Impact of Force Majeure on

Contracts
Presentation at the Indian Council of
Arbitration
By
Mohit Saraf
Partner
Luthra & Luthra
Law Offices

6th December

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Agenda

Basic concept of Force Majeure

Doctrine of Frustration distinguished

Force Majeure in Commercial Contracts

Examples

Distinguishing Features

Effect of Force Majeure

Issues

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Basic Concept of 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

(Contd.)

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

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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

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Doctrine of Frustration
Distinguished (Contd.)

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

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Doctrine of Frustration
Distinguished (Contd.)

Satyabrata Ghose v. Mugneeram Bangur & Co.

AIR 1954 SC 44

Alopi Parshad v. Union of India

AIR 1960 SC 588

Naihati Jute Mills Ltd. v. Khyaliram Jagannath

AIR 1968 SC 522

IFCI v. Cannanore Spinning and Weaving Mills

AIR 2002 SC 1841

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Doctrine of Frustration
Distinguished (Contd.)

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
Section 56 rule of positive law, not will of parties.
Frustration change of circumstances so fundamental
as to strike at the root of the contract as a whole.
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.

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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

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Effect of Force Majeure (Contd.)

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

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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

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Issues (Contd.)
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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