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DECLINE IN RESPECT OF RULE OF LAW

Author :- Shivang Raj Mehotra

INTRODUCTION

There is no such discipline that has escaped the impact of COVID-19. Legal framework of almost every country is being affected by this pandemic. In the coming days courts across the world including India is perforated with a number of cases related to COVID-19, such as retrenchments, disruptions in business supply, closing of business units and non performance of contracts, implementations delay and calling off projects. This has lead to huge increase of pendency of cases at various courts, loss of livelihood and breakdown of commercial activities. Therefore a proactive approach is needed to resolve this issue.

The impact of coronavirus or COVID-19 on domestic and international businesses is severe, across countries and sectors. There are number of the COVID-19 outbreak related key legal issues that companies should be brooding about within the current environment.

Supply Chain Disruption:

Considering the supply chain disruption caused by the COVID-19 outbreak, it is likely that performances under many contracts will be delayed, interrupted, or even cancelled. Counterparties (especially suppliers) to contracts may seek to delay and/or avoid performance (or liability for non-performance) of their contractual obligations and/or terminate contracts, either because COVID-19 has legitimately prevented them from performing their contractual obligations, or because they are seeking to use it as an excuse to extricate themselves from an unfavorable deal. Further, companies may not be able to perform their obligations under their customer agreements because of their supplier’s non-performance and may in turn seek to delay and/or avoid performance (or liability or nonperformance) of their contractual obligations and/or terminate contracts. Parties can also cite COVID-19 as a basis for renegotiation of price or other key contractual provisions (example: volume of materials exported from or imported into affected areas due to shifts in supply and demand).

In this context, it’s important to work out if COVID-19 are going to be considered as a ‘Force Majeure’ event. On Feb.17, 2020, the China Council for the Promotion of International Trade (CCPIT), revealed that it had already issued over 1,600 ‘Force Majeure certificates’ to firms in 30 sectors, covering contracts worth over $15 billion. In India, the Department of Expenditure, Procurement Policy Division, Ministry of Finance issued an Office Memorandum on February 19, 2020, in reference to the government’s ‘Manual for Procurement of Goods, 2017’, which serves as a guideline for procurement by the government.

However, 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. Companies are, therefore, well advised to proactively manage the related legal risk and punctiliously assess which party must ultimately bear the financial losses caused by COVID -19.

Force majeure – The law relating to Force Majeure (a French phrase that means a ‘superior force’) is embodied under Sections 32 and 56 of the Indian Contract Act, 1872. It is a contractual provision agreed upon between the parties. The occurrence of a force majeure event protects a party from liability for its failure to perform a contractual obligation. Typically, force majeure events include an Act of God or natural disasters, war or war-like situations, labor unrest or strikes, epidemics etc. The intention of a force majeure clause is to save the performing party from consequences of something over which it has no control. Force Majeure is an exception to what would otherwise amount to a breach of contract. Whether a particular contractual obligation can be avoided is a factual analysis. The courts would examine, whether in a given case, impact of COVID-19 epidemic prevented the party from performing its contractual obligation. Indian courts have generally recognized this concept and have enforced it where appropriate.

Force Majeure cases:

  • Contracts that arisebetween Indian parties who have entered into contract
  • Contracts that arise between Indian and Foreign parties
  • Contracts that arise between employer and employees.

A COVID-19 pandemic could make it more difficult for parties to perform their contractual obligations. There are two possible instances, which may suggest that a force majeure clause covers a pandemic: (a) if the contractual definition of a force majeure event expressly includes a pandemic. Inclusion of pandemic to the list of force majeure events will provide clarity as to whether COVID-19 outbreak would trigger a force majeure clause in a contract; or (b) if the force majeure clause covers extraordinary events or circumstances beyond the reasonable control of the parties. Such general, catch-all wording may be invoked if it is determined that the factual circumstances caused by the pandemic are beyond reasonable control of the affected party. Having said that, whether a party can be excused from a contract on account of COVID-19 being declared a pandemic is a fact-specific determination that will depend on the nature of the party’s obligations and the specific terms of the contract.

The party claiming force majeure is usually under a duty to show that it has taken all reasonable endeavors to avoid or mitigate the event and its effects. This is a subjective standard and will be interpreted on a case-to-case basis. The force majeure event or circumstance must be causative to the contractual breach and a party claiming force majeure is typically required to establish that it was the force majeure event (and not some other factor) that caused the party to be unable to fulfil its contractual obligations.

Courts place the burden on the party asserting force majeure defense to demonstrate the existence of force majeure. Such clauses are construed strictly by the courts.

Counterparties may also attempt to invoke other contractual clauses like price adjustment clauses, material adverse change (MAC) clauses, and limitation or exclusion clauses, to limit or exclude liability for non-performance. The ability to invoke such other grounds will depend on the wording of the relevant clause, and how the clause is construed by courts. Further, companies should also consider the ramification of non-performance clauses under the contracts, such as liquidated damages clauses, under which the amount of compensation for non-performance has been predetermined and agreed by the parties.

Companies may consider the following curative actions in connection with their commercial contracts:

  • Key contracts should be analyzed to assess the parties’ rights and obligations, including with respect to termination, force majeure, governing law and dispute resolution.
  • Copies of critical correspondence and other communications should be maintained if disputes arise later. This can be particularly important in establishing that the company has done all that was reasonably possible to mitigate the losses.
  • Detailed review of supply chains should be conducted to understand geographic scope of operations, dependencies and business risks and legal rights.
  • Legal views should be obtained on whether the force majeure clause in key contracts is open-ended or exhaustive in relation to the list of force majeure events and whether the COVID-19 outbreak is covered or excluded.

The law in India has been laid down in the seminal decision of the Supreme Court in the case of Satyabrata Ghose vs Mugneeram Bangur & Co. The entire jurisprudence on the subject has been well summarised by Justice RF Nariman of the Supreme Court in a the recent decision in the case of Energy Watchdog vs CERC (2017).

In particular, the following aspects should be kept in mind:

  • Outline of force majeure – The general concept means that events or conditions beyond the reasonable control of one party should not cause them to be held liable under the terms if that event or condition prevents the performance of the obligations of the contract. Some contracts list examples of force majeure events that automatically meet the standard. Others list events that must still meet the definition of force majeure. One may also rely on generic clauses usually included in force majeure clauses, such that the COVID-19 is an ‘Act of God’.
  • Force majeure provisions vary widely – The language used in most contracts vary widely and, therefore, it is important to review these clauses carefully.
  • Duty to mitigate and exercise reasonable diligence? – If a ‘duty to mitigate’ obligation is imposed under the contract, then the meaning of ‘reasonable diligence’ becomes important. This is a subjective standard and will be interpreted on a case-to-case basis.
  • Does the event have to be foreseeable? – Most contracts provide that for an event to qualify as force majeure, it must be unforeseeable or not reasonably foreseeable.
  • Notification requirements – Most contracts require notice to the other party to invoke a force majeure provision. Some also provide deadlines for making such notice to make the claim effective.
  • Burden of proof – The party that relies upon the force majeure event generally has the burden of proof and such clauses are construed strictly by the courts.
  •  Keep records – Copies of critical correspondence and other communications should be maintained if disputes arise later.

If the contract does not have a force majeure clause- If the contract does not include a force majeure clause, the affected party could be to resort to the doctrine of frustration under Section 56 of the Indian Contract Act, 1872. However, in order to claim that the contract is frustrated, it must be shown that performance of the contract is entirely impossible and that it has become fundamentally different from the arrangement contemplated at the time of executing the contract.

Other possible consequences for contracts – Counterparties may attempt to invoke other contractual clauses like price adjustment clauses, material adverse change (MAC) clauses, and limitation or exclusion clauses, to limit or exclude liability for non-performance. The ability to invoke such other grounds will depend on wording of the relevant clause, and how the clause is construed by courts or tribunals.

Impact on M&A Transactions

The outbreak of COVID-19 may impact M&A transactions. The parties to M&A transactions should carefully examine the terms of their transaction documents and consult with their counterparties to promptly address the challenges brought by COVID-19 outbreak.

Some of the key issues are highlighted below:

  • Material adverse change – The impact of COVID-19 and whether it would trigger a MAC (generic or specific) would need to be examined. Whether a MAC has or has not been triggered would need to be assessed on a case by case basis, depending on the impact of the event on the company and would depend heavily on the specific wording of the MAC clause and the particular circumstances of the business at issue.
  • Pre-completion undertakings – Sellers should check if they can comply with pre-completion compliance of business covenants, whether general commitments about ordinary course of business or trading, or specifically linked to contracts, production or employees.
  • Warranties and repetition – Buyers should consider requesting warranties around risk assessments, scenario planning and adverse impact of COVID-19. Sellers conceding these should seek knowledge and materiality qualifiers.
  • Warranty limitations – Sellers should consider a general COVID-19-related exclusion of liability. Ring-fencing of such clauses should be considered, such that COVID-19-related claims can only be made under specific warranties and not under general warranties.
  • Disclosure – Sellers should carefully consider the need for COVID-19- related disclosures (for example against material contracts warranties), being as specific as possible to satisfy any requirement for ‘fair’ disclosure.
  • Delayed Closing – The challenges posed by the COVID-19 outbreak may cause delay in closing of M&A transactions. The parties required to satisfy any closing conditions that may be delayed should consult with their counterparties to manage expectations and negotiate the appropriate waivers, moving certain closing conditions to the post-completion covenants, or extending the long-stop date.

Insolvency

The spread of COVID-19 has already resulted in an increase in companies experiencing financial distress as they try to mitigate the financial impacts of supply chain issues coupled with lower customer demand. Companies with already high debt levels are finding existing credit lines withdrawn at a time once they are wanting to pay suppliers who are ready to deliver on time while not receiving customer payments. Likewise, planned re-financing and distressed M&A activity is being delayed (as a result of travel restrictions and other measures), with the result that companies are finding it more challenging to execute and implement time-critical turnaround plans. Consequently, companies may be forced to seek formal and informal protection from their creditors, and we expect to see, in more distressed cases, increased insolvency on the horizon.

Workplace Issues

The COVID-19 outbreak could begin to throw up a variety of employment law issues relating to travel, health and safety concerns, sickness and absence. Below is a high-level overview of the key workplace related issues that employers should consider:

Employer’s obligations – Employers are generally obligated to ensure a safe and healthy work environment for their employees, temporary workers, trainees and staff. To ensure a safe and healthy working environment, employers should do ‘everything reasonably possible’ to ensure prevention. Employers may consider the following actions:

• Check with official sources (e.g. website of the Ministry of Health and Family Welfare, Government of India, official sources such as the World Health Organization) to see if there is an official recommendation and implement them.

• Inform employees unambiguously about steps, including measures (to be) taken including certain hygiene guidelines.

• Keep the lines of communication open. Educate the staff without causing panic by keeping them up to-date with factual and accurate information from reliable sources.

• Make provision of specific equipment such as hand sanitizers and face masks, if the risk becomes real.

The key need for employers is to plan ahead and behave proportionately, reasonably and consistently. A failure to do so will not only risk legal claims, it may also impact adversely on staff morale and damage future employee relations.

Travel – The Indian government has issued an advisory to Indian travelers to refrain from travelling to China, Iran, South Korea and Italy and advised to avoid non-essential visit other COVID-I9-affected countries. The government has also decided to start universal screening for all passengers flying into the country from abroad for the virus at the airports besides testing people coming in through open borders. India has temporarily suspended visa on arrival for nationals of Japan, China, Iran, Italy and South Korea and has cancelled all flight operations to and from China, Hong Kong and Iran.

Employers should review how best to protect staff travelling on business, especially if they are travelling abroad, when tailored guidance and support may be appropriate. Further it would need to be considered whether measures are in place to deal with staff being quarantined or falling ill when abroad. Can they be easily repatriated, or moved to a safer place? How will the employer’s travel insurance policies respond in those situations? Employers should review whether travel is necessary, and whether meetings can be conducted by video link.

VARIOUS ADVISORIES ISSUED BY GOVERNMENT

Has the Indian Government issued any travel related advisory?

The Government of India has issued several advisories concerning travel restrictions on account of COVID-19. Some of the key advisories issued as on March 13, 2020 are:

  • All existing visas (except diplomatic, official, UN/International Organizations, employment, project visas) stand suspended till April 15, 2020. This came into effect from March 13, 2020, at the port of departure.
  • Visa free travel facility granted to OCI card holders is kept in abeyance till April 15, 2020. This, too, came into effect on March 13, 2020, at the port of departure.
  • OCI card holders already in India can stay in India as long as they want.
  • Visas of all foreigners already in India remain valid and they may contact the nearest FRRO/FRO through e-FRRO module for extension/conversion, etc., of their visa or grant of any consular service, if they choose to do so.
  • Any foreign national who intends to travel to India for any compelling reason may contact the nearest Indian Mission.
  • In addition to visa restrictions already in place, passengers traveling from/having visited Italy or Republic of Korea and desirous of entering India will need certificate of having tested negative for COVID-19 from the designated laboratories authorized by the health authorities of those countries. This was enforced from March 10, 2020, and may be a temporary measure till COVID-19 cases subside.
  • All incoming travelers, including Indian nationals, arriving from or having visited China, Italy, Iran, Republic of Korea, France, Spain and Germany after February 15, 2020, shall be quarantined for a minimum period of 14 days. This came into effect on March 13, 2020, at the port of departure.
  • Incoming travelers, including Indian nationals, are advised to avoid non-essential travel and are informed that they can be quarantined for a minimum of 14 days on their arrival in India.
  • Indian nationals are further strongly advised to refrain from travelling to China, Italy, Iran, Republic of Korea, France, Spain and Germany.
  • All incoming international passengers returning to India should self-monitor their health and follow required do’s and don’ts as detailed by the Government.
  • International traffic through land borders will be restricted to designated check posts with robust screening facilities. These are going to be notified separately by M/o Home Affairs.
  • All international passengers entering India are required to furnish duly filled self-declaration forms in duplicate (including personal particulars i.e. phone no. and address in India) (as annexed) to Health Officials and Immigration officials and undergo Universal Health Screening at the designated health counters in the least Points of Entry.

Has the Government issued any other advisories related to COVID-19?

The Government of India and State Governments have issued several advisories associated with the COVID-19 pandemic. Some of the key advisories as on March 13, 2020 are:

  • On March 11, 2020, the Indian Government issued an order under Section 69 of the Disaster Management Act, 2005 delegating its power under Section 10 of the Act to Secretary, Ministry of Health and Family Welfare, Government of India, to reinforce the preparedness and containment of COVID-19 and other ancillary connected matters. The Order is deemed to have come into effect from January 17, 2020.
  • On March 5, 2020, the Ministry of Health & Family Welfare advised that mass gatherings may be avoided or possibly postponed till the disease spread is contained. In case any such mass gatherings are organized, states may take necessary action to guide the organizers on precautions to be taken as per the danger communication material already sent in order to avoid any Severe Acute Respiratory Illness (SARI) and Influenza Like Illness (ILIs), including COVID-19.

What actions are State Governments taking to contain COVID-19?

Under the Epidemic Diseases Act, 1897, which was enacted to supply for the higher prevention of the spread of dangerous epidemic diseases, the Central and State Governments are empowered to undertake certain actions once they are satisfied that the State, country or any part thereof is visited by, or threatened with an epidemic of any dangerous infectious disease and therefore the ordinary provisions of law for the nonce effective are insufficient for the aim.

While the Central Government’s power is limited to ships/vessels and ports, the State Government is empowered to take, or require any person to take any measures, and by public notice, to prescribe temporary regulations to be observed by the general public , or any class(es) of the general public .

Issued with immediate effect and for a period of 1 (one) year from its notification, a number of the key features of those COVID Regulations are as follows:

All hospitals (Government & private) should have separate corners for screening of suspected cases of COVID-19.

  • All hospitals (Government and private) during screening of such cases shall record the history of travel of the person if he/she has travelled to any country or area where COVID-19 has been reported. In addition, the history of contact with a suspected or confirmed case of COVID-19 shall be recorded. Information of all such cases must tend to state integrated disease surveillance unit and collector of the district/local municipal commissioner immediately.
  • Specific quarantine measures have also been provided under the COVID-19 Regulations, such as self-quarantine for 14 days in case a person has travelled to any of the affected countries and is asymptomatic. Any person with a travel history to any of the affected countries and symptoms of COVID-19 is required to be isolated in a hospital as per protocol.
  • No person/institution/organization will use any print or electronic media for information regarding COVID-19 without prior permission from the Department of Health & Family Welfare. In case any person/institution/organization is found indulging in such activity, it’ll be treated as a punishable offence under the COVID-19 Regulations.
  • Only laboratories authorized to test COVID-19 samples will collect them as per the guidelines of the Government of India. Such samples shall be sent to designated laboratories as authorized by the Government of Maharashtra/ Government of India.
  • All persons with travel history in the last 14 days to a country or area where COVID-19 has been reported must voluntarily report to the prescribed authorities in accordance with the COVID-19 Regulations.
  • Specifically under the Maharashtra COVID-19 Regulations, 2020, empowered officers are authorized to isolate and/or admit a person who develops symptoms simulating that of the COVID-19 infection, and may even initiate action under Section 188 of the Indian Penal Code, 1860, against any person who refuses to comply with the same.

What are the obligations of an employer during the COVID-19 pandemic?

Employers are generally obligated to ensure a safe and healthy work environment for their workforce, and must do ‘everything reasonably possible’ to ensure prevention of COVID-19 outbreak at the workplace. Employers may consider the following actions:

  • Stay updated with notifications, orders, and directives from official sources (g. websites of the Ministry of Health and Family Welfare, Government of India and State Governments, official sources such as the World Health Organization) for all official directives / recommendations / guidelines and implement them.
  • Take proactive steps such as promoting good workplace hygiene by placing instructions such as the need for regular hand washing, ensuring that keyboards and phones are regularly wiped clean, etc., and by undertaking other measures such as disabling biometric access, ensuring availability of tissues, masks, hand gloves, sanitizers and adequate disposal mechanisms, encouraging employees to stay at home if they develop even mild symptoms, etc.
  • Inform employees unambiguously about preventive and precautionary steps, including measures to be taken. Issue guidelines and conduct regular awareness training to stop and avoid infections.
  • Keep lines of communication open. Educate the staff without causing panic by keeping them up so far with factual and accurate COVID-19 related information from reliable sources.

Can the employer forbid employees to travel privately, for example via public transport, or to an area of high risk?

Unless the Government prohibits travel via public transport or to a place or country, the employer cannot prohibit such travels on grounds of COVID-19 outbreak. The employer may inform the worker of the newest travel advisories issued by the govt of India, and invite the worker to tell himself of the risks related to such a trip and discourage such travel. If an employee travels to a high-risk area, the employer could inform the employee that he may be refused access to the workplace if the health and safety of the other employees are at risk.

Do employers need to establish any protocol for COVID-19 exposure and sickness?

Employers should consider developing protocols to deal with inter alia:

(i)        Employees returning from travel (whether business or personal);

(ii)       Employees who have been exposed to either confirmed or potential cases of COVID-19;

(iii)      Employees who have symptoms similar to COVID-19, but have not yet been diagnosed;

(iv)      Employees who have tested positive for COVID-19; and

(v)       Consequences and implications of breach of protocols (specifically, of breach of those measures mandated by Government regulations/guidelines). Protocols should cover whether self-quarantine should be requested or required, what reporting is mandated (under law and under company policy), what leave policies will apply and the work-from-home norms and guidelines.

Specific self-quarantine and self-reporting measures as set out in the regulations framed by the State Governments may be included in such protocols.

COVID-19 VS. RULE OF LAW (A CASE OF EUROPEAN UNION)

Over the years, the European Union (EU) has endured several crises prompted by European debt, mass migration, and most recently, Brexit. However, the ongoing coronavirus pandemic threatens to be the most destructive to the bloc, as it not only exposes the deep fractures within the union, but also threatens to divert EU attention from internal challenges that are seriously undermining its values and power.

Concerns about the rule of law and the state of democracy in certain EU member states have been looking for some time now. With a rise in populist governments that enjoy a fair amount of public support, countries like Hungary and Poland have not been shy about bulldozing the independence of state institutions capable of enforcing checks and balances.

What is concerning is that the all-consuming nature of the COVID-19 outbreak is bound to take up all of the bloc’s attention. In fact, Hungary and Poland have already pounced on the EU’s diverted focus to freely pursue their own political interests. On March 30, 2020, the Hungarian parliament passed an emergency law granting PM Viktor Orbán’s government the power to rule by decree for an unlimited amount of time. Though justified by Hungarian officials as a necessary measure to combat the coronavirus pandemic, the legislation goes well beyond the emergency statutes passed by other countries during this crisis, and essentially gives Orbán free reign to do as he pleases without any oversight, for as long as the crisis lasts. This includes the suspension of all elections, and the power to imprison any media personnel guilty of supposedly disseminating false information. Meanwhile in Poland, the ruling PiS party, in a bid to maintain its lead in the upcoming presidential elections in May, unconstitutionally made changes to the electoral code last weekend, despite calls from opposition parties to postpone elections due to coronavirus concerns.

In both cases, however, citizens seem satisfied with the leadership. Therefore, without any EU intervention, any change in either government’s attitudes is perhaps only possible if the countries experience a severe outbreak, which would increase pressure from their populations. However, unlimited powers vested in the government—especially in the case of Hungary—could be used to quell any kind of dissent in the country.

CONCLUSION

While the full impact of the COVID-19 outbreak on businesses is not clear at the moment, and the outbreak is likely to spread in the coming days, this is an issue which is seemingly becoming critical by the week. It has disrupted supply chains, resulting in the closure of several manufacturing facilities globally, serious disruption of air and sea traffic and closure of important air routes, like the one between the US and Europe. The outbreak of Covid-19 is affecting litigation in multiple ways and has also crippled the courts across the country as judges, advocates and litigants are trying to achieve justice under the law while balancing public safety. The rapid spread of this virus has led to the closing down of Courts and Tribunals within the country to avoid human association and to curb the spread of novel coronavirus in the country. However, the Central Government and Judiciary has taken plural steps to supply relief to the people that face this unprecedented challenge. Even though the courts are pack up, the Hon’ble Supreme Court of India has decided to require up urgent matters via virtual techniques in order that the advocates and litigants don’t have to appear physically in the court in this present situation. The Hon’ble Supreme Court of India has also directed the respective Bars to promote virtual proceedings and e-filing. Even the Courts suo-moto, taking cognizance of the challenges being faced by the lawyers to present before the Court physically for filing of respective Appeals, Petitions, etc and has extended the period of limitation until its further order, with this, hopes to fight against coronavirus and put estoppel on its widening territorial jurisdiction.

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