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Energy Watchdog vs CERC: Analysis of Commercial Impossibility on the Frustration of Contracts

Written by Sakshi Garg

Graduate, Hansraj College, Delhi University



Disclaimer: Please note that the views expressed below represent the opinions of the article's author. The following does not necessarily represent the views of Law & Order.


 

Introduction:


The year 2020 turned out to be an unprecedented one that forced everyone to re-assess their stand on the number of issues that were raised by the pandemic. While the world is busy avoiding the virus, a lot of people are in a conundrum regarding the enforceability of their contracts. The legal obligation of parties to contract now appears to be difficult to perform by the unseen fundamental changes in the business environment which may have directly or indirectly occurred due to the pandemic itself. Among the other questions that are raised, the one which worries many is whether the contract could be frustrated if it becomes commercially impossible to execute due to changes caused by force majeure event?


Commercial impossibility can be construed as a situation where the execution of the contract would cause pecuniary loss to a party and thus would be commercial impossibly to execute without incurring a certain amount of loss. In this regard, the court is obstinate in its view that one can't frustrate a contract just because it has become more onerous.

Analyzing ‘Energy Watchdog Vs Central Electricity regulatory Commission’ or the ‘Adani’ case:


In the recent case of Energy Watchdog vs Central Electricity Regulatory Commission and others[1],the Supreme Court held that if the fundamental basis of the contract remains unchanged, other changes in the contract wouldn't constitute a force majeure event and would not frustrate the contract. In the said case, a bidding process was undertaken by the Gujarat Urja Vikas Nigam Limited (GUVNL) project for the supply of power.

In the bidding process, the bidders had the option to propose scalable, partly scalable, and non-scalable tariffs. Scalable, here, essentially meant the variability in the amount of tariffs that would be changed. Thus, the options available in simpler terms mean that entities could propose tariffs that could be changed (scalable), or changed to some extent (partly scalable) or couldn’t be changed at all(non-scalable).

Adani Enterprise Limited (hereinafter referred to as ‘Adani’ ) decided to go with a non-scalable tariff relying on its multiple long-term agreements of procurement of coal with coal mines in Indonesia, Gujarat Mineral Development Corporation, a German company, and a Japanese agent. Gujarat Mineral Development Corporation is a public company based in Ahmedabad which provides essential energy minerals like lignite. The company provided major minerals to Adani on a long term basis which assured Adani of its ability to fulfil the obligations which were to be proposed. On 11th January 2007, it was announced that Adani was successful in securing the bid and it signed the purchase power agreements (PPAs) with GUVNL.


However, in 2010 an unforeseen event happened. The Indonesian government changed its law regarding coal which was in force for the past 40 years due to which the coal prices increased. As a ramification, Adani Enterprises was impeded in fulfilling its obligation. Subsequently on July 5, 2012, Adani filed a petition before Central Electricity Regulatory Commission (CERC) seeking relief. However, the CERC ruled against Adani stating that change in law of some other country would not be considered as a force majeure event. Even the decision by the appellate court was not in favor of the appellant. Then the case was brought in front of the Supreme court.


It was argued by counsel appearing on behalf of Adani that change in the law in Indonesia was unexpected and would construe change in the law within the meaning of Section 56 of The Indian Contract Act, 1872[2]. Section 56 of the Indian Contract Act expressly stipulates that “A contract to do an act which, after the contract is made, becomes impossible, or, because of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.” Here, due to a change in law[3]procurement of coal from Indonesia became unlawful and thus could render the contract impossible to perform which would frustrate it. Opposing counsel appearing on behalf of CERC contended that Adani was given free reign to bid and Adani Enterprise chose the non-scalable tariff to be competitive. Non-scalable meant that prices would be stable and wouldn’t change according to the circumstances. This would be attractive for any buyer and thus offered a competitive advantage to Adani. Subsequently, if non-scalability becomes more onerous on its part due to external changes, it can't frustrate this contract. It was further asserted that the petition was filed to change the tariff from non-scalable to scalable. Moreover, procurement of coal from Indonesia wasn't a fundamental part of the contract which was essentially only for the supply of power. They also referred to clause 12.4 of the PPAs which didn’t consider the import of coal from Indonesia as a fundamental part of the contract which could make the contract impossible.


The Supreme Court of India ruled in favor of CERC The bench constituted of Justice Nariman and Justice Ghose who narrowly interpreted the force majeure clauses of PPAs and elaborated that “hindrance could mean an event wholly or party preventing performance. But a mere rise in prices is not a hindrance, whole or part. Clause 12.4 specifically excluded rise in fuel cost or agreement becoming onerous to perform from the purview of force majeure.” It was discerned by the judges that import of coal from Indonesia specifically neither was fundamental to the contract nor was the basis on which the contract was entered into at the first instance.


Precedents in this regard:


Here the court relied on the precedent of Satyabrata Ghose v Mugneeram Bangur & Co [4], where the Supreme Court had held that a contract can’t be frustrated due to change in circumstance which is not fundamental to the contract. The court denied frustration of contract even when the object matter of contract, which was the land on which roads were to be built was requisitioned by the collector. It stated that “the events which have happened here cannot be said to have made the performance of the contract impossible and the contract has not been frustrated at all.


Moreover, it was also observed in the case of M/s Alopi Parshad & Sons Ltd. v. Union of India [5], that the parties to an executable contract are often burdened with extraneous circumstances which may be deleterious to them but such circumstances are in the course of carrying out the contract. Commercial contracts are inherently accompanied by the risk of uncertainty due to the turn of events that parties do not at all anticipate, but this could not per se get them rid of the bargain they have made. It was further held that the performance of a contract is never discharged merely because it may become onerous to one of the parties.


The principles of no frustration which has been established in India are based on English Law where courts have often interpreted impossibility as an extreme condition and did not consider extraneous costs or price increase to be one of them. Even in the recent case of the Sea Angel case[6], it was held by the UK Court of Appeal that "the application of the doctrine of frustration requires a multi-factorial approach.” It was observed that multiple factors are germane to the doctrine of frustration. A radical change in a majority of factors that may change the entire premises on which the contract was made or just simply broke the identity of the contract could only be construed as force majeure and can frustrate the contract. Since the subject matter of the doctrine of frustration is the contract, and contracts are about the allocation of risk, unfavourable situations which arise due to such risk won't simply frustrate the contract. The court also observed that “the doctrine is not to be lightly invoked; that mere incidence of expense or delay or onerousness is not sufficient; and that there has to be as it were a break in identity between the contract as provided for and contemplated and its performance in the new circumstances.” This approach was also applied in India in a case[7] where it was held that a contract is not discharged merely because it is difficult to perform or onerous.


Exceptions to the principle:


This doctrine of fundamental change is the rule of precedent but has certain exceptions. In some peculiar cases, the court has allowed the contract to be frustrated where fundamental change was interpreted broadly and the contract was commercially impossible for the parties to execute. In the case of Easun Engg. Co. Ltd. v Fertilizers and Chemicals Travancore Ltd.[8], there was a contract for the supply of Power Transformers. The contract itself contained a clause for the fixation of Price. The contract also contained an exception for the fixed price in case of any “force majeure” event and discharged the defaulting party from paying the damages in this situation. Subsequently, there was a substantial increase in the price of transformer oil due to which the party couldn't supply transformers, and other parties claimed damages. The court observed that an "abnormal or exorbitant increase in the price of transformer oil is not a natural and ordinary event but a substantial and drastic event. Therefore, the contract stands frustrated”.

Thus, in this case, a change in the price of raw material due to force majeure was treated as a fundamental part of the contract and subsequently, the contract was frustrated.

Even in Satyabrata Ghose vs Mugneeram Bangur & Co[9]., though the contract was not frustrated it was observed by the court that the word “impossible” has not been used in Section 56 of the Indian Contract Act, 1872 in the sense of physical or literal impossibility. In a subsequent case of Naihati Jute Mills vs Khyaliram[10], it was observed by the Supreme Court that in case there is a change in circumstance or a particular state of things depending on which the parties made the contract they could not be bound by it and the contract would stand frustrated.


Conclusion:


Commercial impossibility can’t be per se construed as impossible within the definition of section 56. However, it can be discerned in every case after examining the fundamentals of the contract which may include the source of procurement, cost, or even the object of the contract whether section 56 could be extended to commercial impossibility. In case Adani had relied solely upon imports from Indonesia while submitting the bid, it could have been considered as the foundation of the contract on part of Adani and could have frustrated the contract based on the doctrine of frustration. It is correct to say that one can't revoke a contract just because it has become more onerous, however, this can’t be used to force us into fulfilling a contract that may affect us to a large extent without any fault on one’s part. The court analyzes the change in circumstance and its impact on parties rather than analyzing the commercial burden on the party. Thus, Commercial impossibility itself can't be the sole reason to make the performance of the contract impossible and is bound by the principles of section 56 which expounds that only in case of fundamental change in circumstance which renders the contract impossible or unlawful could frustrate it. Though the ambit of such fundamentals could also be extended to the pecuniary part of the contract.


 

[1] Energy Watchdog Vs Central Electricity Regulatory Commission and others (2017) 14 SCC [2] Indian Contract Act, 1872 [3] Indonesia’s Law No. 4 of 2009 on Minerals and Coal Mining replaces Law No. 11 of 1967 [4] Satyabrata Ghose v Mugneeram Bangur & Co [1954] SCR 310 [5] M/s Alopi Parshad & Sons Ltd. v. Union of India, 1960 (2) SCR 793 [6] the Sea Angel case, 2013 (1) Lloyds Law Report 569 [7] Today Homes and Infrastructure Pvt Ltd Vs Jitender Singh OMP 13/2012 (Delhi High Court) [8] Easun Engg. Co. Ltd. v Fertilizers and Chemicals Travancore Ltd., 1991, [9] Supra no. 2 [10] Naihati Jute Mills vs Khyaliram 1976


BIBLIOGRAPHY

  1. Monika Mukherjee, Case Brief: Energy Watchdog Vs. Central Electricity Regulatory on 11th April, 2017, can be accessed at https://www.airtract.com/article/case-brief-energy-watchdog-vs-central-electricity-regulatory-on-11th-april-2017-, (Last visited on 28th November, 2021).

  2. Aditya Mehta et al, Frustration (Of Contract) In The Time Of Sars-Cov-2, can be accessed at https://corporate.cyrilamarchandblogs.com/2020/04/frustration-of-contract-in-the-time-of-sars-cov-2/ (Last visited on 28th November, 2021).

  3. Vikrant Rana & Tulip De, India: Supreme Court Examines The Ambit Of Force Majeure Clause In Agreements, can be accessed at https://www.mondaq.com/india/contracts-and-commercial-law/614324/supreme-court-examines-the-ambit-of-force-majeure-clause-in-agreements (Last visited on 28th November, 2021).

  4. Diva Rai, How change in circumstances bring about frustration of contracts, can be accessed at https://blog.ipleaders.in/how-change-in-circumstances-bring-about-frustration-of-contracts/ (Last visited on 28th November, 2021).

  5. Sushmita Gandhi, India - A Closer Look At Force Majeure, Frustration Of Contract And Impossibility To Perform Contracts During The COVID-19 Pandemic, can be accessed at https://www.conventuslaw.com/report/india-a-closer-look-at-force-majeure-frustration/ (Last visited on 28th November, 2021).

  6. Shalaka Patil, Debate: Can Force Majeure Be Invoked as a Statutory Defence Regardless of Contractual Terms ?, can be accessed at https://thewire.in/law/debate-force-majeure-contractual-terms (Last visited on 28th November, 2021).

  7. Shipra Sayal, Energy Watchdog v. Central Electricity Regulatory Commission & Ors. : Analysis, can be accessed at https://lexinsight.wordpress.com/2018/12/12/energy-watchdog-v-central-electricity-regulatory-commission-ors-analysis/, (Last visited on 28th November, 2021).




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