Supreme Court on Hardship vis-à-vis Frustration and Force Majeure

[This is a guest post contributed by
Rishabh Raheja, a third year student
at NALSAR University of Law, Hyderabad.]

The Supreme Court was presented with the perfect opportunity to
clarify the relationship between frustration,
force majeure and hardship
or commercial impracticability in its decision in 
Energy
Watchdog v. Central Electricity Regulatory Authority
.
While it has already been argued

on this blog that the Supreme Court’s approach has further obfuscated
the doctrine of frustration
, and
undermined
the Party’s autonomy in stipulati
ng for force majeure
, this post
will deal with the implications of this decision on a party’s position in the
face of onerous performance or hardship.

BACKGROUND

The concepts of frustration, force majeure and hardship are
varied manifestations of the universal principle of
rebus sic stantibus, or
changed circumstances, an exception to the tenet of pacta sunt servanda, or
the sanctity of contractual promises.[1] It
is crucial to note that the similar origin of these doctrines does not imply
that they are the same; in fact, they have differing threshold
s and different
implications for the parties.[2]

The contract being considered in Energy Watchdog involved an extremely detailed set of force
majeure
clauses, and the dispute concerned a situation of hardship to one
of the parties, in the form of a drastic and unprecedented rise in the cost of
raw material,
yet the Court focused not on force majeure or on hardship, but
on frustration.The Court did correctly note that the
risk allocation between the parties, and their explicit exclusion of increasing
costs as a force majeure event would mean that this hardship would not
attract the relief of the force majeure clauses. However, it did this
almost as an afterthought, leading with an elaborate exposition on how this
situation would be treated under the doctrine of frustration. Analysing this
situation in the context of frustrationwhen the concerned party was not even seeking
to frustrate the contract, and what’s more, when there was an explicit
provision on exemption in the contract, was certainly unnecessary, and even harmful,
as I shall demonstrate. Ironically enough, the Court both began and ended its
discussion on the issue in full recognition of the above point that the
doctrine of frustration embodied in Section 56 could not be invoked where there
was an express stipulation of force majeure:





Having once held that clause 12.4 applies as a result of which rise in the
price of fuel cannot be regarded as a force majeure event contractually, it is
difficult to appreciate a submission that in the alternative Section 56 will
apply… 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.
”


IMPACT ON FRUSTRATION AND FORCE MAJEURE:

The potential harms of the Supreme Court’s overreaching approach
include an extension of an already nebulous doctrine of frustration to
situations where the parties have decided to leave the allocation of risk not
to the default rule under Section 56, but rather to their own determination.
Further, this decision did not avail of the opportunity to strengthen a largely
underdeveloped jurisprudence on force majeure clauses.

In fact, while the force majeure provisions in the contract
did explicitly exclude changes in price in the general, it still carved out an
exception for such a price rise to the extent that it was a consequence of
an event of force majeure.
Pursuant to these provisions, while a price rise
resulting from market fluctuations would be excluded from the relief of force
majeure
, the same may not as easily be said about a price rise resulting
from an unprecedented foreign regulation implemented several years after the
contract was concluded, as occurred in this case. In fact, the non-exhaustive
‘Non Natural Force Majeure Events’ clause in the contract did include
several references to governmental interference, embargoes and the like, and so
this regulation was definitely a pertinent question for the Court to consider.

While the extremely clear allocation of risk between the parties
would have probably still led the Court to the same conclusion- especially
since such an event was not express and at best analogous to those specified-
the Court should have still taken these clauses into account, as it was, after
all, faced with a direct question of contractual interpretation. If at all the
Court was interested in considering concomitant issues, examining the role of
rules such as expression uniusest exclusion alterius and ejusdsem
generis
in this force majeure clause would have been much more
preferable to delving into the completely inapplicable doctrine of frustration.
In fact, the position with respect to foreign regulations implemented after the
contract’s conclusion is a present controversy in global force majeure jurisprudence[3],
and is distinguishable from plain and simple ‘onerousness’ that the Court
emphatically rejected. However, the Court glossed over all of these
considerations, choosing instead to devote most of its reasoning to the
(non-)issue of frustration.

IMPACT
ON HARDSHIP VIS-À-VIS FRUSTRATION:
It was the Court’s emphatic and outright rejection of onerousness
as a ground for relief that is perhaps the most concerning aspect of this
decision[4].
While rejecting onerousness as a defence based on the specific force majeure
provisions of this dispute would have been entirely reasonable, the Court did
not stop, or technically even begin there. It began by citing a plethora of
English authorities as per which onerousness or hardship is not considered as
grounds for frustration. Not only was the Court incorrect in doing this as it
was not even dealing with frustration, but this is also potentially
inconsistent with the Indian jurisprudence on frustration, which has long since
freed itself of English influence[5].
The threshold laid down in SatyabrataGhose v. MugneeramBangur[6],
relied on in this judgment for being a ‘seminal’ decision on frustration, seems
to suggest that impracticability is grounds for frustration:

“This much is clear that the word ‘impossible’ (in
Section 56) has not been used here in the sense of physical or literal
impossibility. 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 which the parties had in view
and if an untoward event or change of
circumstances totally upset the very foundation
upon which the parties rested their bargain
, it can very well be said that
the promisor found it impossible to do the act which he promised to do.”

The language in the above paragraph contains several invocations
of the doctrine of hardship. In fact, the use of the word ‘impracticable’
itself indicates a possible practical and commercial colouring, such as in the
Uniform Civil Code in the US, where ‘commercial impracticability’ is listed as
an excuse for performance for a rise in cost caused, inter alia, by an
unforeseen governmental action.[7]
Similarly, this paragraph is at least comparable to the definition of hardship
under the UNIDROIT Principles- a transnational instrument of contract law:

“There is hardship where the occurrence of events fundamentally
alters the equilibrium of the contract either because the cost of a party’s
performance has increased or because the value of the performance a party
receives has diminished…
[8]

Thus, as per the test laid down by SatyabrataGhose,
it could even be argued (not in the present case, as the risk allocation was
clear) that the purpose of the contract, i.e., profit, was eroded due to the
completely unanticipated change in circumstances, through the enactment of an
unprecedented law leading to an astronomical rise in costs. Such a position may
still be arguable under the doctrine of frustration in future if Courts are
willing to view Energy Watchdog’s findings on frustration and hardship
as obiter, since they were completely irrelevant to the real matter at
hand- the force majeure clauses.
IMPACT
ON HARDSHIP VIS-À-VIS FORCE MAJEURE:
The Supreme Court’s rejection of
hardship as a ground for frustration may— in a climate where force majeure
clauses are viewed through the unitary lens of frustration— even percolate down
to force majeure clauses, where hardship, even when resulting from
another event, is rejected. This is counter to the current trend in
transnational law, where unforeseen and insuperable hardship is increasingly
being viewed as a force majeure event. The
CISG Advisory Council has found
that Article 79— which is near identical to the force majeure model
clause of the ICC— should also be seen to cover onerous performance and
hardship, and this has been the approach taken on the provision by a recent
Belgian Court decision
.
Even in the Common Law tradition, the 2002 Uniform Civil Code’s addition of ‘commercial
impracticability’ as an excuse for performance indicates a potential shift in
stance with respect to hardship and
force
majeure
.
As force majeure is largely if not solely a question of construction
of the Parties’ intent through contractual clauses, a blanket rejection of
hardship as a force majeure event
should not become the prospective influence of the decision in Energy Watchdog. Whether Indian law will
want to take the CISG and US approach remains to be seen, but an overzealous obiter in a case with a special
allocation of risk should not play a role in this decision.




[1] Peter J. Mazzacano, Force
Majeure, Impossibility, Frustration & the Like:
Excuses for
Non-Performance; the Historical Origins and Development of an Autonomous
Commercial Norm in the CISG
, Nord.
J. Comm. Law
, 1 (2011).
[2]
A.H.
Puelinckx, Frustration, Hardship, Force Majeure,
Imprévision, Wegfall der Geschäftsgrundlage, Unmöglichkeit, Changed
Circumstances
, 3(2)J.Int’l Arb.,47
(1986).
[3]2012 UNCITRAL Digest of case
law on the United Nations Convention on the International Sale of Goods, Digest
of Article 79 case law, ¶ 17
; JoernRimike, Force majeure and hardship: Application in international trade
practice with specific regard to the CISG and the UNIDROIT
Principles of International Commercial Contracts
, Pace Rev. CISG, 216 (1999-2000).
[4]See
paragraphs 35-39 of the judgment, where the Court relies on several judgments
and commentaries to reject onerousness, stating in paragraph 38, “It is clear that a more onerous method of
performance by itself would not amount to an frustrating event.
[5]Naihati Jute Mills Ltd. v. KhyaliramJagannath,
A.I.R. 1968 S.C. 522; DhruvDev v. Harmohinder Singh, A.I.R. 1968 S.C. 1024.
[6]A.I.R.
1954 S.C. 44.
[7]Uniform
Civil Code,
§ 2-615. Excuse
by Failure of Presupposed Conditions (note 4).
[8]UNIDROIT
Principles, Article 6.2.2.

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Mihir Naniwadekar

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