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‘Essential’ pharmaceuticals amid disrupted supply chains- A legal nightmare!

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Can COVID-19 and the lockdown qualify as a force majeure event even when the pharmaceutical industry was never under a lockdown? Sandeep Grover, partner, Aditya Nayyar, partner and Tarang Agarwal, associate, Ortis Law Offices explain that while this could be the case, they opine that it may be worthwhile for GoI to put a quietus on this entire controversy so that unnecessary litigations may be avoided and the burden on the already overburdened judiciary of our country may be minimised

Today, India is proudly the third largest pharma drug producer in the world in terms of volume[1] and is accredited with exporting generic drugs to various countries at affordable prices. However, the Indian pharma companies remain significantly dependent on China for import of crucial active pharmaceutical ingredients (APIs)[2]. As such, to a large extent, the much talked about ‘Make-in India’ initiative and policies formulated by the Government of India (GoI) to promote domestic players have been rendered practically academic.

Unfortunately, and owing to such over-dependency on imports, the outbreak of the Corona virus (COVID-19) pandemic has brutally impacted our pharma sector. Let’s not forget, the GoI did its best by declaring the pharmaceutical industry as ‘essential’ during the present medical emergency situation–of course to minimise disruptions in supply of medicines, vaccines and drugs. Despite GoI’s efforts, the pharma industry has clearly not blossomed the way one would have expected in such time of medical emergency, possibly due to our dependency on imports. In fact, similar to other sectors, we hear stories about how even in the pharma sector, there are pharma companies which are unable to fulfil their contractually agreed supplies. That’s why we say the impact is ‘brutal’.

Can we blame the Government?

The government can’t be blamed, can it? It played its role in increasing demand and also ensuring supply by coming out with certain welcome policy measures such as (a) allowing manufacture of drugs and other medical equipment as well as operation of distribution units such as dispensaries, chemists laboratories, pharmacies etc.[3]; (b) permitting unobstructed movement of pharma goods, medical personnel, para-medical staff etc.[4]; (c) complete prohibition on export of hydroxychloroquine to ensure its availability for domestic use[5]; (d) amendment in export policy of APIs by permitting free export of essential antibiotics and vitamins[6]. Adding to this, GoI also fell prey to massive peer pressure from certain other nations (which we refrain from naming) to export tons of certain in-demand medicines, which are believed to aid in curing COVID-19 patients.

COVID-19 and Supply-chain disruptions

While huge increase in demand during the lockdown period was inevitable, the significant thwarted supply chains, has not helped the pharma sector. The disruption was a necessary offshoot of the lockdown which led to non-availability of raw material and labour, logistical issues, shortage of supply of packaging material and more significantly inadequate import from China.

Aditya Nayyar, Partner, Ortis Law Offices
Sandeep Grover, Partner, Ortis Law Offices
Tarang Agarwal, Associate, Ortis Law Offices

Thus, a situation has emerged where on the one hand, the GoI appears to have done adamantly and adequately enough in terms of policy to ensure adequate supply of medicines and medical related equipment, and on the other, the pharma sector seems to be still reeling under the obvious pressure of operational hurdles to meet the ever rising demand, but unable to meet supplies.

Legal Impact on existing inter-se contractual obligations

As pharma companies and their distributors/suppliers continue to grapple with the practical challenges thrown open by the lockdown, it is clear that their inter-se contractual obligations have also taken a massive COVID hit.

The question that begs to be answered therefore is-can the outbreak of COVID-19 and the lockdown qualify as force majeure event (a legal jargon being used now more than ever) even when the pharma industry was never under a lockdown?

While no doubt, recent judicial pronouncements of Courts and repeated notifications/ circulars issued by the GoI provide guiding light insofar as the treatment of the lockdown period as a force majeure event is concerned, but as a first step, the terms of the contract would necessarily take precedence. As for the pharma sector, it may be a challenge for parties to take recourse to force majeure clauses in their contracts (assuming it exists in the first place), given that the GoI did not officially impose any restriction on manufacture, import or supply/distribution of drugs and other medical equipment. Recently, while dealing with a similar issue where importers of steel were seeking interim protection by invoking force majeure clause in their contracts, the Bombay High Court refused interim protection while observing that distribution of steel has been declared as an “essential service” during the lockdown period and there were no significant restrictions on movement of vehicles, manpower etc. in the steel industry.[7]

Having said that, other major human and trade related factors, such as import related restrictions, have been a big hurdle for maintaining supplies even for pharma players, thus entitling them to make out a case of force majeure.

The question also arises whether in the absence of the import of the APIs, was it not possible for pharma companies to develop alternate methods to produce the required APIs in India, more so when the pandemic hit the Indian shores much after it was initially discovered in China. Possibly, no one has given a thought to this idea – see how China claims to have developed a hospital equipped with 1,000 beds within a short period of 10 days. ‘Where there is a will there is always a way’. It is obviously easier said than done, but the brutal impact to the Indian pharma sector may have been minimised if the concerned players had the ‘will’ to manufacture APIs as against seeking permissions to import. GoI is inviting foreign companies to establish their units in India, but the question also is whether the GoI can ensure that the Indian pharma companies can also follow that and reduce their dependence on imports.

Another aspect which arises for consideration is in cases where a force majeure clause does not find place in contracts. One such situation has been envisaged under the Indian Contract Act, 1872 which provides parties’ recourse to the doctrine of frustration, where an unforeseeable event beyond the control of the parties makes performance of contractual obligations impossible. Again, owing to the lockdown and its direct and indirect consequences, it may be open for pharma companies to invoke the said doctrine should such a situation arise.

Conclusion

It would be in the best commercial interests of all parties concerned that such potential contractual disputes are resolved through commercial negotiations before they end up in courts.

Where such an amicable resolution is not forthcoming, which we foresee to happen in various cases, especially where defaults result in cessation of business or termination of contracts itself, the cases may end up before the Courts. It would be interesting to see how courts in India will react to and deal with the aforesaid aspects of the matter, especially in the case of ‘essential’ pharmaceutical sector. While deciding such cases, it would also be interesting to see whether the arguments vis-à-vis the pharma companies utilising this emergency situation as an opportunity to reduce their dependence on imports are taken up.

It may be also be worthwhile for GoI to consider whether it can come out with an ‘executive policy decision’ in order to put a quietus on this entire controversy so that unnecessary litigations may be avoided and the burden on the already overburdened judiciary of our country may be minimised.

One may also expect that in order to be ready to combat similar force majeure situations in the future, policies are framed/revisited to mandate players in the pharma sector to “Make-in India”, as much as possible rather than be dependent upon imports from other countries.

[1] Press release bearing release ID: 1606725 titled “Import of Bulk Drugs/APIs”, issued by Ministry of Chemicals and Fertilizers, Government of India on 17.03.2020

[2]Ibid. Two-thirds of the total imports of Bulk Drugs/ Drug Intermediates is from China

[3] Order bearing no. 40-3/2020-D dated 24.03.2020 issued by MHA

[4]Ibid

[5]Notification bearing no. 01/2015-2020 dated 04.04.2020 issued by MCI

[6]Notification bearing no. 02/2015-2020 dated 06.04.2020 issued by MCI

[7]Standard Retail Pvt. Ltd. v. M/s G.S. Global Corp & Ors., Commercial Arbitration Petition (L) No. 404 of 2020 (High Court of Bombay)

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