Articles

CONTRACTS – SAVIOUR FROM UNFORESEEN LIABILITIES

BACKGROUND

In lights of COVID-19 being declared as a pandemic by World Health Organization, The Ministry of Health and Family Welfare has issued several guidelines to prevent the spread of the disease. Social distancing with reference to mass gathering, implementation of travel restrictions are some of the measures that are effectively enforced. The outbreak has been declared as an epidemic and the provisions of Epidemic Diseases Act 1897 have been invoked wherein shutdown of educational institutions and many commercial establishments has been declared. Due to arrears of accounts, pile-up of inventories, breakage of production cycle, discharge of workers, etc. almost all industries are experiencing depletion at an alarming rate.  

For parties that have entered into agreements for purchase, sale, leasing, licensing, renting, servicing, etc., the uncertainty caused by the spread of Corona virus has raised crucial concerns in regards to implementation of such agreements. The pertinent question that arises in this situation is “How to justify the rights and obligations of the parties in the agreement amidst the outbreak?”, “What shall be the scope of contractual relation between parties to an agreement in lights of the current pandemic?” The Government of India has clarified that disruption of supply chains due to spread of Corona virus should be considered as a case of natural calamity and “force majeure” clause may be invoked wherever considered necessary, vide an office memorandum O.M. No. 18/4/2020-PPD3.

Interpreting the above O.M., it can be safely concluded that the rights, obligations and contractual relations amongst parties to an agreement in the Corona virus pandemic depend upon the presence of “Force Majeure” Clause in the commercial contract.

WHAT IS FORCE MAJEURE?

“Force majeure” is a French phase and is used to describe a “Superior force” event. The law relating to Force Majeure is embodied under Sections 32 and 36 of the Indian Contract Act, 1872. The term has been defined in Merriam Webster Dictionary as “superior or irresistible force” and “an event or effect that cannot be reasonably anticipated or controlled”

In Cambridge Dictionary it is defined as “an unexpected event such as a war, crime, or an earthquake which prevents someone from doing something that is written in a legal document. “

As per Indian Contract Act, 1872 and various applicable rules, regulations and advisory notifications, it can be said that Force Majeure clause in a contract frees the parties in the contract from performing and exercising the rights and obligations as incorporated the in the contract on happening of events that are beyond the control of the parties. The common law incorporates Force Majeure as Doctrine of frustration which As per Section 56 of the Indian Contract Act reads “a contract to do an act which after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful. It can be inferred that both Force Majeure and Doctrine of Frustration operates at the instance of a supervening impossibility which is unforeseen and is not attributable to either parties in the commercial contract. In a plethora of judgments and landmark cases, the courts have defined ‘Force Majeure” as an event that neither be controlled nor can be anticipated. It includes an Act of God or natural disasters, war or war-like situations, labor strikes, epidemics, pandemics, etc.

IMPORTANCE OF CONTRACTS IN A PANDEMIC:

Due to the outbursts and subsequent governmental advisory, many suppliers will not be able to perform their contractual obligations, of the very least, the performance will be delayed. Under such scenarios, the force majeure clause would be a determining factor to understand the implications of these events. A contract defines the rights and obligation of the parties.  It also covers within its ambits clauses like “force majeure” to bring remedy in situations that are beyond the control of parties. In the case of Syed Khused Ali vs. State of Orissa and Anr. (AIR 2007 Ori 56) the facts laid that there was no Force Majeure clause in the agreement between the parties. The performance of the contract at the later stage became impossible and unlawful as it depended on the issuance of certificate by the government and the act was declared unlawful. It was held that Section 56 of The Indian Contract Act, 1872 would apply to the case and the petitioner would not be liable for payment of damages.  Entering into contractual relations prevents business and enterprises from hefty liabilities which may arise due to non performance of a contract even when the non performance is attributed to a supervening impossibility.

INTERPLAY OF FORCE MAJEURE AND COVID-19

As mentioned earlier in the article, Force Majeure operates not at the instance of the parties but on the happening of a supervening event which frustrates the performance of the Contractual obligations.  The ambit of Force Majeure is wider than Act of God and includes pandemics. On declaration of Covid-19 outbreak as a pandemic by World Health Organization and subsequent steps taken by Government of India, to control the outburst, the contractual obligations and relations between parties and affected.  The facts and the specific terms of the contract will define whether the parties in the contract can be freed from performing the contractual obligations. In situations like these and especially concerning around “force majeure” courts have laid focus on the language of the specific clause in the agreement to provide protection to the parties.

PROCEDURAL REQUIREMENTS TO INVOKE THE CLAUSE

The parties shall invoke the Force Majeure clause after satisfying the procedural requirements as mentioned in the clause. For instance the clause may provide that the party suffering from the Force Majeure event shall inform about the same to the other party giving all necessary details without any delay. The clause can also provide for a specific “x” day notice period from one party to another.

CONCLUSION: DETERMINATION OF COVID-19 AS FORCE MAJEURE EVENT

As per the latest reports published by the World Health Organization on 13^th May 2020, the Corona Virus outbreak has led to 287399 deaths globally. More than 4170424 positive cases have been registered. It has spread to more than 112 countries and territories around the world. The WHO defines a pandemic as “worldwide spread of a new disease”. The declaration to the effect as to whether the spread of Covid-19 would be include as an impossibility in terms of performance of contractual obligations in necessary.  Following factors shall have to be kept in mind to render the outburst of Covid-19 as impossibility in performance of a contract:

• Nature of contract
• Means and time available with parties to discharge their contractual obligations
• Flexibility in interpretation of contractual relations between parties
• Ambiguity in contracts
• Scope of Force Majeure clause in the contract
• Inclusion of “pandemic” in the Force Majeure

At this point in pandemic, it is important to realize the importance of contractual relations between the parties vis-à-vis the inclusion of Force Majeure clause in the same.

Choosing the right type of entity for your Business

The most important decision before starting your business operations is to choose the correct business entity for your business. This decision is not as straightforward as it seems, as every business entity has its own pros and cons.
There are various parameters to determine the best option for your business type, like Industry you will work in, capital requirements, future prospects for funding, government benefits available for the industry under different schemes, type of your proposed clientele and vendors are a few to be named. Not every business entity is good for conducting every kind of business.
For Example: best entity option for opening up a restaurant might be an LLP. Whereas, a private limited company will be a preferred option for their IT and Software business depending upon the various factors and their requirements.

Selection of the right kind of entity for a business concern determines the success of the organization. A business can be organized in varying forms ranging from corporation, LLPs, Partnerships, HUFs, etc. Just like a seed determines the kind of plant it will reap into, the kind of business entity determines its/its owner’s legal liability and income tax treatment. Some of the factors that needed to be kept in mind while selecting the kind of organization are –

• Extent of control ( Sole proprietorships exercise 100% control whereas control in a corporation is limited)
• Ownership and availability of resources(increase in the number of partners is usually proportional to increase in amount capital inflow),
• Managerial capabilities (decision making can be much easier with more brains to think about a problem) ,
• Scale of operations ( huge operational capacity in corporations) ,
• Ease of set up( incorporation of company requires legal and secretarial skills whereas sole proprietorship can be set up with minimum compliances) ,
• Legal liability( it is limited up to the amount of unpaid up share capital in the company),
• Tax benefits ( MSMEs and co-operative societies enjoy numerous tax benefits),
• Technical prowess, flexibility of operations, need for secrecy, risk, etc.

So, it’s always advisable to analyze the requirement well before choosing the business entity type.

Difference between a Pvt. Ltd. Company and an LLP

The Paradoxical Crisis of Patent Laws in the Indian Pharmaceutical Industry

Valued at a staggering USD$33 Billion as the world’s largest supplier of generic drugs and control of over 18% of the global market, the Indian pharmaceutical industry is a behemoth to behold[i]. It has emerged as a generic drug haven for all the global pharma key players in the world. But how exactly did it earn its generic repute and is this repute covertly hurting India? Unlike other third world countries, patent rights were introduced in India as early as 1856. It even had a product patent regime for all inventions under the Patents and Designs Act, 1911[ii]. However, in 1970, the government introduced the new Patents Act of 1970, (“the Patents Act”). It wasn’t until the Uruguay round trade negotiations of the General Agreement on Tariffs and Trade (GATT)[iii] that an International agreement on Trade-Related (Aspects of) Intellectual Property Rights (TRIPS) with an important provision of incorporating intellectual property issues was met. India signed the GATT on 15 April 1994. However, it was evident that GATT was more inclined towards developed countries rather than the developing ones. Therefore, India decided to join the nascent World Trade Organization. On January 1, 1995, the TRIPS Agreement went into force under WTO, which meant that India as a member was required to comply with its provisions. As a developing country, India obtained a 5-year transition period and an additional 5 years to amend patent laws on patent protection of pharmaceuticals.

Now, the period between the Patent Act of 1970 and the TRIPS agreement accorded Patents (Amendment) Act of 2005[iv], proved imperative in cementing India’s position as a generic drug haven. Section 5 of the Patents Act, 1970[v], provided that no patent would be granted for food, medicine, drug, relating to substances prepared or produced by chemical processes. This provision was omitted in the 2005 amendment. Meaning for a period of more than thirty years, India did not recognize patents with regard to medicines and drugs. This provided a great stimulus for the Indian pharmaceutical industry to develop expertise in reverse- engineering of novelty drugs due to absence of international patent recognition in medicine. The domestic industry grew rapidly by developing cheaper versions of a number of drugs patented for the domestic market and eventually aggressively shifted to the international market with generic drugs, after the expiration of international patents. For reference, the market share of multinational companies has fallen from 75% in 1971 to around 35% in the Indian pharmaceuticals market at present.[vi]

This generic growth came at the price of hostility from Global industry. Foreign firms started following a trend, a trend which may be easily observed with the example of Takeda pharmaceuticals. It is a Japanese pharma company with its key R&D efforts focused on Oncology and Rare Diseases, areas commanding novel cancer drugs such as Bortezomib and Brentuximab vedotin[vii]. It is disconcerting to find that these drugs are not open to the Indian market. Moreover, their Indian subsidiary merely manufactures generic drugs rather than the company’s core oncology focused business[viii]. A similar pattern can be found in almost all the other MNCs; Novartis and Pfizer to name a few.

This hostility cannot be completely categorized as unwarranted. India has a tendency of denying patents and issuing compulsory licenses against foreign novelty drugs. The landmark Novartis v Union of India case[ix] provides a better understanding of India’s malafide perception on the global stage. In the year 2006, Novartis applied to the Indian Patent Office seeking a patent for its formulation “Glivec”, used in the treatment of blood cancer. Novartis challenged the decision in the Supreme Court of India. The court rejected Novartis’ appeal for a patent in 2013. The major accepted argument was dismissing the appeal under the infamous section 3(d) of the patent’s act in order to ensure that expensive drugs are available at affordable rates to the poor. An argument which has been recycled time and time again to deny patents for novelty drugs. However, the flaw in this argument becomes profound when one understands that Novartis already provided “Glivec” free of charge to roughly 95% of afflicted patients under one of its patient support schemes”. The remaining 5% were reimbursed, insured, or covered under a very generous co-pay program[x].

As no patent for “Glivec” was provided in India, domestic generic drug manufacturers usurped the entire R&D that Novartis put into the discovery and development of “Glivec”. Unfortunately the “Glivec” situation is not an isolated incident. India has granted compulsory licenses to other cancer drugs, including Bayer’s “Nexavar”, Roche’s “Tarceva”, and Pfizer’s “Sutent”[xi]. These licenses allow India generic drug manufacturers to make these drugs with impunity rendering the original producers uncompensated in the process.

It is hard to feel sympathetic towards multi-billion corporations for losing out on some money. But the issue at hand is much bigger. Not only do these continued instances quip mistrust in foreign firms, but they also strip the companies of their incentive to invest in years of expensive R&D to create new drugs; effectively putting an end to innovation. This is egregiously dangerous for public welfare as well as the generic drug industry; which depends upon reverse engineering of these novelty drugs.

This mistrust has resulted in International companies not launching their drugs in the Indian market. This not only proves detrimental to patient health but directly creates demand for illegal counterfeits of these drugs. Bangladesh, a fellow signatory of the TRIPS agreement is infamous for its illegal supply of internationally patented drugs in the Indian market. Bangladesh falls under least developed countries (LDCs); as a result, it enjoys Agreement on Trade-Related Aspects of International Property Rights (TRIPS) waiver allowing LDCs to produce patented drugs until 2033[xii]. Thus, it may legally export generic versions of patented drugs to any country where those drugs aren’t covered by patents such as Vietnam, Myanmar and Kenya. The Indian market doesn’t qualify for this export but due to abundant output and locational advantage, such firms illegally sneak their potentially unregulated and dangerous drugs under personal consumption category circumventing customs authority’s scrutiny.

Now, having a dedicated generic drug industry is not inherently wrong. But Katherine Eban paints a scary picture of the Indian generic drug industry dominated by key players such as Lupin, Glenmark, Cadila and Aurobindo, in her book “Bottle of lies”[xiii]. The book uses the Ranbaxy scandal of 2013 as an example. To combat the blazing massive HIV/AIDS crisis, the Bush administration introduced the President’s Emergency Program for AIDS Relief. Ranbaxy was chosen as one of the beneficiaries. In its rush to introduce generic drugs to the markets, Ranbaxy blatantly falsified data. Data that proved their drugs were safe and therapeutic. They did so by essentially taking patented drugs, breaking them down, and passing off the results as their own. No regulatory actions were taken against the company during this process for clear IP violations.

The same author, a veteran investigative journalist in the field of public health commented that during her time reporting in India, she observed that the Indian plants don’t fear being shut down by regulators due to negative findings[xiv]. On paper the patent laws of India readily provide for various injunctions, along with grave criminal and civil liability for IP contraventions for pharmaceuticals. But in practice, much like the Ranbaxy scandal, the guilty corporate executives usually get away unscathed.

Additionally, the pharmaceutical industry has not been sheltered from corruption allegations and administration deficiencies, Good laws solely do not merit protection of patents; rather it is the stringent implementation of such laws that accomplishes this goal. The widespread corruption can be combated through increased accountability and transparency between citizens and the concerned government regulatory organizations with regard to information about the drug regulatory processes. This transparency must also be coupled with a decrease in political funding by big pharma corporations. Currently, the fines for IP mishaps, ranging in lakhs and crores fail to curb such violations in the industry. Simply because the profits made from such activities are far superior to the value of the fines imposed. Moreover, sanctions for pharmaceutical companies that violate patents must be severe and exemplary enough to command retributive results to further discourage such actions. This could involve an escalation pyramid of sanctions where regular offenders are treated with increased severity in proportion to the violations they commit.

To put it bluntly, Indian pharmaceutical companies have grown to accept being reduced to a generic market. Our lack of adequate funding towards R&D has made it too incredulous for an Indian company to independently manufacture novel drugs. Although the recent Bloomberg report concurred that the top 5 Indian Pharma giants Sun, Lupin, Glenmark, Cipla and Dr. Reddy’s spent a record Rs.8025 crore in R&D for FY 17 in line with their global competitors[xv]. It must be noted that the majority of these investments were under traditional generic systems. It is nonetheless a start for it serves to exhibit that healthily investing in R&D is a possibility. Going forward, a mere shift in the streamline of resources towards novelty and specialized drugs can help revitalize India’s lost innovation potential.

It is irrational to expect pharmaceutical companies; profit oriented businesses to function as humanitarian mercenaries for public welfare and allow for cheap generics of their arduously expensive and labour-intensive novelty drugs. This onus must be instead shouldered by the government of the country. How can it do so? By simply integrating a better healthcare system. Although India did establish a semi- universal healthcare in the form of Ayushman Bharat scheme, it isn’t very effective in cases of rare diseases where novelty drugs are required. It has a low financial coverage cap and covers less than half of the country’s population. Arguing for the sacrosanct of human life over “greedy patents practices” but failing at proper implementation of the national patent laws to provide patent security, resulting in distrust and loss of potential novel market for global pharma firms; thereby risking the lives of citizens due to unavailability of those novel drugs is irresponsible. Secondly, India has systematically failed at investing in healthcare. As per the Global Health Expenditure database 2016 of WHO, India ranks 170 out of 188 countries in domestic general government health expenditure as a percentage of GDP. Spending a measly 1.28% of its GDP as public expenditure on health for FY 2017-18. In contrast, the US spent 16.9%, China 5%, Germany 11.2% and Japan spent 10.9%., India must simply invest more in public healthcare[xvi].

Such an investment is entirely a plausible solution as evidenced by Punjab, a state with 1 million cases of suspected Hepatitis C, which required expensive treatment consisting of injectable peg-interferon. Understanding the economic duress it could put the patients under, the government created a special fund of $2.9 million to cater to patients and the treatment was provided for free[xvii]. Instead of denying patents over public welfare, it is upon the government to formulate welfare oriented policies and invest in public healthcare. For example; various state or union governments can strike direct deals such as access to medicine schemes with a company holding a patent for an expensive novelty drug required in public interest. Whereby economically vulnerable are furnished with expensive novelty drugs for treatment. Section 135 of India’s Companies Act that makes it mandatory for companies to spend two percent of their average net profit for the past three years on Corporate Social responsibility can be leveraged to arrive at such a deal.

Now more than ever we must act. At the backdrop of the government’s effort to ramp up domestic output after India’s API reliance on China was coldly unveiled during COVID-19. The nation attempts to transform into a self- reliant India. Today, proper implementation of patent laws and investment in novelty drug research and manufacturing becomes all the more necessary. India must shed its conflicting generic drug haven image and its dependency upon foreign firms for novelty drugs to transform into the Global pharmacy of the world.

This blog was written for academic purposes only and gives a third-party perspective of things. Views expressed in the blog are not for endorsement of any parties.

Author: Sanskriti Bahuguna

SVKM’s Pravin Gandhi College of Law

Mumbai University

END NOTES:

[i] Ibef.org. 2020. Indian Pharmaceuticals Industry Analysis Presentation | IBEF. [online] Available at: <https://www.ibef.org/industry/indian-pharmaceuticals-industry-analysis-presentation> [Accessed 2 July 2020].

[ii] Patents and designs Act, 1911

[iii] The Uruguay Round was the 8th round of multilateral trade negotiations (MTN) conducted within the framework of the General Agreement on Tariffs and Trade (GATT), spanning from 1986 to 1993 between 123 countries

[iv] Indian Patents( amendment)  Act, 2005

[v] Indian Patent Act, 1970

[vi] Zacharias, N. and Farias, S., 2020. Patents And The Indian Pharmaceutical Industry. [online] Nishithdesai.com. Available at: <http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Patents_and_the_Indian_Pharmaceutical_Industry.pdf> [Accessed 30 June 2020].

[vii] Takeda.com. 2020. Products | Takeda. [online] Available at: <https://www.takeda.com/what-we-do/our-products/> [Accessed 1 July 2020].

[viii] Medindia.net. 2020. Zydus Takeda Healthcare Pvt. Ltd. Product Information | Medindia. [online] Available at: <https://www.medindia.net/drugs/manufacturers/zydus-takeda-healthcare-pvt-ltd.htm> [Accessed 1 July 2020].

[ix] Novartis AG v. Union of India, A.I.R. 2013 S.C. 1311 (India), available at http://supremeco urtofmdia.nic.in/outtoday/patent.pdf

[x] SHAHANI, R., 2020. Misinformed Campaign Against Glivec. [online] @businessline. Available at: <https://www.thehindubusinessline.com/opinion/misinformed-campaign-against-glivec/article22994863.ece> [Accessed 30 June 2020].

[xi] PMLive. 2020. India Revokes Pfizer’s Patent On Sutent. [online] Available at: <http://www.pmlive.com/pharma_news/india_revokes_pfizers_patent_on_sutent_434858> [Accessed 1 July 2020].

[xii] Gay, D., 2020. What LDC Graduation Will Mean For Bangladesh’s Drugs Industry | LDC Portal. [online] Un.org. Available at: <https://www.un.org/ldcportal/what-ldc-graduation-will-mean-for-bangladeshs-drugs-industry/> [Accessed 30 June 2020]

[xiii] EBAN, K., 2020. BOTTLE OF LIES. NEW YORK: ECCO

[xiv] Porecha, M., 2020. Bottle Of Lies Proves A Bitter Medicine For DCGI. [online] @businessline. Available at: <https://www.thehindubusinessline.com/news/bottle-of-lies-proves-a-bitter-medicine-for-dcgi/article30463171.ece> [Accessed 30 June 2020].

[xv] Sharma, S., 2020. India Spending More On Healthcare Now, But Yet Not As Much As Others; Here’S How Much US, China Spend. [online] The Financial Express. Available at: <https://www.financialexpress.com/economy/india-spending-more-on-healthcare-now-but-yet-not-as-much-as-others-heres-how-much-us-china-spend/1922253/> [Accessed 2 July 2020].

[xvi] Sharma, S., 2020. India Spending More On Healthcare Now, But Yet Not As Much As Others; Here’S How Much US, China Spend. [online] The Financial Express. Available at:

<https://www.financialexpress.com/economy/india-spending-more-on-healthcare-now-but-yet-not-as-much-as-others-heres-how-much-us-china-spend/1922253/> [Accessed 2 July 2020].

[xvii] ANI News. 2020. Over 18000 Patients In Punjab Receive Free Treatment For Hepatitis C. [online] Available at: <https://www.aninews.in/news/business/over-18000-patients-in-punjab-receive-free-treatment-for-hepatitis-c/> [Accessed 1 July 2020].