GST As A Force Majeure Event – In Arbitration Contracts

Force Majeure

'Force majeure' is an event or effect that cannot be anticipated or controlled. It includes acts of nature and people. Often, companies may create a force majeure clause in their agreements and contracts to exempt themselves from liability to breach of contract when they are unable to comply with the terms of the contract during such an event.

Under the Indian Contract Act, 1872, there are two sections relevant to force majeure. Section 32 provides for the enforcement on an event happening, while Section 56 deals with frustration of a contract, and provides that a contract to do something impossible is void. The Supreme Court has ruled that when an event is related to an express or implied clause in a contract, the governing provision would be Section 32 would apply whereas a force majeure event dehors the contract, the applicable provision would be Section 56.^[1]

The consequences of a force majeure event are provided for in Section 56, wherein the contract becomes void. Thus, when parties have not provided what would take place upon such an event, Section 56 becomes applicable.^[2] However, parties are free to choose what consequences would follow upon the occurrence of an uncertain future event, as per Section 32.

'Change in law' clauses

When parties enter into a contract, terms are negotiated by considering the legal and regulatory framework prevailing at the time. However, a change in law could be unforeseen and out of the control of the parties, and such changes may cause changes in expenditure and costs. In some cases, it may be difficult to gauge what effects such a change in law can cause and most importantly, how it effects the liability of parties. Therefore, such a clause may be brought in to reduce the uncertainty and clearly identify the party liable for such contingencies based on the change in law.

Thus, a 'change in law' clause within a contract would attract Section 32 of the Contract Act. A 'change in law' clause is usually inserted with the object of offsetting any loss or damage that a party may face in the event of the applicable law being in force at the time of creation of such contract being altered. Such clauses may be drafted in a unique manner, depending on multiple factors such as the relevant industrial fields, the prevailing economic conditions, the relative bargaining power of each party to the contract amongst other considerations.

Facts of the case

NHAI had entered into an agreement with the respondent, who was granted the concession to collect User Fee at a toll plaza and was required to pay a fixed amount to NHAI every week. This amount was exclusive of taxes or service charges. Furthermore, there were several clauses in the contract which quantified penalty in case the respondent was unable to pay their weekly due to NHAI.

Upon the implementation of the GST Act, the respondent claimed that the aforementioned Act brought uncertainty and caused a rapid decline in the movement of traffic, adversely affecting the collection of tolls. The respondent quantified his loss and sought payment of compensation and/or waiver of part of the remittance from NHAI on the ground that this event qualified as a 'force majeure event' as per Clause 25(b)(v) of their agreement, which reads as follows:

"25. (b) FORCE MAJEURE EVENT:

Except as stated in Clause (a) above, Force Majeure event means an event or circumstances or a combination of events and circumstances referred to in this clause which are beyond the reasonable control of the Party or Parties to this Contract and which party could not have prevented or reasonably overcome with the exercise of its reasonable skill and care in relation to performance of its obligations pursuant to this Contract and which are of the nature, without limitation of those described below:

…(v) Any change in law which has a material adverse effect on the obligation of the parties hereto."

The NHAI rejected their claim of the GST Act qualifying as a change in law materially affecting the respondent and thereafter the matter was referred to a Sole Arbitrator to decide the dispute. The Sole Arbitrator accepted that the GST Act qualified as a change in law having material adverse effect on the parties, and thus was a force majeure event.

The High Court of Delhi's rationale

Before the High Court, NHAI contended that GST merely simplified the levy and collection of indirect taxes and encompassed existing taxes and dues. Such a law could not affect the obligations of the parties to contract. Additionally, the respondent was to give NHAI a fixed amount per week as per the contract and the said amount was independent of any taxes or service charges. Moreover, it was stated that 'material adverse impact' should mean a complete blockade of road, as was held by the High Court in a different case.^[3]

The uncertainty around the tax regime under GST caused a short fall in traffic as the suppliers and manufacturers of goods, which in turn caused significant loss to the respondent, which was recognized by NHAI. The relevant a circular of the NHAI as considered, wherein it was stated that though the promulgation of GST appeared to be a change in law, though its material effect on reducing traffic could not be proven. Therefore, the view that GST was a change in law could not be said to be without merit.

The High Court went on to hold that the Arbitral Tribunal had correctly decided the claim of the respondent. Two independent Project Directors had evaluated the respondent's claim and assessed that in the period from 01.07.2017 to 04.08.2017, the respondent had incurred a loss of over Rs. 1 crore, which could not be said to have been immaterial. Furthermore, another decision of the High Court of Delhi where a challenge to a similar award was rejected was also considered.^[4] Thus, the High Court concluded that the Arbitral Tribunal's approach was correct in deciding that the introduction of GST a force majeure event.

The High Court further supplemented its reasoning by stating that the question of interpreting the contract is within the jurisdiction of the Arbitral Tribunal and its decision should not be interfered with unless the decision is patently illegal or against the fundamental policy of Indian law, as has been decided by the Supreme Court from time to time.^[5] As the view of the Arbitral Tribunal was a plausible view, the High Court refused to interfere under Section 34 of the A&C Act.

Evaluating the judgment

The court was correct in not interfering with the award of the Arbitral Tribunal. It is important that awards should not be interfered with in a casual manner unless the perversity of the award goes to the root of the matter without there being a possible alternative interpretation.^[6] The High Court went into the question of whether the Arbitral Tribunal had applied its mind when passing the order. It was clear that GST could reasonably considered as a 'change in law' as it brought about a new tax regime and the same was even admitted by the NHAI in its circular. Moreover, it was the implementation of GST which reduced traffic due to uncertainty by suppliers and transporters of goods. This was also supported by the submission of actual data of reduced traffic in the period right after the implementation of GST and evaluation of such loss by independent persons.

The approach of the court in considering the matter was not to explore if there were any alternative interpretations of the contract. It found that the view of the Arbitral Tribunal was reasonable and therefore it did not warrant any other consideration. It is important that as the arbitrator has applied his mind, the court does not reappraise the matter as if it were an appeal and even where two views are possible, the view of the arbitrator should prevail.^[7] Furthermore, that courts should not interfere with an arbitral award in usual course on factual aspects as the commercial wisdom behind opting for arbitration would be frustrated.^[8]

Abhinav Shrivastava is Co-Founding Partner of GSL Chambers and an Advocate on Record of Supreme Court of India.

Nirmal Prasad is an Associate with GSL Chambers. Views are personal.