The article focuses on the broad contours of possible legal issues and the solutions thereof, which can help the judicial system to clear the backlogs and at the same time, fine tune the system to respond to the cataclysmic shifts that have been brought about by Covid-19...Hardly is there any discipline that has escaped the impact of Covid-19. It is impacting the legal framework of every...
The article focuses on the broad contours of possible legal issues and the solutions thereof, which can help the judicial system to clear the backlogs and at the same time, fine tune the system to respond to the cataclysmic shifts that have been brought about by Covid-19...
Hardly is there any discipline that has escaped the impact of Covid-19. It is impacting the legal framework of every country. In the coming days, courts across the world including India will be riddled with a number of cases related to Covid-19, such as manpower rationalization (retrenchments), closures of business units, disruptions in supply chains and non-performance of contracts, calling off projects, implementation delays and what have you. That can add to the existing massive pendency of cases at various courts, breakdown in commercial activities, loss of livelihood, etc. Therefore, a proactive approach is needed to insulate the legal system from possible breakdowns.
This note focuses on the broad contours of possible legal issues and the solutions thereof, which can help the judicial system to clear the backlogs and at the same time, fine tune the system to respond to the cataclysmic shifts that have been brought about by Covid-19.
1. Use of technology to clear the backlog
Every crisis brings in its wake, opportunities. COVID-19 can be leveraged to bring about greater use of technology in the legal system-from the apex court to the grassroots layers of the legal system. A limited experiment is being carried out in the Supreme Court and High Courts for introduction of technology to make access to the system easy and affordable to litigants. For instance, a few benches of the Supreme Court and some High Courts are hearing important cases through the virtual medium. This has to be intensified and widened so as to equip every court with the right technology and bandwidth to facilitate the process. This also requires, among other things, the following;
1. Larger allocation of outlay specifically for technology upgradation, which can reduce the pendency of cases drastically.
2. Overhaul of the entire legal ecosystem to equip the judiciary and legal fraternity, particularly at the district courts with the knowledge of handling technology and use of visual platforms for filing cases, arguments, authentication of documents, presenting evidences etc. It may also require amendments to the Evidence Act, acceptance of e-authentication, e-signatures, etc. This also calls for drastic changes in the Indian Criminal and Civil Procedure Acts.
3. Importantly, in the entire chain of events, the litigant - common man - should be an active participant and he should be able to see court proceedings through virtual media, get intimation of the hearing well in time, daily rulings not being present in the court.
4. Importantly, the digital platforms should not be subject to hacking, cyber threats and manipulation by vested interests. There should be strong cyber security systems in place.
5. Use of technology is not a low hanging fruit. Considerable work has to be done in integrating and linking systems, data, harmonizing procedures, creating digital structures that are user friendly. For instance in the US, the idea of induction of technology started over a decade back through meticulous planning to create an ecosystem, which is comprehensive and taking care of all possible disruptions the system can cause. India can borrow from the US system the automation methodology and innovation trail instead of reinventing the wheel.
Mechanism to Deal with Explosion of Cases Involving Force Majeure
During the Covid-19 and post Covid-19, there can be a groundswell of cases that focus on force majeure since the parties to contract would seek the escape route because of the disruptions in the supply chain and other eventualities.
Under both Indian and English law, force majeure does not simply mean anything outside the control of the parties to a contract. Its meaning and applicability depends on the wording of a contract intended to anticipate unforeseen events and remedies for what happens on their occurrence. Implicit in that is the possible variance in Force majeure clauses incorporated in the contracts. There are possibilities that some contracts might not have visualized this eventuality or would have given a restricted narration of the clause.
Force Majeure cases
1. Contracts that arise between Indian parties, who have entered into contract
2. Contracts that arise between Indian and foreign parties
3. Contracts that arise between employers and employees (This is discussed separately)
Between Indian Parties
On 19th February, 2020, vide an office memorandum O.M. No. 18/4/2020-PPD(3), the Government of India has clarified that the disruption of supply chains due to spread of coronavirus in China or any other country should be considered as a case of natural calamity and "force majeure clause" may be invoked, wherever considered appropriate, following due procedure. This seems to be a nebulous observation and one can expect a lot more will be heard on this issue in due course.
Four important aspects have to be taken cognizance in this regard;-
1. It applies in the case of China or any other country
2. The term "wherever considered appropriate" seems to be vague and lacks finality
3. The memorandum is silent on the business deals between India parties.
4. The legal applicability of a memorandum vs. notification has to be cleared as also the admissibility of the notification and/or memorandum in the court of law.
It is also important to reckon that on Feb.17, 2020, the China Council for the Promotion of International Trade (CCPIT), said that it had already issued over 1,600 'Force Majeure certificates' to firms in 30 sectors, covering contracts worth over US$15 billion, details of which have to be ascertained.
The Reserve Bank of India has, vide notification
No.BP.BC.47/21.04.048/2019-20 dated 27th March, 2020(16) also announced that in respect of all term loans (including agricultural term loans, retail and crop loans), all commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all-India Financial Institutions, and NBFCs (including housing finance companies) are permitted to grant a moratorium of three months on payment of all installments falling due between 1st March, 2020 and 31st May, 2020. Further, in respect of working capital facilities sanctioned in the form of cash credit/overdraft, the lending institutions have been permitted to defer the recovery of interest applied in respect of all such facilities during the period from 1st March, 2020 up to 31st May, 2020.
This notification defers the payment of EMI / installments for another three months. There is a feeling among the business community and general public, who have installment commitments to the bank and institutions.
The point to be considered in this regard is whether the three months moratorium on term loans meets the excruciating financial squeeze being faced by the corporations at hand and the general public, who have heavy EMI commitments.
Experts feel that COVID-19 is unlikely to give rise to a valid force majeure defense under every contract and in every circumstance, as different contracts and governing laws stipulate different requirements for different situations. There are legal risks that have to be carefully assessed.
Some of the risk perceptions that can arise are explained below:
1. Tenancy; already there are talks whether the lockdown would preempt the tenants from paying rentals during the period of lockdown. In that case, what is the mechanism to protect the interests of the landlord or any other party/ies.
2. Exports: there are many exporters, who fear that overseas buyers may cancel the contracts using the Doctrine because of disruption in the supply chain. In that event, what would be the exporters' remedies vis a vis suppliers, vendors and a whole lot of stakeholders.
3. Importers: because of the shutdown of factories overseas, many of them would not be able to perform the contractual obligations, leading to disruptions in production and consequent losses. Some people may cancel or delay payments.
4. What would be the contractual obligation between lenders and borrowers, despite the deferment of term loans for a period of three months and the incidental interest payment including how the staggering of capital payment.
5. What are the remedial actions for those who have entered into contracts where force majeure is not invoked or where wording is such that it favors one party to the detriment of other/s.
6. Jurisdiction of the contract will be another issue to be settled. For instance, both China and India had issued notifications/ advisories, which are couched up in vague terms. There are subtle differences in the nuances for interpretation of the applicability of the Doctrine say in the UK and the US.
In the given situation, it is important for the Supreme Court to revisit the Doctrine and lay down conditions for applicability of the Doctrine, especially when the Indian Contract Act is mostly silent on this issue and there will be preponderance of such cases in the future. It is also worthwhile for the Legislature to consider amending the Indian Contract Act, so that it takes care of disruptions caused in the supply chain in a balanced manner.
Matters relating to Employer and Employee
Covid-19 triggered fear among both employees and employers about the continuity of employment and continued operations of the business enterprises. All segments of businesses, such as manufacturing, services, agri-based, etc. are being affected by Covid-19. Even if the lockdown is lifted in the conceivable future, the impact will be felt for some time or even years together. Some of the business entities are contemplating closing down their operations while others are scaling down sooner or later. A few enterprises have already announced wage cuts and retrenchment of contract workers, including public sector undertakings.
In the given situation, there should be a cushion for both employers and employees to sustain the operations for the former and employment for the latter since mass unemployment would lead to social unrest.
In the short span of time, creation of a safety net by imposing social security tax both from the employer and employee as is the case in many developed countries like the US may not be feasible during these difficult times. To tie down the crisis, the Central and State governments should create a fund, say an Employment Insurance Fund for Rs 1000 crores or so in states where there are large number of employees who are likely to be redundant temporarily (three to six months) and Fund with lesser corpus for states having lesser number of redundant employees. In case, the employer is cutting down the salaries by 50%, the other 50% employees should be able to draw from the insurance fund till the normalcy is maintained. Once the pandemic is over and the enterprises go into full steam, this Fund should be made a permanent one by way of collecting every month, say 6.5% of the salary each from the employer and employees. This will be a permanent fund to help employees during their period of unemployment. This can also be converted into a pension fund for employees after retirement or during unemployment or incapacitated in the event of an accident or sickness. Till a full-fledged revolving Fund is created, Government should deploy a portion of the US$1 billion assistance given by the World Bank since the very purpose of the grant is to meet the exigencies arising from health issues and revamping supply-side.
To implement this humanitarian scheme, the government should amend the labor law to help the corporations to hire people on a contract basis whenever the need arises, and lay them off when the work is completed.
Arbitration, Conciliation and Mediation to Reduce Pendency of Cases
Cases emanating from Covid-19 will further increase the pendency of cases in the courts. Alternative dispute settlement mechanisms like arbitration, conciliation and mediation should be resorted to in settling the cases arising out of Covid-19, particularly relating to tenancy, employment, deferment of loans and the interest chargeable thereof etc. There should be finality for the cases decided and higher courts should be approached with an appeal only under exceptional cases. Special courts and benches also can be considered across the country to handle Covid-19 commercial cases and other related ones.
Work from home
One important positive spin-off of the Covid-19 is the growing number of people who work from home, wherever such a work model can be adopted. During the lockdown days, most of the employees in the ICT sector and a large number of people from other vocations are working from home. School teachers are conducting online classes. Some state governments have decided to promote that culture not alone during the lockout days but beyond to save on students' travel time, early going to schools during inclement weather etc.
Work from home will have a number of benefits including cost saving, decongesting roads, controlling pollution etc, a number of steps should be taken to create an ecosystem. These are mostly relating to protection of intellectual property rights since there can be a possibility of infringement on that since the employees are working from the confines of their homes, adopting newer tools for authentication and change in the employment contracts etc. For instance, in certain sectors other than IT, women are prohibited from working beyond a stipulated time. While working from home, these restrictions are no longer valid. Also, there should be a system in place to monitor the psychological ferment of employees since isolation can have an emotional backlash.
Review of Existing Laws
Covid-19 also necessitates amendment to a number of existing laws to make them contextual to the changes that are conceived. Indian Contract Act, Indian Evidence Act, IPR, Indian Labor Act, Indian Disaster Management Act, Indian Epidemics Act, etc. are some of the legislations that need review to align with the perceived changes in the economic and legal framework.
Corporate Social Responsibility (CSR)
Covid-19 has led to many migrant workers leaving cities to return to their villages. When the lockdown is lifted, there is a possibility of more migrant people leaving cities to return to their villages and their return would take more time. In the meantime, a lot of productive jobs have to be created near their home to gainfully engage them. Government schemes like NREGA or state employment guarantee schemes, etc. alone will not be able to absorb them. The private sector can chip in. For instance, the corporations can be encouraged to take up development works near the place of their operations. Instead of contributing to the CSR fund set by the government, they should be able to carry out development works involving local people, such as creating village capital assets like roads, sanitation works, irrigation works etc. Some of the agro-based industries are ideally suited to carry out such works more efficiently than the government departments. Expenditure towards such works should be eligible for tax deduction in the same way as the contributions towards CSR, PM Care Fund, PM Relief Fund, etc. This will help extend immediate succour to the affected people and regulate migration to the overcrowded metros.