determine whether or not the disturbing element, which is allowed to have happened here, has substantially prevented the performance of the contract as a whole"
The affected party cannot by default attract the exemptions of FM clause or attract the Doctrine of Frustration at the blank point. It is evident from the Department of Finance notification pertaining to the purchase firms that, the firm has to give notice of FM as soon as it occurs and it cannot be claimed ex post facto. There shall be communication from purchase and supplier either way about the FM event and intention of the contract and further actions regarding addendums or non-performance and non-liability considerations. It is also clear that even if the dispute takes the parties to the Court, if due procedures are not followed, preferably the parties must have taken efforts under the ADR, else the circumstances may not favor the violating party even if FM event is considered amidst lockdown implication.
In spite of the relevant notifications issued, every industry will have its own nature of implications and impacts; post lockdown, consequence of business policy change, the manufacturing and service industry is in distinctive situation to take wise business decisions. Hence, reduction in volume or downsizing of employees, mitigating and magnifying the possible effects of such decision requires distinctive planning and never thought strategies to cope up. Thus, apart from planning, taking due procedure of legal course of actions will safeguard the business, in effect, to have immunity from the non-performance and non-liability condition. But by default, exceptions cannot be presumed and assumed until a plan and alternatives plans are in place, and business is restored in steadfast manner, with due procedure of law and dispute resolution is in place.