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Force Majeure under Electricity Laws

The whole nation is going through a pandemic which is named COVID-19. The virus is highly dangerous every country is seeking protective measures to get rid of this, one being the lockdown. In India, the first lockdown was announced on 24th March 2020 which was of 21 days.

It was expected that this lockdown will slow the growth rate of the people getting infected by it. But advisory committees further advised that the lockdown should be extended due to which the lockdown on 14 April was announced to be extended till 3rd May. Consequently, on 1st May the lockdown was increased till 17th May, and the areas were divided into red, orange, and green zones depending upon the number of people infected in that area.

The lockdown is majorly impacting the international and domestic business as the government has sealed borders and there have been traveling restrictions, the commercial agreements are coming at halt. Although the green zone and orange zone have been given relaxations but they are limited. The article discusses about the impact of COVID-19 on commercial contracts, and that whether the force majeure clause is applied in such cases specifically contracts related to electricity.

Force Majeure

Force majeure simply refers to such an event that is beyond the reasonable control of a person or a party to a contract due to which that party or person is unable to perform its contractual obligations of a contract. Under the Black's Law Dictionary, it has been defined as “an event or effect that can be neither anticipated nor controlled”. It is a contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event that the parties could not have anticipated or controlled.[1]

Force majeure includes acts of God, terrorism, war, earthquake, hurricanes, acts of government, explosion, epidemics, and a non-exhaustive list where the parties in contract cover such other events as force majeure.

Force majeure as the name suggests is a type of force or a consequence on which the human have no control or the events which cannot be anticipated. It is similar to the act of god under tort. The term is widely used as a clause under the contracts as it refers to any unforeseen event which cannot be apprehended before but if that event arises it is covered under this term. In order to apply the force majeure clause to an event, it is important that such an event must occur which is beyond the reasonable control of the party.

It is also to be kept in determination that the clause must mention the events in the contract. If the event which has occurred is covered under the clause then the parties will be relieved from performing their contractual obligation. The same has been laid down in the case of Energy watchdog Vs. central Regulatory Electricity commission[2] that the clause must be strictly interpreted.

Difference between the doctrine of frustration and force majeure

The doctrine of frustration which is defined in section 56 of Indian Contract Act, 1872 means any supervening event which took place after the execution of a contract or during its execution, on which parties have no control and such contact's performance becomes impossible or unlawful, then such contracts become void or frustrated.

The term frustration of contract was first recognized by English law in Taylor vs Caldwell[3] wherein the court held that in the contracts in which the performance depends on the continued existence of a given person or thing, a condition is implied that the impossibility of performance arising from the perishing of the person or thing shall excuse the performance.”

Reference of force majeure can also be found in section 32 of the Indian contract act, 1872 which defines contingent contract. Under these types of contract the performance by the promisor is based on some conditions that are basically happening or non-happening of an event, when such conditions are met the promisor performs his obligations.

So, therefore, “If two or more parties enter into a contract to do or not do something, if an event which is collateral to the contract does or does not happen, then it is a contingent contract.”[4]

Force Majeure under Electricity laws

Before Electricity Act, 2003, the Indian Electricity sector was guided by The Indian Electricity Act, 1910 and The Electricity (Supply) Act, 1948 and the Electricity Regulatory Commission Act, 1998. The generation, distribution, and transmission were carried out mainly by the State Electricity Boards in various States.

The generation and distribution of the electricity is done by making a PPA (Power purchase Agreement) between the parties. The agreement list out the Gencoms (generating companies) and Discoms (Distributing Companies) and all the necessary details

Under the 2003 act electricity generation has been made a non-licensed activity and the techno-economic clearance from the Central Electricity Authority (CEA) has been done away with for any power plant, except for hydro-electric power stations above a certain amount of capital investment. This has been provided in section 7 and 8 of the Electricity Act 2003. The generators can sell electricity to any licensees or where it was allowed by the state regulatory commissions, to consumers directly.

The Act licenses distribution in rural areas and brings in a licensing regime for distribution in urban areas.[5]

Now the concern arises that whether the COVID-19 would be considered as a Force Majeure event under the power purchase agreements.

In the case of Satyabrat Ghose v. Mugneeram Bangur[6]it was laid down that:
“It is not necessary that the force majeure event to be considered its performance should be literally impossible, even if the performance or the obligation to perform becomes difficult in practical view point of the parties then that will also be a force majeure event”. The court further stated that if the contract between the parties stated the force majeure event as a clause then the event will be dealt with respect to that clause and not under section 56 of the Indian Contract Act.

Ministry of Finance (MOF) in its office memorandum which was published on 19th February 2020 clarified that that the disruption of supply chains due to spread of COVID-19 in china or any other country would be considered as a natural calamity and the force majeure clause may be invoked wherever considered appropriate.

Challenges
Major challenges that whether such event is included in the force majeure clause and that whether the COVID-19 will be a force majeure event or not.

Where the COVID-19 is impacting the business so much so that the business is coming at halt then that agreement should be terminating but first in order to do that it has to be examined that till what extent the performance of the contract is hindered. It is very important that the party relying on the force majeure clause should satisfy that they have taken all the reasonable steps so as to avoid those consequences.

Although pandemics are included in the definition of force majeure and reasonable time to delay the performance is also given when such an event arises. But when the event is continuing for a longer period like this lockdown where it is impacting business so much so that it cannot be continued more then such agreement can be terminated.

It is difficult for the parties to analyze and to see its effect on the business as eventually termination of the contract will be more disastrous for the firm or business. The company will be under debt. And the more the event continues the more business will be shutting down which will drain the economy. Force majeure is a very important and useful clause but at the same time, it is coming at the neck of the businessmen.

The Discoms, maintain a payment assurance for all the power that they intend to procure from a power generator, to prevent build-up of dues. When the nationwide lockdown was imposed on 24th March, trouble for the Power sector increased. The demand for power in all the states came down by 20-30 %, along with blocking of their major source of income, the high end earning sources like railways, industrial and commercial consumers, etc.

The electricity bill collections by Discoms witnessed a fall by 80% only in a few days, due to which the Discoms now are unable to make daily payments not only to generators but also debt servicing to banks and financial institutions. The inability of Discoms to not pay the power generators has also affected the coal payments and coal transport by railways.[7]

Even the state government companies are not able to make payment for the coal that is used in the generation of electricity despite which Coal India is ensuring the supply of coal to these companies ( Gencoms).

The order regarding the late payment surcharge by the discoms to the gencoms was reduced by Central Electricity Regulatory Commission (CERC).

Conclusion
The parties are free to opt for the force majeure clause provided under the agreement but if it does not include those events then the parties are free to approach the court under section 56 of Indian Contract Act, 1872.

However, the point of invoking force majeure clause becomes unreasonable at a point where the event is not ending and thus leads to termination of the contract.
If the issue is not resolved soon then the power sector of India will bury into more problems.

End-Notes:
  1. https://economictimes.indiatimes.com/small-biz/legal/what-is-force-majeure-the-legal-term-everyone-should-know-during-covid-19-crisis/articleshow/75152196.cms
  2. (2017) 14 SCC 80
  3. 122 ER 309; 3 B. & S. 826 (1863).
  4. https://www.toppr.com/guides/business-laws/indian-contract-act-1872-part-ii/contingent-contracts/
  5. https://en.wikipedia.org/wiki/The_Electricity_Act,_2003
  6. 1954 AIR 44 : 1954 SCR 310
  7. https://www.indialegallive.com/special-story/post-covid19-power-gencoms-discoms-duel-force-majeure-94779

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