CHANGE IN FOREIGN LAW: WHETHER FORCE MAJEURE?

CHANGE IN FOREIGN LAW: WHETHER FORCE MAJEURE?

ROHITH KAMATH,

ADVOCATE & CS, REX LAW CHAMBERS, BENGALURU

With the rise in Globalization, there has been not merely a traverse in the Economic Contours of a Country, albeit, it brought forth the expansion, nay! I’d say Explosion, of all other factors that regulate, affect or induce the success or failure of a Multi-National based Enterprise.

As a primitive Lawyer, i may begin by elucidating that a Force Majeure Clause is one that is found in a, almost every, Contract that seeks to protect the interests of either parties to a contract, from the wrath of the effect of non-performance, that either of them may succumb to by way of shelling out damages or by performance at a greater hardship, being either economic hardship or otherwise, provided the Parties agree to the events for which Non-performance may not be considered a Breach of the Contract.

Before, I deviate from the mainstream of the Topic due to the typical quality that most Lawyers have, viz.  ‘To Speak or Argue, often, for what is not called for’; I would like to submit, one of the contemporary contractual issue that is an offspring of the Globalization is as to whether a ”Change in Foreign Law” can be used as a defense for Non-Performance.

“Proper Law of the Contract” as defined by the Supreme Court in NTPC v. Singer, way back in 1992 providing that it is to be determined with regard to the substantive principles of the domestic law which is applicable to the contract in question. The Adani Power Case, decided by the Appellate Tribunal For Electricity on 07-04-2016, brought forth the need to distinguish between “proper law” from “Change in Law”, as to whether the term “law” in the latter is required to be given an expansive interpretation to include foreign law as well. In the said case, A Power Purchase Agreement was entered into between Adani Power and Gujarat Urja Vikas Nigam Limited. It was dealt in detail as to whether there would be a frustration of the PPA if the changed circumstances are induced by a change in law in Indonesia. Adani Power had agreed to supply electricity to Gujrat Nigam and certain State Utilities in Haryana. Adani Power had made provisions for procurement of fuel, viz. coal at reasonable price rate, from Indonesia due to issues in procuring fuel from domestic sources. In 2010, the Indonesian Government issued a set of regulations stipulating that holders of mining permits in Indonesia will be permitted to sell coal only at benchmark prices accepted in the international markets and any sale of coal at a price lower than the benchmark price would lead to the cancellation of the mining license.These Indonesian regulations had a significant impact on export prices of coal from Indonesia, which were higher than the contracted prices, due to which it became unviable for Adani Power to supply power at agreed prices to the state utilities in Gujarat and Haryana. Adani Power approached the CERC for are vision of the Tariff rates on account of changed circumstances; arguing that the performance of the obligations had become impracticable and therefore the contract should be held to be frustrated. However, the CERC refused to hold that the Contract was frustrated for the reason that a mere rise in the price of a commodity does not result in impossibility of performance, and further held that the force majeure clause was not attracted on the basis that the ‘change in law’ as contemplated in the PPA, referred to the change in the law regulating the PPA, viz. Indian Law. However, the CERC allowed for the revision of tariff by providing for what it called a Compensatory Tariff, so as to counterbalance the effect of increased price of coal imports. The CERC took this approach on the ground that, if the parties were to resort to the process of competitive bidding it would bring uncertainty to the power sector and would be prone to misuse. The CERC ordered in the Adani Case that the Petitioner needs to be compensated for the intervening period. And as and when the hardship is removed or lessened, the compensatory tariff would be revised or withdrawn. It was observed by the Commission that the same was the most pragmatic way to make PPAs workable while ensuring supply of power to the consumers at competitive rates. An appeal to the APTEL upon dismissal, the Supreme Court of India, on application allowed the Adani to raise the argument relating to Change in Foreign Law before the Appellate Tribunal. This decision is a great on-set for the performance of contractual obligations that have a trans-national or multi-national transactions, wherein the laws of one nation may be modified to the effect making the performance of the contract, commercially unviable or sustainable.  It was held that the increase in price of coal was on account of the intervention by the Indonesian Regulation as also the non-availability / short supply of domestic coal, thereby constitute a Force Majeure Event in terms of the PPA.

Globalisation, having brought forth an integrated market economy, there is a striving thrust and need to take into consideration the effect of “change in foreign law” as a factor that determines the carrying out of contractual obligations. The law is yet unclear, after this decision, as to whether “change is foreign law” can be regarded as “force majeure”, due to the intricacies in the Adani Case, wherein there was a “change in price” caused due to “change in law”.