International In-house Counsel Journal; Vol.14, No. 56, Summer 2021, 1

LOKANATH KAR
Founder, ElpeeCo

 

Singularity is an interesting concept of theoretical physics. Colloquially explained, a singularity is a location in space-time where all known laws of physics suffer complete breakdown. Without the cushion of these known laws, the first casualty is loss of predictability. We are no more able to predict the outcome of a singularity. In a way, a singularity, is the ultimate exception to the otherwise pliant and strictly rule driven Universe we are accustomed to.

 

In a rule based pliant environment, predictability becomes an important tool to survive and thrive. If imagined, one would find many comparable situations here on our own home world too. Homo sapiens routinely transact assuming too many variables to count; ability of the world to keep spinning being least of our concerns but it being an absolute essential at the same time. We do not ponder about it much because we take the spin of Earth for granted.

 

We predict outcomes in our everyday life based on our experience. To give a more mundane example, a restaurateur would work out average number of patrons to visit the restaurant on any given day and prepare food accordingly. He would naturally be aware of a distinct possibility of facing a day with zero footfalls or 100 times the average footfalls. He keeps these possibilities out of the equation for sheer convenience of business; knowing well that these possibilities are extremely unlikely to materialize. It is, therefore, not unreasonable to conclude that generally speaking, predictability works wonderfully for people and businesses alike.

 

Like almost everything else in the Universe, the premise of predictability has proved its worth in gold to the design of insurance models across the globe. World over, the basic principles of insurance remain the same. Insurance, as an idea, inter alia follows the principle of “many for the needs of few”. Many come together and contribute to a pool by way of payment of premium. This contribution to the pool (premium) is always a small sum, well within the reach of one single individual. In lieu of the premium, the payer receives a promise of protection against damage caused by specified future losses. The promised indemnity is always larger than the premium amount by multiple factors which is also one of the clinching points for buying an insurance policy.

 

If low premiums are one end of the deal, then terms and conditions act as a balancer. Typically, only specific perils are covered in an insurance policy and exclusions are carefully added to ensure elimination of outlier situations. Thus, a standard contract of insurance is a ropewalk with rights and liabilities effectively balancing each other. Keeping a low premium is possible because of a reasonable assumption that not all the contributors would need the support of the pool. At any given point in time, there will be only very few needing the resources on account of the peril which is the core of the contract.

 

Take for example the healthcare system. World over, it is an accepted practice to examine hospital beds as a proportion of population. Theoretically speaking, there is a distinct possibility of entire population needing the hospital beds at the same time. However, common sense dictates that no establishment can provide for hospital beds for all the population at all the time. The healthcare system works on a reasonable assumption that at any given point in time, only a miniscule percentage of the population would require the assistance of healthcare services.

 

In normal circumstances, this works just fine. However, there is always a catch. An outlier situation which is possible just like entire population in the need of hospital beds. However, it just makes sense to treat such a situation as an exception and provide for all other circumstances. In other words, it is better to rely on probability than take into account every possibility. Just like, we do not discard laws of physics just because they break down at ‘Singularity’.

 

Coincidently, entire world is experiencing the exact outlier in present times. There is a rampaging pandemic which is leaving a trail of disruption in terms of loss to lives and livelihoods. The invisible enemy has brought the world and even the most advanced economies on their knees. Individuals, Institutions, Governments and Societies are pinned against the wall and frantically looking for solutions. However, history tells us that, just like any other pandemic, this one will also not stay here for eternity either. Once the pandemic claims its share of flesh, this too shall pass.

 

In order to be able to respond to the present situation, two questions must be asked. The general question being, how we restore normalcy once the pandemic is over? And the specific question, can insurance be of any assistance during these trying times?

 

Insurers world over are in the business of analyzing risk. The word “risk”, by its very nature, is oblique and speculative. Risk becomes a liability once it materializes and necessitates compensation. Since, insurance by and large, is a contract of indemnity, and since there are types of losses (for example death) which cannot be truly and completely indemnified, the mitigation of liability is often in monetary form. However, analysis, assessment and assumption of risk for something akin to a pandemic has always remained and continues to be a colossal challenge for the insurance industry.

 

As described in the beginning, insurance is modelled on the idea of many persons coming together and pooling their resources. However, a hypothetical question can be asked here. What if, all the contributors or most of them require the pool resources at the same time? Clearly, no pool would ever be sufficient to cater to those number of claims. Needless to state, it will collapse because the basic premise of insurance has blacked out at this point in time.

 

Today, this question does not remain hypothetical, anymore. A pandemic, in the eyes of law, would squarely fall under a specific category. In normal parlance we know it as ‘Force Majeure’.

 

Force majeure

 

Force majeure (“vis major” in Latin) is sometimes translated in English as “Act of God”, but literally translates to ‘Superior force’. The force majeure doctrine relates to supervening unforeseen events, that makes performance impossible. It covers cases of subsequent impossibility, i.e. external and unpredictable supervening events occurring after contract formation, that are beyond control of the contracting parties, which render the performance of a party’s contractual obligations not just excessively onerous, but impossible[1], whether on a temporary or permanent basis.[2]

 

The COVID-19 pandemic seems to be a classical example for such an event. However, it is important to differentiate between the systematic determinations of the pandemic from a political, socio-economic or health-related standpoint. A development of this magnitude is naturally expected to be evaluated by medical researchers, politicians, governments and public authorities and international organizations. Also, the legal qualification of a COVID-19 related situation as a force majeure event shall be critically examined, discussed and debated for some time to come.

 

On January 30th, 2020, the Director-General of the World Health Organization (WHO) declared that the outbreak of COVID-19 constitutes a “Public Health Emergency of International Concern” (PHEIC)[3]. He advised that “all countries should be prepared for containment, including active surveillance, early detection, isolation and case management, contact tracing and prevention of onward spread of 2019-nCoV infection, and to share full data with WHO”[4]. This is exactly what happened in the entire world in the subsequent months. In spite of this global reach and profound impact that the COVID-19 pandemic will have on international contracts, the question whether a force majeure event does in fact exist in these circumstances remains a legal issue[5] and a highly mooted point.

 

A reasonable mind however, would expect parties to a contract, seeking benefit of the Force majeure or specific performance, as the case may be, in the coming time. It can also be expected that a portion of these demands and counter demands would eventually knock on the doors of the judiciary seeking redressal. The courtrooms world over shall witness a battle unfold. The battle to determine whether a pandemic can be covered in the definition of a force majeure event or not shall be fought by sharpest and finest of the legal minds.

 

Generally speaking, a pandemic is hard pressed to be classified as a force majeure event, and at best can be viewed from the lenses of the factual or legal effects of the public health crisis. Factual effects may involve illness or quarantine or even death of key personnel, production facility closures, or interruption of supply chains[6]. Legal effects relate to lockdowns, curfews, travel restrictions and other measures by governments and public authorities which are issued in reaction to the crisis[7].

 

Neither the declaration of the WHO Director-General on January 30th, 2020[8], nor force majeure certificates issued by public authorities, like the one issued by the Chinese CCPIT[9], in and of themselves would be tantamount to a legal force majeure determination[10]. The Chinese certificates may be considered as providing an indicative effect for the factual existence of force majeure in that country. As such, they may be binding for the Chinese court’s interpretation of domestic force majeure provisions in Art. 117 of the PRC’s Contract Law[11] and Art. 180 of its General Provisions of the Civil Law[12] for want of clarity on separation of powers between the executive branch and the judiciary[13]. They may not, however, prejudge a domestic court’s or international arbitral tribunal’s factual evaluation of the COVID-19 situation in a given case, if that court or tribunal sits outside China[14].

 

Both the strict distinction between the outbreak of the COVID-19 pandemic on one hand and its factual or legal consequences on the other, as well as the limited effect of declarations, certificates or similar statements by governments or public authorities are important to prevent misuse of the force majeure defense.[15]

 

Force Majeure - Transnational Perspective

 To the extent that transnational contract law is concerned, the force majeure clause may rightly be characterized as a truly transnational legal principle. For most obvious reason that most international contracts have contained and will continue to contain force majeure as express clauses.

All combined, the transnational rules and the practice of international long-term contracting have led to the general understanding that the force majeure excuse for non-performance as a transnational doctrine and as a contractual clause is based on the following four cumulative requirements[16]:

 

 • Externality: The occurrence of an external event[17], for which the obligor has not assumed the risk;

• Unavoidability/Irresistibility: The occurrence of the external event was beyond the obligor’s sphere of control/ the ordinary organization of his business and was absolute[18];

 • Unforeseeability: The event and its consequences, i.e. the adverse impact on the obligor’s ability to perform, could not reasonably have been avoided or overcome by the obligor[19].

• Causation (“conditio sine qua non” or “but-for” test): The obligor’s non-performance was, as a “matter of commercial reality”[20], caused by the external event and not by the obligor’s own fault, e.g. by self-inflicted production problems, defective goods or packaging etc.[21].

 

The COVID-19 pandemic meets this four-pronged test, provided that a court or arbitral tribunal confirms that the situation caused by the effects of or by measures taken to combat the COVID-19 pandemic constitutes a force majeure event. The pandemic clearly is an external event[22].

 

In January 2013, the German Parliament published a comprehensive risk analysis study conducted by the German government-related Robert Koch Institute together with a number of German government agencies. This study qualified the occurrence of a hypothetical viral pandemic such as COVID-19 as “conditionally probable” i.e. as an event which, statistically, would occur once in a period of 100 to 1,000 years”. At the same time, the German study makes it clear that the COVID-19 scenario was not foreseeable per se, given that no one could predict when and where such a pandemic would occur. In spite of the disastrous and potentially lethal nature and systemic consequences of quickly spreading infectious diseases, parties to international contracts cannot be expected to be “on permanent alert”[23].

 

In the legal context of the force majeure doctrine, the COVID-19 pandemic must thus be characterized as “an event so unlikely to occur that reasonable business parties see no need explicitly to allocate the risk of its occurrence, although the impact it might have would be of such magnitude that the parties would have negotiated over it, had the event been more likely”[24].

 

The party invoking the force majeure doctrine is obliged to notify his contractual partner in writing of the existence and nature of the disruptive event and his intention to make use of the force majeure exception in order to prevent surprises for the other side[25].

 

If the force majeure doctrine, invoked by a non-performing party has met the four requirements outlined above, then the contractual performance is, depending on the nature and duration of the supervening external event will still put the aggrieved party under an obligation to continue to perform reasonably. However, considering whether the impact of such event is partial or total[26], temporary or permanent, shall continue to guide the performance of obliged party. Termination of the contract is only an “ultima ratio” remedy and the parties are compensated for performance already rendered[27].

 

In international contracting practice, the regulation of force majeure events is often left to ‘boilerplate clauses’[28]. Rather than providing legal certainty, they may pose difficult problems like interpretation[29]. Ultimately, the four fundamental requirements of the transnational force majeure doctrine may serve as a yardstick for the internationally useful construction of such force majeure clauses by courts[30].

 

In the coming months and years, as the tsunami of pandemic recedes, the true nature of loss and devastation will come in sharper focus. This pandemic is a ‘tragedy’ in modern as well as classical sense of the word.

 

In the former perception, this is a disaster which has caused immense suffering to the human race, whereas in the later, it is a battle between a prone species against a superior force (of nature). However, like its predecessors, Covid-19 shall have to beat a humble retreat. The incessant onslaught of the virus is only to be matched by the undying resilience of the collective.

 

Be that as it may, disasters of similar magnitude, have always taught us in some or the other way. The influenza pandemic in early twentieth century, gave us the first flu vaccine. Second World War too being a tragedy of a global scale, gave humanity, mass production and acceptability of penicillin, Jet Engines, Blood Plasma Transfusion, Electronic Computers and Radar technology. These were inventions born from the womb of disasters and benefitted the next generations.

 

And what is insurance but the efforts of the collective? I am willing to stick my neck out and declare that insurers world over are carefully calibrating the direct and indirect losses caused by the pandemic. And soon, the world should witness a new range of insurance solutions which offer to mitigate losses suffered by the unfortunate victims. Like other disasters, we will learn from this pandemic as well. Best minds are once again coming together to find solutions and rest assured, this is one singularity, which will definitely witness resistance of the ‘Rule of Law’

 

***

Lokanath Kar is the founder of ElpeeCo., Priorly he was working as the General Counsel and Chief Compliance Officer at ICICI Lombard for fifteen years. Before which, he was working as an in house counsel for organizations in the financial services business in India. Had started  career in the year 1997 as a practicing lawyer in Delhi, India.

 

 

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[1] Article in  McGill law journal. Revue de droit de McGill ; July 2020;volume6; ” Force Majeure and Hardship in the Age of Corona: A Historical and Comparative Study” by Klaus Peter Berger and Daniel Behn

[2] See e.g. Thames Valley Power Ltd v Total Gas & Power Ltd, [2005] EWHC Comm 2208 (“[t]he force majeure event has to have caused Total to be unable to carry out its obligations under the GSA. Total’s obligation under the GSA is to supply, i.e. to make physical delivery of, gas in accordance with the conditions. These include provisions in respect of a nominated amount of consumption by the customer for each of the contract years, and a maximum consumption in any one day. Total is unable to carry out that obligation if some event has occurred as a result of which it cannot do that. The fact that it is much more expensive, even very greatly more expensive for it to do so, does not mean that it cannot do so. To interpret clause 15 as applicable in circumstances where performance is ‘commercially impractical’ or Total is ‘commercially unable’ to supply is to enforce a qualification highly uncertain in ambit and open ended in reach which is neither necessary nor obvious and which is inconsistent with the express terms of the [contract]” at para 48);

[3] World Health Organization, International Health Regulations (2005), Switzerland: 2008, Art. 1 (defines the term PHEIC as “an extraordinary event which is determined, as provided in these regulations to constitute a public health risk to other States through the international spread of disease and to potentially require a coordinated international response” at 9).

[4] International Health Regulations Emergency Committee, Statement on the Second Meeting of the International Health Regulations Regarding the Outbreak of the Novel Coronavirus, (January 30 2020), 19-nCov, online: WHO https://www.who.int/news-room/detail/30-01-2020-statement on the second meeting of the international health regulations(2005) emergency committee regarding the outbreak of novel coronavirus(2019)

[5] Article in McGill law journal. Revue de droit de McGill ; July 2020;volume6; ” Force Majeure and Hardship in the Age of Corona: A Historical and Comparative Study” by Klaus Peter Berger and Daniel Behn

[6] UK Cabinet Office, “Guidance on responsible contractual behavior in the performance and enforcement of contracts impacted by the Covid-19 emergency” (7 May 2020) at para 12 (c), online (pdf): GOV.UK https://assets publishing service .gov.uk/government/uploads/system/uploads/attachment data /file/883737/Covid-19 and Responsible Contractual Behavior web final.pdf.

[7] High Court of Delhi, Halliburton Offshore Services Inc v Vendanta Ltd & ANR, OMP (I) (Comm) & IA 3697/2020 (“the countrywide lockdown, which came into place on 24th March, 2020 was, in my opinion, prima facie in the nature of force majeure. Such a lockdown is unprecedented, and was incapable of having been predicted either by the respondent or by the petitioner” at para 20);

[8] See e.g. Marc-Philippe Weller et al, Virulente Leistungsstörungen — Auswirkungen der Corona Krise auf die Vertragsdurchführung (2020) Neue Juristische Wochenschrift 1017 at 1022 (for German law).

[9]  “CCPIT Guides Enterprises to Leverage Force Majeure Certificates, which Help to Maintain Nearly 60% Contracts” (10 April 2020), online: China Council for the Promotion of International Trade http://en.ccpit.org/info.

[10]  Christoph Brunner, Force Majeure and Hardship under General Contract Principles: Exemption for Non-performance in International Arbitration (Alphen upon Rhine: Kluwer Law International, 2009) at 263

[11] See Contract Law of the People’s Republic of China, Art 117 (1999), online (pdf) at www.ilo.org : (“if a contract cannot be fulfilled due to force majeure, the obligations may be exempted in whole or in part depending on the impact of the force majeure, unless laws provide otherwise. If the force majeure occurs after a delayed fulfillment, the obligations of the party concerned may not be exempted. Force majeure as used herein means objective situations which cannot be foreseen, avoided or overcome” at 16); but see Art 1260 PRC’s Civil Code (China) (the Contract Law of the People’s Republic of China will be replaced by the new PRC’s Civil Code which was promulgated on May 28, 2020 and will enter into force on January 1, 2021).

[12] Art 180 General Provisions of the Civil Law of the PRC (China); but see Art 1260 PRC’s Civil Code (China) (the General Provisions of the Civil Law of the PRC will be replaced by the new PRC’s Civil Code which was promulgated on May 28, 2020 and will enter into force on January 1, 2021); Guiding Opinions of the Supreme People’s Court on Several Issues Concerning the Legally and Properly Conduct of Proceedings in Civil Cases Pertinent to the COVID-19 Epidemic (1) (2020) Zuigao Renmin Fayuan Gongbao, para 2 (in which it stressed the need for a strict application of the mentioned statutory provisions to COVID-19 scenarios and emphasized that the burden of proof is on the party invoking these defenses)

[13] See World Justice Project, “WJP Rule of Law Index” (2020), online: World Justice Project worldjusticeproject.org (128 countries were surveyed for the 2020 World Justice Project Rule of Law Index. Among these, China ranks 122 with regards to governmental interference in civil court proceedings)

[14] «Déclaration de M. Bruno Le Maire, ministre de l’économie et des finances, sur l’impact économique de l'épidémie de COViD-19, à Paris le 28 février 2020» (28 February 2020), (see for the comparable declaration of the French Ministry of Economy of 28 February 2020); See supra note 1 at 19.

[15] See supra note 1at 19

[16] Brunner, “Force Majeure and Hardship”, supra note 10 at 111—12.

[17] See the list of typical force majeure events in TransLex Principle VI 3.

[18] See Article by Klaus Peter Berger and Daniel Behn supra note 1at 109

[19] See Article by Klaus Peter Berger and Daniel Behn supra note 1at 109

[20] Alan Berg, “The detailed drafting of a force majeure clause”, in Ewan McKendrick, ed, Force majeure and frustration of contract (London: Lloyd’s of London Press, 1995) 63 at 71

[21] Classic Maritime Inc v Limbungan Makmur SDN BHD, [2019] EWCA Civ 1102 (“it is a valid use of language to say that a failure to supply the cargo (or even a cargo) does not ‘result from’ an event if in fact the event makes no difference because the charterer was never going to supply a cargo anyway” at para 45);

[22] See Article by Klaus Peter Berger and Daniel Behn supra note 1at 110.

[23] See for this definition of unforeseeability, Brunner “Force Majeure and Hardship”, supra note 10 at 158 citing Pietro Trimarchi, “Commercial impracticability in contract law: An economic analysis” (1991) 11:1 Intl Rev L & Econ 63 at 65, n 9.

[24] See supra note 23 at 111

[25] Brunner “Force Majeure and Hardship”, supra note 10 at 342.

[26] Anaconda-Iran, Inc v Iran, IUSCT Case No 167 (1986) (“under a variety of names most, if not all, legal systems recognize force majeure as an excuse for contractual non-performance. Force majeure therefore can be considered a general principle of law” at para 43) [Anaconda-Iran]; Questech Inc v Iran, IUSCT Case No 59 (1985) at 121;

[27] Anaconda-Iran, supra note 26 at 211–12;

[28] See supra note27

[29] Brunner “Force Majeure and Hardship”, supra note 10 at 83.

[30] See supra note27