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Business News/ Opinion / Columns/  Opinion | Opportunities and challenges arising from a force majeure
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Opinion | Opportunities and challenges arising from a force majeure

China’s Covid-19 crisis could draw ‘Make in India’ investment but we need to show a better record on contract enforcement

Photo: ReutersPremium
Photo: Reuters

China National Offshore Oil Corp. (CNOOC), in a rare and dramatic step, has declined to accept some Liquified Natural Gas (LNG) cargo, citing a contractual provision called force majeure while sending letters to suppliers saying it would not be honouring the contracts because of the disruption caused by Covid-19.

The dictionary meaning of force majeure is “superior force". In law, it is used to imply disruption caused by an unanticipated and chance occurrence beyond the control of either party. It is a common legal clause, rarely invoked, that frees both parties from obligations if an extraordinary event, often described as an “Act of God" , takes place and prevents one or both parties from fulfilling commitments.

The Covid-19 outbreak has resulted in China issuing a record number of force majeure certificates. In February, the China Council for the Promotion of International Trade issued more than 3,000 such certificates to exporters ranging from electronics firms to auto parts suppliers. This scale of contract suspension is unprecedented in modern global trade history and is likely to result in many trade disputes. Contracts with Chinese exporters typically use an arbitration mechanism outside China, but enforcing such an award against a Chinese company in Chinese courts could prove problematic. Contracts likely to come under the force majeure umbrella because of Covid-19 are already estimated to be worth more than $50 billion and could well end up being several times that number.

Serious diseases that are endemic to a large region or end up as pandemics or epidemics are becoming more common. The trend can be attributed to a range of inter-related factors, including global mobility, interaction between humans, animal hosts, and disease vectors, mutating viruses and environmental change. The interaction between these factors in the age of climate change compounds their effects significantly. The costs and risks surrounding serious diseases that emanate from developing countries have been studied, but the widespread fallout on international mobility, global supply chains, and trade has not been well planned for.

In addition to pandemics, climate change is also resulting in extreme events occurring more frequently. When extreme events become less rare, the very idea of obligations under force majeure would need to change. The cost-benefit analysis of the intensity of a response relative to the economic cost is not well studied and understood. Some analysts believe that the response may cost more than the disruption if not properly calibrated. In addition to innovations in risk mitigation and insurance, global trade will structurally need to become more diversified in character. The geographic path of Covid-19’s significant impact beyond China appears to run through South Korea, Iran, and Italy as of now, all located relatively far apart. Simple geographic notions of supply chain diversification may not suffice.

For India, the global disruptions to travel and trade caused by Covid-19 are a clear wake-up call. The situation points, at once, to meaningful opportunities and challenges. Opportunities arise mostly as a consequence of this evolving structural need for diversification of global supply chains. While the prevailing paradigm of diversification remains geographic, with India being lumped with the rest of Asia, Covid-19 could be used as a case study to show that “geographic diversification" may not be the appropriate approach. From auto parts to textiles and steel to consumer goods, it is a force-majeure-driven opportunity to showcase the opportunity to “Make in India".

As this Make in India opportunity is arising out of the broad field of contractual obligations, India will need to seriously examine its own record on contracts. Through some legislative action, India has improved its Ease of Doing Business ranking to 63 out of about 190 countries, but the component ranking on the parameter of enforcing contracts remains at an unflattering 163. On a broader basis, India’s approach to the sanctity of contracts, which is a pillar of reliable global trade, is abysmal. A recent decision by Andhra Pradesh chief minister Y.S. Jaganmohan Reddy to abrogate nearly all contracts of the previous government is an example of this capricious and arbitrary approach to the sanctity of contracts. In what looks like a show of superior force, the Indian government owes money to countless businesses and citizens through its policy of sitting on direct and indirect tax refunds for years. Taking a cue from government, the private sector also seems to display a rather amoral approach to the sanctity of contracts and appears willing to take its chances with a judiciary whose reputation for probity at the local level remains weak. Civil dispute resolution mechanisms, including mediation and arbitration, take a long time and have not yet become mainstream. The legal framework for contract enforcement, the Contract Act of 1872, is nearly 150 years old and needs to be completely reformed.

So, Make in India is a real opportunity, but will need to progress from a slogan to a national reorientation to recognizing the sanctity of contracts. This is a major transformation and may well require an “Act of God".

PS: “Jo vaada kiya woh nibhaana padega, Roke jamaana chaahe roke khudaayee," go the lyrics of a duet in the film Taj Mahal which translates to: “You must keep your word even if the world or God stops you."

Narayan Ramachandran is chairman, InKlude Labs. Read Narayan’s Mint columns at www.livemint.com/avisiblehand

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Published: 02 Mar 2020, 08:57 PM IST
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