Wednesday, May 24, 2017

Force Majeure Clauses and Impossibility Under the Indian Contract Act

[Post by Isha Jain, who is a 4th year student at the National Law School of India University, Bangalore.

Other posts related to this topic are available here and here.]

The Supreme Court’s recent decision in Energy Watchdog v. Central Electricity Regulatory Authority (“AdanĂ­”) has obscured rather than clarified the law on contractual impossibility in India. The case was concerned with the interpretation and application of force majeure clauses in certain power purchase agreements (PPA). In this post, I will examine: first, the legal position on force majeure clauses and impossibility in contracts under Indian law, and second, the correctness of the Supreme Court’s decision in Adani. Through this, I shall propose an alternative approach to the application of force majeure clauses.

Force Majeure Clauses Under Indian Law

A force majeure clause in a contract is an express provision of circumstances in which performance under the contract will be excused.[1] The purpose behind inserting such clauses is to save the performing party from the consequences of anything over which the party has no control.[2] However, an express force majeure clause is only one of several routes by which a party can escape its obligations under a contract on grounds of impossibility of performance.

The law on contractual impossibility under the Indian Contract Act, 1872 (“Contract Act”) can be best understood through a careful analysis of sections 9, 32 and 56 of the Act.

Section 32, read alone, provides for the discharge of obligations due to the impossibility of an express contingency. In other words, if the contract expressly provides that performance is contingent on the occurrence of an event, the impossibility of that event shall lead to the contract becoming void. Express force majeure clauses can be read as stipulating such contingencies. For instance, a force majeure clause that provides for the discharge of obligations in case of nationalisation of the assets that are the subject matter of the contract can be read as making the contract contingent on the assets not being nationalised.

Section 9 permits the courts to consider implied terms in contracts. Accordingly, section 9 read with section 32 provide the basis for discharge of obligations due to the impossibility of an implied contingency. This means that though the parties may not have expressly provided for it, there may be certain contingencies upon which performance of the contract rests. While the court may uncover such terms through construction of the contract,[3] it ought not to imply a term merely because such term would be a reasonable term to include.[4] Such implication may only derive from the intent of the parties, as indicated by the relationship of the parties, their prior dealings, and the purpose of the contract at issue.[5]

Section 56 provides, separately, that a contract to do an act becomes void when the act becomes impossible. Before delving into the interpretation of section 56, it is necessary to draw a clear distinction between the purport of section 32 and that of section 56. Under both sections 32 and 56, obligations under the contract stand discharged due to an impossibility. However, under section 32, the link between the impossibility and the discharge of obligations is to be found in express or implied contractual terms. In other words, section 32 accounts for the subjective intent of the parties to discharge obligations upon the occurrence of certain contingencies. On the other hand, section 56 is concerned with impossibilities which, on an objective determination by the court, go to the root of the contract.

The landmark decision interpreting section 56 is Satyabrata Ghose v. Mugneeram Bangur & Co.[6] The Supreme Court in this case acknowledged the aforementioned distinction between section 32 and section 56, stating: “Section 56 lays down a rule of positive law and does not leave the matter to be determined according to the intention of the parties.” The Court observed that section 56 allowed for discharge of obligations on grounds of impossibility if “an untoward event or change of circumstance totally upsets the very foundation upon which the parties entered their agreement” (emphasis added).

The Decision in Adani

To reiterate, the Adani case was concerned with the interpretation and application of express force majeure clauses in certain PPAs. Under these PPAs, Adani Power had agreed to supply power to state utilities in Gujarat and Haryana. Subsequent to the conclusion of the contracts, a change of law in Indonesia, from where Adani sourced much of its coal, resulted in a significant increase in the export prices of coal from Indonesia. Because of this change, Adani sought relief on grounds of force majeure under the contract, and in the alternative, on grounds of FRUSTRATION under section 56 of the Contract Act. The relevant clauses of the PPA can be summarised as follows:

- Clause 12.3 provided a non-exhaustive list of events that would be considered “force majeure events” under the contract.

- Clause 12.4 specified “force majeure exclusions”, i.e., events which were not to be considered force majeure events under the contract.

- Clause 12.7 laid down the available relief in case of occurrence of a force majeure event.

In its decision, the Court first examined the development of the doctrine of frustration under common law. According to common law, a contract would be frustrated only if the fundamental basis of the contract was affected by the change in circumstances.[7] In this case, the Court found that the fundamental basis of the PPAs remained unaltered by the change in price of the Indonesian coal exports.

Next, the Court turned to examine whether Adani could take recourse to the express force majeure clauses in the PPAs. The clause provided for the discharge of obligations in case of an event that partly prevented or hindered the performance of obligations under the agreement. However, the Court observed that force majeure clauses are to be narrowly construed, and that a mere price rise rendering the contract more expensive to perform would not constitute a “hindrance”. More specifically, clause 12.4 of the PPA specified that “changes in cost of the ... fuel ... for the Project” or “the agreement becoming onerous to perform” would not constitute force majeure events under the contract. Thus, the contract itself was found to have provided for this contingency.

Finally, the Court declined to address Adani’s alternative argument under section 56, holding: “When a contract contains a force majeure clause which on construction by the Court is held attracted to the facts of the case, Section 56 can have no application.”

There are two issues with the manner in which the Court arrived at its decision. First, there was no reason for the Court to go into the common law doctrine of frustration,  and second, the Court was not precluded from going into the alternative argument under section 56. I shall address these issues in turn.

It is unclear why the Court went into the common law doctrine of frustration, immediately after acknowledging that the law on force majeure is contained in sections 32 and 56 of the Indian Contract Act. Yet, it chose to cull out a test of “impossibility going to the fundamental basis of the contract”, without expressly deriving this test from either statutory provision. Interestingly, all of the quotes from Indian cases that were cited by the Court were made in relation to section 56, and not in relation to an abstract common law doctrine of frustration. This stands out in contrast with the Court’s final conclusion that it would not consider Adani’s alternative claims under section 56.  

The Court declined to consider the alternative claim, stating that “As has been held in particular, in the Satyabrata Ghose case, when a contract contains a force majeure clause which on construction by the Court is held attracted to the facts of the case, Section 56 can have no application.” However, it appears that this is an unduly narrow reading of the cited case. Admittedly, the Court in Satyabhrata Ghose did observe: “When a contract contains a force majeure clause which on construction by the Court is held attracted to the facts of the case, Section 56 can have no application.” However, this should be read to mean that section 56 has no applicability in the construction of that force majeure clause. Section 56, and the ground of impossibility thereunder, should still remain available as an alternate basis for avoidance of obligations under the contract. There is nothing in the Contract Act or the PPAs to suggest that the contractual inclusion of a force majeure clause precludes parties from taking recourse to the statute under section 56.

A more forceful argument for the non-applicability of section 56 would be to say that the parties, through clause 12.4, expressly assumed the risks of rising prices. Where parties expressly assume the risk of impossibility, they cannot then avoid the performance of obligations on grounds of impossiblity.[8] If a contract provides that an obligation is unconditional or unaffected by any impossibility, it is not open for a party to bring a claim under section 56.[9] However, there is a difference between a contractual provision which says that a rise in prices shall not be considered a force majeure event under the contract, and a provision which says that the obligations of the supplier are unconditional or are to be unaffected by rise in prices. Clause 12.4 is in the mold of the former, and accordingly only restricts the scope of claims that can be brought under the force majeure clause of the contract. However, a claim under section 56 is distinct from a claim under the force majeure clause of the contract, and accordingly would not be restricted by the limitation imposed under clause 12.4.

Thus, the Court in Adani arguably misstated the law when it found that the mere existence of a force majeure clause would prevent the parties from bringing an alternative claim under section 56.

- Isha Jain



[1] Pollock and Mulla, Indian Contract and Specific Relief Acts (13th edn., 2006).


[2] Davis Contractors Ltd v Fareham Urban District Council, [1956] 2 All ER 145.

[3] Naihati Jute Mills Ltd. v. Hyaliram Jagannath, 1968 (1) SCR 821.

[4] Pradgas Mathuradas v. Jeewanlal, A.I.R. 1948 P.C. 217.

[5] C. Scott Pryor, Clear rules still produce fuzzy results: impossiblity in Indian Contract Law27 Arizona Journal of International and Comparative Law, 1, 10 (2010) .

[6] Satyabrata Ghose v. Mugneeram Bangur & Co., 1954 SCR 310.

[7] Taylor vs. Caldwell, (1861-73) All ER Rep 24.

[8] V.L. Narasu v. P.S.V. Iyer, AIR 1953 Mad 300.

[9] Piarey Lal vs Hori Lal, AIR 1977 SC 1226.

4 comments:

vswami said...

IMPROMPTU

".......the law on contractual impossibility in India....."

To put the proposition for discussion, in a better light : Obvious reference is to the unforeseen circumstances, - beyond the control of a contracting party, not envisaged at the point in time of entering into the contract, but arising subsequently, - rendering the performance of the obligation (s),well-nigh impossible, to infinity. True, with the trend in recent times of any change, material or otherwise,- more so retrospectively, - in the applicable and governing law or rules being made almost on a day-to-day basis, the sky is the limit for such clauses being invoked / summoned to rescue.
It is in this context that it becomes imperative to specifically provide in every contract agreement that 'time is the essence of the contract'. So that, no such shelter or defense could be spuriously taken /put up as an after thought, in any instance of non-performance within the agreed time frame; by citing reason of any subsequent development, unforeseen or otherwise, such as change in law, or rules, or the like.

In any event, ideally speaking, the subject matter/ proposition is not amenable to being discussed, with a purpose, either generally or relying on any case law; but calls for consideration, in a case-to-case basis, with varying facts and peculiar circumstances,open to be differentiated in each case.

vswami said...

Rider: On the foregoing premise, the writer's concluding remark- , - "Thus, the Court in Adani arguably misstated the law when it found that the mere existence of a force majeure clause would prevent the parties from bringing an alternative claim under section 56."- may not be acceptable to have substance or merit.

Rahul Sibal said...

Excellent Article. However, one question. I think the 'more forceful' argument that you propose is exactly what the SC had in mind. I am not able to find an alternative interpretation of the SC's observation. Is it possible to illustrate the conceptual distinction between the SC's observation, and the more forceful interpretation you propose? I think the interpretation you have put forward is the underlying basis of the SC's observation, and not its alternative.

Isha Jain said...

Yes, I agree. What I was trying to say is that of all the analysis put forth by the Court to support its conclusion, that argument was the most forceful one.