Case comment on Supreme Court’s latest judgment on frustration and ‘force majeure’ in Energy Watchdog v. CERC & Ors (2017 SC)

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Shorn of too many details, the facts of the case are fairly straightforward :

Adani Enterprises was selected as the successful bidder by GUVNL (Gujrat Urja Vikas Nigam Limited) for supply of power and letter on intent was issued in its favour, followed by a Power Purchase Agreement. The energy charges quoted were non-escalable. In a subsequent (and serious!) development, due to a change in law in Indonesia, the export price in Coal was linked to international market prices (as opposed to the price prevailing earlier for the last 40 years). This was unforeseen and led to Adani power seeking discharge from the performance of the contract on the ground of ‘frustration’.

The Central Commission (a special tribunal entrusted with deciding such disputes)  dismissed the claim of ‘force majeure and/or change in law’  (Force Majeure, as per Black’s law dictionary means, Superior or irresistible force). However, a committee was formed to look into the difficulties of Adani Power (in the larger interests of financial health of the sector as such!). This was followed by grant of compensatory tariff (One need not bother with this, as this is something that is  governed by special electricity law regime, and we shall try confine our discussion to core contract law principles highlighted in this decision).

The matter finally reached the Supreme Court where the question of ‘force majeure’ and ‘frustration’ was directly in issue. The Supreme Court went on to hold the following:

a) The fundamental basis of the contract was not dislodged by the rise in price of coal in Indonesia. Alternative modes of performance, albeit slightly more expensive, were clearly available. There was nothing in the contract that envisaged procurement of coal only from Indonesia. Mere commercial inexpediency or onerousness of the Contract is not tantamount to ‘frustration’. This is a risk that the parties under such contracts knowingly assume. Compensatory tariff was also shot down.

(However, the Court did go on to hold that merely because there was a ‘non-escalable’ clause in the Contract does not mean that the Court would turn down a plea of frustration at the very outset; having said that, presence of such a clause it would be a factor against ready-acceptance of plea of frustration, having regard to the intention of the parties. However, this needs to be examined on a case to case basis and no straightjacket formula can be laid down in this regard) 

b) As regards the plea of ‘force majeure’ the Court held that there was a specific clause in the agreement which governed such matters and according to that clause ‘rise in price of fuel’ cannot be regarded as force majeure event.

The Court very importantly made clear : the subtle distinction between statutory frustration and contractual force majeure. The Court held that “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”.

Concludingly, on the facts of the case, plea(s) of Section 32 of the Contract (dealing with contingent contracts) and Section 56 (dealing with physical, legal and practical impossibility/frustration) were both turned down by the Court.  This case makes for an interest exposition of the principles of impossibility/force majeure/contingent contracts etc and contract law students should not let this one go without reading.

Particularly instructive is the observation to the effect :  “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 of the Contract can have no application”. This observation becomes extremely important as most contracts these days would have a force majeure clause which might consider ‘X’ event to amount to ‘force majeure – or in other words a superior/irresistible force absolving a party from performance of the Contract’; in that case, even though the event might not qualify as impossibility/frustration for the purpose of Section 56 of the Contract Act, but the same having been contractually considered by the parties to be an absolving event, the same would apply – over and above – the traditional principles of Section 56 of the Contract Act.

 

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