Impact of Force Majeure On Contracts - PowerPoint by gio15356


									             Impact of Force Majeure
                  On Contracts

                   Presentation by
                     Mohit Saraf
                   Luthra & Luthra
                     Law Offices
April 19, 2001          L&L/MDI        1
• 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
April 19, 2001                 L&L/MDI                               3
Basic Concepts of Force Majeure
• 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

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

April 19, 2001              L&L/MDI                    4
                 Doctrine of Frustration
• 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

• 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
• 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
• 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
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
• Epidemic;
• Change of law or regulation (including a change in the
April 19, 2001               L&L/MDI                         10
    terms of any approval or consent)
                 Distinguishing Features
• Impossibility of performance versus “material & adverse
• 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
   – Fixed Price fixed term contract
April 19, 2001               L&L/MDI                    13
• Adverse effect on party
• Economic hardship
• Inconsistent Force Majeure provision among project
   – 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
             – Business interruption insurance
             – All risk insurance
             – Self insurance
         • Financial Balance
April 19, 2001                 L&L/MDI                           15

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