Impact of Force Majeure

On Contracts

Presentation by
Mohit Saraf
Partner
Luthra & Luthra
Law Offices

April 19, 2001 L&L/MDI 1

 Agenda
• Basic concept of Force Majeure
• Doctrine of Frustration distinguished
• Force Majeure in Commercial Contracts
• Examples
• Distinguishing Features
• Effect of Force Majeure
• Issues

April 19, 2001 L&L/MDI 2

 Basic Concept of Force Majeure
• Force Majeure

– Definition
• any event or circumstance or combination of events
and circumstances which materially and adversely
affect the performance of the obligations of either
Party to a contract and is not within the reasonable
control (directly or indirectly) of the Party affected.

– Civil law concept

– Foreseeability and fault

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Basic Concepts of Force Majeure
(Cont’d.)
• Elements of Force Majeure:
– Events or circumstance must be unforseen or
unforeseeable at the time of making of contract.
– Beyond the control of affected party.
– Not caused by any default or negligence of affected
party.

• Common law
– Contractual obligation-strict liability
– Frustration of contract

April 19, 2001 L&L/MDI 4

 Doctrine of Frustration
Distinguished
• Frustration

– Performance becomes impossible;

– Performance becomes illegal;
– Events outside the control of the parties defeat the
purpose of the contract

• Discharges the contract

• Indian Contract Act

– Section 56
– Section 32

April 19, 2001 L&L/MDI 5

 Doctrine of Frustration
Distinguished (Cont’d.)
• Section 32 - Contingent contracts to do or not to do
anything if an uncertain future event happens cannot be
enforced by law unless and until that event has happened.
If the event becomes impossible such contracts become
void.
 
• Section 56 -An agreement to do an act impossible in itself
is void. A contract to do an act which, after the contract is
made, becomes impossible, or, by reason of some event
which the promisor could not prevent, unlawful, becomes
void when the act becomes impossible or unlawful……...

April 19, 2001 L&L/MDI 6

 Doctrine of Frustration
Distinguished (Cont’d.)
• Satyabrata Ghose Vs. Mugneeram Bangur & Co.
AIR 1954 SC 44
• Alopi Parshad Vs. Union of India
AIR 1960 SC 588
• Naihati Jute Mills Ltd. Vs. Khyaliram Jagannath
AIR 1968 SC 522
• Devendra Singh Vs. State of U.P.
AIR 1971 SC 1759

April 19, 2001 L&L/MDI 7

 Doctrine of Frustration
Distinguished (Cont’d.)
• 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.
• Courts can declare frustration only when a change of
circumstances occurs which is so fundamental as to be
regarded by law as striking at the root of the contract as a
whole.
• Contracts, which contain an implied or express term for the
discharge of the contract upon happening of certain
circumstances, would be discharged under the terms specified
in the contract and covered under Section 32 and
would be outside the purview of Section 56
• In cases of frustration, performance of the contract comes to
an end but the contract would still be in existence for
purposes such as the resolution of disputes .

April 19, 2001 L&L/MDI 8

 Force Majeure in Commercial
Contracts
• Exception to the normal contractual consequence of breach of
contract.
• Rationale
• Negotiation
– Location of the Project
– Legal systems
– Political governance
• Classification
– Political Force Majeure ( State/governmental authority not
excused)
– Non-Political/ Natural Force Majeure

April 19, 2001 L&L/MDI 9

 Examples
Includes, without limitation :
• Strikes or other industrial action;
• War (whether or not declared) or other hostilities (including
terrorist action, sabotage, riot or insurrection);
• Blockage or embargo;
• Adverse natural phenomena (earthquake, hurricane, storm, fire,
flood, volcanic eruption);
• Epidemic;
• Change of law or regulation (including a change in the terms of
any approval or consent)

April 19, 2001 L&L/MDI 10

 Distinguishing Features
• Impossibility of performance versus “material & adverse
effect”
• Notice/ reporting requirements
• Onus on affected party
• Duty to mitigate
• Excuse only till performance is affected
• “Including, without limitation”

April 19, 2001 L&L/MDI 11

 Effect of Force Majeure

• Affected party not in breach

• Suspension of obligations

• Payment obligations not excused

• Accrued liabilities not excused

• Termination after protracted Force Majeure

April 19, 2001 L&L/MDI 12

 Effect of Force Majeure (Cont’d.)
• Concession Agreement
– Extension of term
– Compensation

• Supply Agreement
– Take or pay liability

• Construction Contracts
– Contractor entitled to extension of time and/ or compensation.
– Fixed Price fixed term contract

April 19, 2001 L&L/MDI 13

 Issues
• Adverse effect on party
• Economic hardship
• Inconsistent Force Majeure provision among project contracts
– breach under one contract e.g. Construction contract
providing for extension of time upon occurrence of Force
Majeure; same relief must be available in the off-take
sales agreement. The result of an inconsistency would be
that the project company would be unable to comply with
the sales agreement due to delay in completion of the
project. Result - payment of damages and/or a
terminated sales contract

April 19, 2001 L&L/MDI 14

 Issues (Cont’d.)
– “Resurrection” Clause
• To cure inconsistent force majeure provisions
• Party not to receive relief greater than that available to
the other party under associated contracts.
– Mitigation
• Insurance
– Political Risk insurance (ECAs & Multilateral
Agencies)
– Business interruption insurance
– All risk insurance
– Self insurance
• Financial Balance

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