[Post by Isha Jain, who is a 4th year student at the National Law
School of India University, Bangalore.
School of India University, Bangalore.
The Supreme
Court’s recent decision in Energy
Watchdog v. Central Electricity
Regulatory Authority (“Adaní”) 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.
Court’s recent decision in Energy
Watchdog v. Central Electricity
Regulatory Authority (“Adaní”) 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.
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.
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.
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]
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.
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).
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:
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.
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.
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.
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.
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.
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.”
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.
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.
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.
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.
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.
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).
Indian Contract and Specific Relief Acts (13th edn., 2006).
[2] Davis
Contractors Ltd v Fareham Urban District Council, [1956] 2 All ER 145.
Contractors Ltd v Fareham Urban District Council, [1956] 2 All ER 145.
[3] Naihati Jute Mills Ltd. v.
Hyaliram Jagannath, 1968 (1) SCR 821.
Hyaliram Jagannath, 1968 (1) SCR 821.
[4] Pradgas
Mathuradas v. Jeewanlal, A.I.R. 1948 P.C. 217.
Mathuradas v. Jeewanlal, A.I.R. 1948 P.C. 217.
[5] C. Scott Pryor, Clear rules still produce fuzzy results:
impossiblity in Indian Contract Law, 27 Arizona
Journal of International and Comparative Law, 1, 10 (2010) .
impossiblity in Indian Contract Law, 27 Arizona
Journal of International and Comparative Law, 1, 10 (2010) .
[6] Satyabrata Ghose
v. Mugneeram Bangur & Co., 1954 SCR 310.
v. Mugneeram Bangur & Co., 1954 SCR 310.
[7] Taylor vs.
Caldwell, (1861-73) All ER Rep 24.
Caldwell, (1861-73) All ER Rep 24.
[8] V.L. Narasu v.
P.S.V. Iyer, AIR 1953 Mad 300.
P.S.V. Iyer, AIR 1953 Mad 300.
[9] Piarey Lal vs
Hori Lal, AIR 1977 SC 1226.
Hori Lal, AIR 1977 SC 1226.
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.
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.
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.
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.