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.

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