April 19, 2001 L&L/MDI 1

Impact of Force MajeureOn Contracts

Presentation by

Mohit Saraf

Partner

Luthra & Luthra

Law Offices

April 19, 2001 L&L/MDI 2

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 3

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

April 19, 2001 L&L/MDI 4

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 5

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 6

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 7

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 8

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 9

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

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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)

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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”

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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 13

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 14

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 15

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