Energy Watchdog v. CERC (2017) — Force Majeure & Frustration of Contract
Primary: Energy Watchdog v. CERC; force majeure; frustration of contract; Section 56
Secondary: change in law; tariff risk; power purchase agreement; Indonesia coal
Quick Summary
The Supreme Court held that price rise and reduced profits do not end a contract. Parties who bid a non-escalable tariff accept price risk. Force majeure protects only against events beyond control as listed in the clause; it is not a tool to escape a bad bargain.
- Commercial hardship ≠ frustration.
- Risk allocation in contract governs first.
- Force majeure is clause-driven, not open-ended.
Issues
- Can higher input costs and change in law abroad frustrate a PPA under Section 56?
- When does a force majeure clause excuse performance in tariff contracts?
Rules
- Section 56 (Frustration): Applies only if a supervening event destroys the foundation of the contract, making performance radically different.
- Force Majeure: An express clause listing events beyond control. It excuses performance only as per its text and risk allocation.
- Commercial Impracticability: Mere price escalation or loss of profit is not frustration.
Facts — Timeline
Optional
Tender for Power Supply
Gujarat Urja invites bids with option to quote escalable or non-escalable tariff.
Bid & PPA
Adani consortium wins with a non-escalable tariff and signs a Power Purchase Agreement.
Fuel Arrangements
Long-term Indonesian coal supply at fixed prices; bidders expect costs to be stable.
Change in Indonesian Law
Export pricing linked to international benchmarks. Coal cost rises; project profits shrink.
CERC Application
Appellants seek force majeure relief or economic restitution; CERC declines.
Litigation
Dispute escalates to courts. Core question: frustration vs assumed risk.
Arguments — Appellant vs Respondent
Appellants (Generators)
- Change in Indonesian law made the bargain impossible/commercially unviable.
- Seek discharge or a mechanism to restore prior economics.
- Invoke force majeure / change-in-law relief.
Respondents (Discoms/State)
- Risk of input price was assumed with non-escalable tariff.
- No clause covers foreign law price changes as force majeure.
- Performance still possible; only profits reduced.
Judgment
No Frustration
The Court refused to treat price rise as frustration. Performance was still possible. Bidders had chosen a non-escalable tariff, so they carried price risk. Force majeure is confined to events stated in the clause; economic loss alone is not force majeure.
Ratio Decidendi
- Frustration arises only if the supervening event destroys the foundation of the contract.
- Force majeure is clause-specific; price risk stays where the contract puts it.
- Change in foreign law causing cost increase is not per se frustration.
Why It Matters
The case anchors Indian law on risk allocation in infrastructure contracts. It warns bidders: fixed tariffs mean you absorb input price shocks unless the contract clearly shifts that risk.
Key Takeaways
- Hardship ≠ impossibility.
- Read the clause first: it rules.
- Fixed price = bidder bears price risk.
- Use change-in-law and pass-through terms.
- Define force majeure tightly; exclude price swings.
- Record assumptions behind tariffs.
Mnemonic + 3-Step Hook
Mnemonic: “R-C-F” — Risk • Clause • Foundation
- Risk: Who bears price risk? Check tariff type.
- Clause: Force majeure/change-in-law governs relief.
- Foundation: Only if the bargain’s core collapses → frustration.
IRAC Outline
Issue
Do cost spikes from foreign law changes frustrate a fixed-tariff PPA? Does force majeure excuse performance?
Rule
Section 56 requires destruction of the contract’s foundation. Force majeure relief is limited to the clause terms.
Application
Performance remained possible; only profitability changed. Non-escalable tariff showed assumed risk.
Conclusion
No frustration; no force majeure relief for price rise absent express coverage.
Glossary (Easy English)
- Force Majeure
- A contract list of events beyond control (e.g., war, bans) that excuse or delay performance.
- Frustration
- Law ends a contract when a later event destroys its basic purpose.
- Change in Law
- New legal rule affecting costs/operations; relief depends on contract wording.
- Non-escalable Tariff
- Fixed price bid; bidder bears later cost increases unless the contract shifts risk.
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