Impact of Force Majeure on
Contracts
Presentation at the Indian Council of
Arbitration
By
Mohit Saraf
Partner
Luthra & Luthra
Law Offices
6th December 2003
Luthra & Luthra Law Offices
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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
6th December 2003
Luthra & Luthra Law Offices
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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
6th December 2003
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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
6th December 2003
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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
6th December 2003
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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
6th December 2003
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Doctrine of Frustration
Distinguished (Cont’d.)

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
6th December 2003
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Doctrine of Frustration
Distinguished (Cont’d.)




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.
6th December 2003
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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
6th December 2003
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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)
6th December 2003
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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”
6th December 2003
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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
6th December 2003
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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
6th December 2003
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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
6th December 2003
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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
6th December 2003
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