Impact of Force Majeure on ContractsPresentation at the Indian Council ofArbitrationByMohit Saraf PartnerLuthra & Luthra Law Offices

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Agenda

Basic concept of Force MajeureDoctrine of Frustration distinguishedForce Majeure in Commercial ContractsExamplesDistinguishing FeaturesEffect of Force Majeure Issues

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Basic Concept of Force MajeureDefinitionany event or circumstance or combination of events and circumstances which materially and adversely affect the performance of the obligations of either Party to a contract and is not within the reasonable control (directly or indirectly) of the Party affected. Civil law conceptForeseeability and fault

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Basic Concepts of Force Majeure (Contd.)Elements of Force Majeure:Events or circumstance must be unforseen or unforeseeable at the time of making of contractBeyond the control of affected partyNot caused by any default or negligence of affected partyCommon lawContractual obligation-strict liabilityFrustration of contract

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Doctrine of Frustration DistinguishedFrustrationPerformance becomes impossiblePerformance becomes illegalEvents outside the control of the parties defeat the purpose of the contract

Discharges the contract

Indian Contract ActSection 56Section 32

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Doctrine of Frustration Distinguished (Contd.) Section 32 - Contingent contracts to do or not to do anything if an uncertain future event happens cannot be enforced by law unless and until that event has happened. If the event becomes impossible such contracts become void.Section 56 -An agreement to do an act impossible in itself is void. 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

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Doctrine of Frustration Distinguished (Contd.)Satyabrata Ghose v. Mugneeram Bangur & Co. AIR 1954 SC 44Alopi Parshad v. Union of India AIR 1960 SC 588 Naihati Jute Mills Ltd. v. Khyaliram Jagannath AIR 1968 SC 522IFCI v. Cannanore Spinning and Weaving MillsAIR 2002 SC 1841

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Doctrine of Frustration Distinguished (Contd.) Contracts, which contain an implied or express term for the discharge of the contract upon happening of certain circumstances, would be discharged under the terms specified in the contract and covered under Section 32 and would be outside the purview of Section 56 Section 56 rule of positive law, not will of parties. Frustration change of circumstances so fundamental as to strike at the root of the contract as a whole.Frustration - performance of the contract comes to an end but the contract would still be in existence for purposes such as the resolution of disputes.

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Force Majeure in Commercial ContractsException to the normal contractual consequence of breach of contract.Rationale NegotiationLocation of the ProjectLegal systemsPolitical governanceClassificationPolitical Force Majeure ( State/governmental authority not excused) Non-Political/ Natural Force Majeure

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Examples Includes, without limitation :Strikes or other industrial action;War (whether or not declared) or other hostilities (including terrorist action, sabotage, riot or insurrection);Blockage or embargo;Adverse natural phenomena (earthquake, hurricane, storm, fire, flood, volcanic eruption);Epidemic;Change of law or regulation (including a change in the terms of any approval or consent)

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Distinguishing FeaturesImpossibility of performance versus material & adverse effectNotice/ reporting requirementsOnus on affected partyDuty to mitigate Excuse only till performance is affectedIncluding, without limitation

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Effect of Force MajeureAffected party not in breachSuspension of obligationsPayment obligations not excusedAccrued liabilities not excusedTermination after protracted Force Majeure

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Effect of Force Majeure (Contd.)Concession AgreementExtension of termCompensation

Supply AgreementTake or pay liability

Construction ContractsContractor entitled to extension of time and/ or compensation.Fixed Price fixed term contract

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IssuesAdverse effect on partyEconomic hardshipInconsistent Force Majeure provision among project contractsbreach under one contract e.g. Construction contract providing for extension of time upon occurrence of Force Majeure; same relief must be available in the off-take sales agreement. The result of an inconsistency would be that the project company would be unable to comply with the sales agreement due to delay in completion of the project. Result - payment of damages and/or a terminated sales contract

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Issues (Contd.)Resurrection ClauseTo cure inconsistent force majeure provisionsParty not to receive relief greater than that available to the other party under associated contracts.

MitigationInsurancePolitical Risk insurance (ECAs & Multilateral Agencies)Business interruption insuranceAll risk insuranceSelf insuranceFinancial Balance

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