Thursday, July 13, 2017

Supreme Court on Hardship vis-à-vis Frustration and Force Majeure

[This is a guest post contributed by Rishabh Raheja, a third year student at NALSAR University of Law, Hyderabad.]

The Supreme Court was presented with the perfect opportunity to clarify the relationship between frustration, force majeure and hardship or commercial impracticability in its decision in Energy Watchdog v. Central Electricity Regulatory Authority. While it has already been argued on this blog that the Supreme Court’s approach has further obfuscated the doctrine of frustration, and undermined the Party’s autonomy in stipulating for force majeure, this post will deal with the implications of this decision on a party’s position in the face of onerous performance or hardship.

BACKGROUND

The concepts of frustration, force majeure and hardship are varied manifestations of the universal principle of rebus sic stantibus, or changed circumstances, an exception to the tenet of pacta sunt servanda, or the sanctity of contractual promises.[1] It is crucial to note that the similar origin of these doctrines does not imply that they are the same; in fact, they have differing thresholds and different implications for the parties.[2]

The contract being considered in Energy Watchdog involved an extremely detailed set of force majeure clauses, and the dispute concerned a situation of hardship to one of the parties, in the form of a drastic and unprecedented rise in the cost of raw material, yet the Court focused not on force majeure or on hardship, but on frustration.The Court did correctly note that the risk allocation between the parties, and their explicit exclusion of increasing costs as a force majeure event would mean that this hardship would not attract the relief of the force majeure clauses. However, it did this almost as an afterthought, leading with an elaborate exposition on how this situation would be treated under the doctrine of frustration. Analysing this situation in the context of frustrationwhen the concerned party was not even seeking to frustrate the contract, and what’s more, when there was an explicit provision on exemption in the contract, was certainly unnecessary, and even harmful, as I shall demonstrate. Ironically enough, the Court both began and ended its discussion on the issue in full recognition of the above point that the doctrine of frustration embodied in Section 56 could not be invoked where there was an express stipulation of force majeure:


Having once held that clause 12.4 applies as a result of which rise in the price of fuel cannot be regarded as a force majeure event contractually, it is difficult to appreciate a submission that in the alternative Section 56 will apply… When a contract contains a force majeure clause which on construction by the Court is held attracted to the facts of the case, Section 56 can have no application.”


IMPACT ON FRUSTRATION AND FORCE MAJEURE:

The potential harms of the Supreme Court’s overreaching approach include an extension of an already nebulous doctrine of frustration to situations where the parties have decided to leave the allocation of risk not to the default rule under Section 56, but rather to their own determination. Further, this decision did not avail of the opportunity to strengthen a largely underdeveloped jurisprudence on force majeure clauses.

In fact, while the force majeure provisions in the contract did explicitly exclude changes in price in the general, it still carved out an exception for such a price rise to the extent that it was a consequence of an event of force majeure. Pursuant to these provisions, while a price rise resulting from market fluctuations would be excluded from the relief of force majeure, the same may not as easily be said about a price rise resulting from an unprecedented foreign regulation implemented several years after the contract was concluded, as occurred in this case. In fact, the non-exhaustive ‘Non Natural Force Majeure Events’ clause in the contract did include several references to governmental interference, embargoes and the like, and so this regulation was definitely a pertinent question for the Court to consider.

While the extremely clear allocation of risk between the parties would have probably still led the Court to the same conclusion- especially since such an event was not express and at best analogous to those specified- the Court should have still taken these clauses into account, as it was, after all, faced with a direct question of contractual interpretation. If at all the Court was interested in considering concomitant issues, examining the role of rules such as expression uniusest exclusion alterius and ejusdsem generis in this force majeure clause would have been much more preferable to delving into the completely inapplicable doctrine of frustration. In fact, the position with respect to foreign regulations implemented after the contract’s conclusion is a present controversy in global force majeure jurisprudence[3], and is distinguishable from plain and simple ‘onerousness’ that the Court emphatically rejected. However, the Court glossed over all of these considerations, choosing instead to devote most of its reasoning to the (non-)issue of frustration.

IMPACT ON HARDSHIP VIS-À-VIS FRUSTRATION:
It was the Court’s emphatic and outright rejection of onerousness as a ground for relief that is perhaps the most concerning aspect of this decision[4]. While rejecting onerousness as a defence based on the specific force majeure provisions of this dispute would have been entirely reasonable, the Court did not stop, or technically even begin there. It began by citing a plethora of English authorities as per which onerousness or hardship is not considered as grounds for frustration. Not only was the Court incorrect in doing this as it was not even dealing with frustration, but this is also potentially inconsistent with the Indian jurisprudence on frustration, which has long since freed itself of English influence[5]. The threshold laid down in SatyabrataGhose v. MugneeramBangur[6], relied on in this judgment for being a ‘seminal’ decision on frustration, seems to suggest that impracticability is grounds for frustration:

“This much is clear that the word ‘impossible’ (in Section 56) has not been used here in the sense of physical or literal impossibility. The performance of an act may not be literally impossible but it may be impracticable and useless from the point of view of the object and purpose which the parties had in view and if an untoward event or change of circumstances totally upset the very foundation upon which the parties rested their bargain, it can very well be said that the promisor found it impossible to do the act which he promised to do.”

The language in the above paragraph contains several invocations of the doctrine of hardship. In fact, the use of the word ‘impracticable’ itself indicates a possible practical and commercial colouring, such as in the Uniform Civil Code in the US, where ‘commercial impracticability’ is listed as an excuse for performance for a rise in cost caused, inter alia, by an unforeseen governmental action.[7] Similarly, this paragraph is at least comparable to the definition of hardship under the UNIDROIT Principles- a transnational instrument of contract law:

“There is hardship where the occurrence of events fundamentally alters the equilibrium of the contract either because the cost of a party’s performance has increased or because the value of the performance a party receives has diminished…[8]

Thus, as per the test laid down by SatyabrataGhose, it could even be argued (not in the present case, as the risk allocation was clear) that the purpose of the contract, i.e., profit, was eroded due to the completely unanticipated change in circumstances, through the enactment of an unprecedented law leading to an astronomical rise in costs. Such a position may still be arguable under the doctrine of frustration in future if Courts are willing to view Energy Watchdog’s findings on frustration and hardship as obiter, since they were completely irrelevant to the real matter at hand- the force majeure clauses.
IMPACT ON HARDSHIP VIS-À-VIS FORCE MAJEURE:
The Supreme Court’s rejection of hardship as a ground for frustration may— in a climate where force majeure clauses are viewed through the unitary lens of frustration— even percolate down to force majeure clauses, where hardship, even when resulting from another event, is rejected. This is counter to the current trend in transnational law, where unforeseen and insuperable hardship is increasingly being viewed as a force majeure event. The CISG Advisory Council has found that Article 79— which is near identical to the force majeure model clause of the ICC— should also be seen to cover onerous performance and hardship, and this has been the approach taken on the provision by a recent Belgian Court decision. Even in the Common Law tradition, the 2002 Uniform Civil Code’s addition of ‘commercial impracticability’ as an excuse for performance indicates a potential shift in stance with respect to hardship and force majeure.
As force majeure is largely if not solely a question of construction of the Parties’ intent through contractual clauses, a blanket rejection of hardship as a force majeure event should not become the prospective influence of the decision in Energy Watchdog. Whether Indian law will want to take the CISG and US approach remains to be seen, but an overzealous obiter in a case with a special allocation of risk should not play a role in this decision.




[1] Peter J. Mazzacano, Force Majeure, Impossibility, Frustration & the Like:
Excuses for Non-Performance; the Historical Origins and Development of an Autonomous Commercial Norm in the CISG, Nord. J. Comm. Law, 1 (2011).
[2] A.H. Puelinckx, Frustration, Hardship, Force Majeure, Imprévision, Wegfall der Geschäftsgrundlage, Unmöglichkeit, Changed Circumstances, 3(2)J.Int'l Arb.,47 (1986).
[3]2012 UNCITRAL Digest of case law on the United Nations Convention on the International Sale of Goods, Digest of Article 79 case law, ¶ 17; JoernRimike, Force majeure and hardship: Application in international trade practice with specific regard to the CISG and the UNIDROIT Principles of International Commercial Contracts, Pace Rev. CISG, 216 (1999-2000).
[4]See paragraphs 35-39 of the judgment, where the Court relies on several judgments and commentaries to reject onerousness, stating in paragraph 38, “It is clear that a more onerous method of performance by itself would not amount to an frustrating event.
[5]Naihati Jute Mills Ltd. v. KhyaliramJagannath, A.I.R. 1968 S.C. 522; DhruvDev v. Harmohinder Singh, A.I.R. 1968 S.C. 1024.
[6]A.I.R. 1954 S.C. 44.
[7]Uniform Civil Code, § 2-615. Excuse by Failure of Presupposed Conditions (note 4).
[8]UNIDROIT Principles, Article 6.2.2.

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