India: Supreme Court Examines The Ambit Of Force Majeure Clause In Agreements

Last Updated: 26 July 2017
Article by Vikrant Rana and Tulip De

Background:

The Electricity Act, 2003 (hereinafter referred to as "the Act") did away with 3 erstwhile legislations namely, the Indian Electricity Act, 1910, the Electricity (Supply) Act, 1928 and the Electricity Regulatory Commissions Act, 1998 paving the way for a new regime for generating and supply of electricity was provided for.

Section 63 of the Electricity Act, 2003 deals with procurement of power and determination of tariff for the supply of electricity. A process of bidding is followed to determine this tariff for which tenders are invited. Based on a pre-disclosed criterion the best possible tariff is followed in order to arrive at the lowest tender as decided amongst the participating bidders in a transparent bidding process.

Facts of the Case: Energy Watchdog v. Central Electricity Regulatory Commission and Anr.1

Two separate Power Purchase Agreements (contracts for supply of power) were executed by Adani Power with two of the Haryana entities and Gujarat entities for supply of power to each of them from their Mundra Power Project. The decided tariff was adopted by the respective State Electricity Regulation Commissions.

However, Indonesia changes its domestic coal distribution policy which resulted in the change in the Indonesian law (from where Coal was imported for the generation of electricity) and increased the export prices of coal from Indonesia drastically changing those which were prevalent since the last 40 years.

Adani Power and Tata Power, filed a petition before the Central Electricity Regulatory Commission seeking relief due to the change in the Indonesian laws praying that it should:

  • discharge them from the performance of the PPA on account of frustration of contract, or
  • to evolve a mechanism to restore the petitioners to the same economic condition prior to occurrence of the change in law.

Even though the Central Commission, in April 2013, rejected the claim of Adani Power as the grounds of force majeure or frustration due to the change in law were held not to be admissible,

the Commission, in exercise of the regulatory powers provided under Section 79 of the Act, proceeded to grant compensatory tariff based on a report of a Committee Report of a committee constituted in this regard.

Aptel's View:

It was argued that, Adani had quoted the non-escalable prices to win the bids and could not later alter the same after winning the bid. It cannot, under the pretense of being affected by force majeure, convert the prices into an escalable tariff. Also, the bid given by Adani Enterprises was not premised on the import of coal from Indonesia only and the contract does not get frustrated merely because it becomes commercially onerous.

Adani stated that "a force majeure event in Clause 12 takes place the moment performance is "hindered" and there can be no doubt that an astronomical rise in prices of Indonesian coal, thanks to a change in law, has certainly hindered performance."

The Appellate Tribunal for Electricity ("ApTEl") observed that in view of the laws on frustration of contract2 and the relevant provisions of the PPAs, a force majeure condition was made out on the facts of these cases and reversed the Commission's order. It also denied the Commission, the regulatory power under Section 79 of the Electricity Act, stating that as there was a PPA entered into under Section 63 of the Act which would dictate the agreement between the parties and not the Commission. Aptel also held that change in legal provisions do not apply to foreign law and, therefore, changes in Indonesian law did not come within the scope of the provisions.

The Verdict:

Appeals were filed against Aptel's order by distribution companies, generators and consumer representatives. The Supreme Court held that it was not within the ambit of the regulatory powers of the Central Commission to decide the tariff but only adopt the tariff already decided in the transparent bidding process as enumerated, which is accordance with the guidelines issued by the Central Government. The Apex Court also observed that the Regulatory Powers of the Commission come into play when the guidelines issues in this regard are silent. "Force majeure" is governed by the Indian Contract Act, 1872. The Supreme Court held: "In so far as a force majeure event occurs de hors the contract, it is dealt with by a rule of positive law under Section 56 of the Contract. The performance of an act may not be literally impossible but it may be impracticable and useless from the point of view of the object and purpose of the parties."It is noteworthy that the Force majeure Exclusion Clause in the Agreements clearly excluded any increase in the cost of the plant, machinery, equipment, materials, spare parts, fuel or consumables for the Project from the purview of Force Majeure.

The escalation of prices of the resources required for the performance of the contract does not render the contract itself impossible to perform. To explain this, the Court referred to M/s Alopi Parshad & Sons Ltd. v. Union of India, [1960 (2) SCR 793], in which the plaintiffs, who were in agreement with the Union of India for supply of "ghee" to the Indian army, pleaded for frustration of contract as there was a rise in demand for supply of ghee and the prices had to be decreased by way of mutual agreement. Here, the Supreme Court had stated that "the Act does not enable a party to a contract to ignore the express covenants thereof and to claim payment of consideration, for performance of the contract at rates different from the stipulated rates, on a vague plea of equity. Parties to an executable contract are often faced, in the course of carrying it out, with a turn of events which they did not at all anticipate, for example, a wholly abnormal rise or fall in prices which is an unexpected obstacle to execution. This does not in itself get rid of the bargain they have made." Unless there is a fundamental change in the events and not merely circumstantial changes, there can be no frustration of contract.

In Satyabrata Ghose v. Mugneeram Bangur & Co. [1954 AIR 44], during unstable times of war, the parties had agreed on the development of a land, which was later requisitioned by the government. The defendant stated that this made the contract impossible to perform, in a suit for specific performance by the plaintiff. The Court held that the requisitioning made it difficult but not impossible to perform. It stated "'The Courts have no general power to absolve a party from the performance of its part of the contract merely because its performance has become onerous on account of an unforeseen turn of events."

In Tsakiroglou & Co. Ltd. v. Noblee Thorl [GmbH, 1961 (2) All ER 179] it was observed that mere closure of the Suez Canal, when there is alternative way of transporting goods through the Cape of Good Hope, does not qualify as a condition for the frustration of contracts just because the alternative route is longer than the original one.

The Supreme Court concluded, "It is clear that an unexpected rise in the price of coal will not absolve the generating companies from performing their part of the contract for the very good reason that when they submitted their bids, this was a risk they knowingly took.".

Takeaway:

The ultimate question before the Apex Court was how far can the ambit for "Force majeure" be stretched so as to make the performance of the contract impossible, thereby frustrating it. It is clear upon perusal of the PPA as a whole, that the price payable for the supply of coal is entirely for the person who sets up the power plant to bear. The very genesis of mutually agreeing to give and take services/ goods is to transfer the risk of performing those services or providing those goods to the contracting party. It is an obligation set upon the contracting parties to complete their parts of the agreement against all odds as far as practicable. Not every difficulty faced can be inferred as a reason for frustration of contract.

In the instant case, the Supreme Court rightly reiterated that the ambit of force majeure cannot be stretched to a probable difficulty or loss caused to the entity obligated to perform the contract. From the point of view of the Electricity Act, the Court also made it clear that prices once bid for cannot be escalated or subsequently changed as the stage for determining the prices is only during the process of bidding and allocation of tenders.

Footnotes

1 Civil Appeal Nos.5399-5400 of 2016

2 contained in the Indian Contract Act, 1872

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Vikrant Rana
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.