Impossibility of performance v. Party Autonomy : Convoluted interpretation by the Supreme Court

1. A CRITIQUE
IMPOSSIBILITY & DOCTRINE
OF FRUSTRATION
as interpreted by the SC in Energy Watchdog v. CERC (Adani Case)
1Aditi Duggal | SLS Noida

2. ENERGY WATCHDOG v. CERC
2
 1.) Power Purchase Agreements :. Clause 12.3 defined force majeure to
include any event or circumstance or combination thereof which “wholly
or partly prevents” performance of obligations. Clause 12.7(a) stated that
the affected party will be immune if performance was “prevented,
hindered or delayed” due to a force majeure event. Clause 12.4(ii)
excluded applicability of force majeure to changes in cost of fuel for the
project or onerous performance of the agreement.
 2.) Rise in price of coal : An unforeseeable change in Indonesian
regulation aligned the coal prices to international prices which made
procurement unforeseeably exorbitant thereby hindering the performance
of obligations under PPAs.
 3.) Defense of frustration : It was argued that they should either be
discharged on account of frustration of the PPAs or restored to the same
economic position prior to force majeure and/or change in law. The matter
went to CERC and then to APTEL & was ultimately decided by the SC.
Aditi Duggal | SLS Noida

3. LEGISLATIVE INTENT
32 – Contingent contracts 56 – Impossibility of performance
The contract can be enforced on the
happening of the contingent event
which, on becoming impossible, renders
the contract void.
It is a rule of positive law embodying the
doctrine of frustration. In order for
frustration to apply, contract must fall
under section 32 or 56.
No present obligation; The obligation
arises on the occurrence of the
contingent event
Doctrine of frustration implies discharge
of contract due to supervening
impossibility or illegality of the act
The fulfilment of condition has the effect
of converting potential obligation into
actual obligation
Impossibility must be interpreted
“practically” & not “literally” i.e.
fundamental basis of contract should
be materially altered beyond the
contemplation of parties
Parties pre-contemplate the
contingency & accordingly draft the
contract in express or implied
contractual terms.
Parties do not contemplate beforehand
the impossibility or unlawfulness of the
act agreed to be done. It is not applicable
to self-induced frustration & express
contractual stipulation to that extent.
FORESEEABILITY MUST BE
PRESENT. OBJECTIVE INTENT OF
PARTIES
FORESEEABILITY MUST BE ABSENT.
SUBJECTIVE INTENT OF PARTIES
3Aditi Duggal | SLS Noida

4. SUPREME COURT ON FRUSTRATION &
INAPPLICABILITY OF FORCE MAJEURE
Factually
• Parties knowingly assumed the risk of fluctuation in price.
• Deliberate quoting of non-escalable tariff is not an absolute bar to the
plea of frustration; Alternative modes of performance are an important
factor
• The exclusion of Clause 12.4 applies to the case and consequently, S.
56 does not apply.
Legally
• Narrow construction and non-exhaustive nature of force majeure clauses
• Fundamental basis of contract is the test of impossibility
• Impossibility relates to practicality of performance
• Inadequacy of onerous method of performance & ground of rise in cost
• Multi-factorial approach including context of the contract, knowledge,
contemplations, risk, nature of supervening event, and parties’
contemplation of future performance
4Aditi Duggal | SLS Noida

5. FINDINGS
Insofar as force majeure is relatable to an express
or implied clause in a contract, it is governed by
Chapter III of the Contract Act, particularly S. 32.
Insofar as a force majeure event occurs dehors the
contract, it is dealt with by a rule of positive law
under Section 56 of the Indian Contract Act
“As has been held, in particular, in Satyabrata
Ghose case, 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.”
5Aditi Duggal | SLS Noida

6. SATYABRATA GHOSE
In the large majority of cases, however, the doctrine of frustration is not
applied on the ground of express or implied contractual terms. The relief
u/s 56 is given on the ground of subsequent impossibility when the
whole purpose or basis of a contract was frustrated by the intrusion or
occurrence of an unexpected event or change of circumstances which
was beyond the contemplation of parties at the time of conclusion of
contract.
It allows for discharge of obligations if an untoward event or change of
circumstance totally upsets the very foundation of the agreement
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
6Aditi Duggal | SLS Noida

7. FOOD FOR THOUGHT?!!
S. 56 & 32 mutually exclusive : There is no clarification on how
Section 56 operates as a default rule and how the applicability of S. 56
was eclipsed by the application of PPA clause on force majeure
If 56 inapplicable, no reason to go into common law of frustration :.
The judgement first dismisses the defense of S. 56 and later holds that it
is not applicable in the first place. Therefore, it tied the test of
impossibility under S. 32 to that of “fundamental basis” under S. 56
thereby impliedly linking them but expressly separating them at the
same time.
Restrictive interpretation of Satyabrata Ghose : Parties can choose to
override the protection of S. 56 vide the S. 32 route. Satyabrata Ghose
made it clear that S. 56 operates independent of the intent of the Parties.
Adani case validated that parties can, if they so intend, escape the
mandate of S. 56 by contractually resorting to S. 32.
7
Aditi Duggal | SLS Noida

8. Was applicability
of S. 32 through a
particular clause
legislatively
intended to be an
absolute escape
for the mandate
in S. 56?
Is there actually
no scope of an
overlap between
the two?
8Aditi Duggal | SLS Noida
BURNING QUESTIONS!!!

9. 9
SECTION 56 APPLIES
Bypass the test of section 32 as the fundamental change would be
judged in light of possibility of performance.
Test of section - judge the possibility of the act (whether there is a
fundamental change which would make the performance impossible)
Governs the contract
Aditi Duggal | SLS Noida

10. 10
SECTION 32 APPLIES
Even if the change makes the performance impossible it would not
be considered force majure.
The agreement of parties to consider a change as not fundamental to
the performance of contract would not entail the parties to argue in
future that the change is now fundamental to the performance of the
contract under the purview of Section 56.
Governs the clause
Aditi Duggal | SLS Noida

11. IS IT JUST??...
11
PRINCIPLE OF EQUALITY
• Party who agreed for a particular act not be considered
impossible should be made liable for performance
• Even if act is impossible the party should be made liable to pay
damages.
PRINCIPLE OF LEGITIMATE
EXPECTATIONS
• When the legitimate expectation of the party who agreed for the
change is violated, the act even violating the legitimate
expectation can be judged in light of Section 56.
Aditi Duggal | SLS Noida

12. CONCLUSION
Legal Position : Contract law acknowledges impossibility
under Section 56 however simultaneously allows parties to
agree for a particular impossibility not to be considered as a
reason of non-performance.
Ambiguity : Clearly, S. 56 encompasses a wider concept of
impossibility that should not be absolutely curtailed by the
application of S. 32. Satyabrata Ghose should have been,
therefore, read to imply that S. 56 does not apply in the
construction of the particular force majeure clause but it
should still remain available as an alternative basis for
avoidance of obligations in terms of the entire contract.
12Aditi Duggal | SLS Noida

13. THANK YOU!!
13Aditi Duggal | SLS Noida