presentation on mdi force majeure

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April 19, 2001 L&L/MDI 1

Impact of Force MajeureOn Contracts

Presentation by

Mohit Saraf Partner

Luthra & LuthraLaw Offices




Agenda

Basic concept of Force Majeure

Doctrine of Frustration distinguished

Force Majeure in Commercial Contracts

Examples

Distinguishing Features

Effect of Force Majeure

Issues




Basic Concept of Force MajeureForce Majeure

± Definitionany event or circumstance or combination of eventsand circumstances which materially and adverselyaffect 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 concept ± Foreseeability and fault




Basic Concepts of Force Majeure(Cont¶d.)

Elements of Force Majeure: ± Events or circumstance must be unforseen or

unforeseeable at the time of making of contract. ± Beyond the control of affected party. ± Not caused by any default or negligence of affected

party.

Common law ± Contractual obligation-strict liability ± Frustration of contract




Doctrine of FrustrationDistinguished

Frustration

± Performance becomes impossible; ± Performance becomes illegal; ± Events outside the control of the parties defeat the

purpose of the contract

Discharges the contract

Indian Contract Act ± Section 56 ± Section 32




Doctrine of FrustrationDistinguished (Cont¶d.)

Section 32 - Contingent contracts to do or not to doanything if an uncertain future event happens cannot beenforced by law unless and until that event has happened.If the event becomes impossible such contracts becomevoid.

Section 56 -An agreement to do an act impossible in itself

is void. A contract to do an act which, after the contract ismade, becomes impossible, or, by reason of some eventwhich the promisor could not prevent, unlawful, becomesvoid when the act becomes impossible or unlawful««...




Doctrine of FrustrationDistinguished (Cont¶d.)

Satyabrata Ghose Vs. Mugneeram Bangur & Co.AIR 1954 SC 44

Alopi Parshad Vs. Union of IndiaAIR 1960 SC 588

Naihati Jute Mills Ltd. Vs. Khyaliram JagannathAIR 1968 SC 522

Devendra Singh Vs. State of U.P.AIR 1971 SC 1759




Force Majeure in CommercialContracts

Exception to the normal contractual consequence of breachof contract.RationaleNegotiation ± Location of the Project ± Legal systems ± Political governanceClassification ± Political Force Majeure ( State/governmental authority

not excused) ± Non-Political/ Natural Force Majeure




ExamplesIncludes, 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 theterms of any approval or consent)




Distinguishing FeaturesImpossibility of performance versus ³material & adverse

effect´

Notice/ reporting requirements

Onus on affected party

Duty to mitigate

Excuse only till performance is affected

³Including, without limitation´




Effect of Force MajeureAffected party not in breach

Suspension of obligations

Payment obligations not excused

Accrued liabilities not excused

Termination after protracted Force Majeure




Effect of Force Majeure (Cont¶d.)Concession Agreement ± Extension of term

± Compensation

Supply Agreement ± Take or pay liability

Construction Contracts ± Contractor entitled to extension of time and/ or

compensation. ± Fixed Price fixed term contract




IssuesAdverse effect on partyEconomic hardship

Inconsistent Force Majeure provision among projectcontracts ± breach 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 inconsistencywould be that the project company would be unable tocomply with the sales agreement due to delay incompletion of the project. R esult - payment of damages and/or a terminated sales contract




Issues (Cont¶d.) ± ³Resurrection´ Clause

To cure inconsistent force majeure provisionsParty not to receive relief greater than that availableto the other party under associated contracts.

± MitigationInsurance ± Political Risk insurance (ECAs & Multilateral

Agencies) ± Business interruption insurance ± All risk insurance ± Self insurance

Financial Balance

presentation on mdi force majeure

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