Following hostilities involving Iran and its adversaries, maritime traffic through the Strait of Hormuz has fallen dramatically, disrupting global oil flows and LNG shipments. This has also triggered force majeure declarations across the energy sector globally, increasing crude oil prices and demonstrating how quickly geopolitical events can translate into contractual disputes.
QatarEnergy, amongst others, has declared force majeure on certain LNG cargoes, with Petronet LNG issuing corresponding notices to downstream buyers while governments and importers scramble to secure alternative supply. For lawyers, this represents a real time stress test of the contractual clauses that underpin global energy trade.
Contingent Contracts and Frustration
Under Indian law, principles governing force majeure and impossibility are codified in the Indian Contract Act, 1872 (Act). Contracts containing force majeure clauses are typically analysed within the framework of contingent contracts, which allow parties to allocate consequences of specified events. When no such clause exists or is applicable, parties often rely on Section 56 which embodies the doctrine of frustration and applies where performance becomes impossible.
Force Majeure in long term trade contracts
Most long-term LNG sale and purchase agreements contain detailed force majeure clauses specifying events that excuse performance. The Indian Supreme Court has clarified that where parties have expressly provided for force majeure events in the contract, it is a contingent contract governed by the terms rather than Section 56.
Practically, if clause includes specific wording for events such as war, blockades, navigation restrictions, or closure of ports, disruptions affecting Strait of Hormuz passage may fall within its scope.
The Doctrine of Frustration and the “Impossibility” Threshold
Where a contract does not contemplate force majeure, parties may seek to rely on Section 56. However, the threshold for frustration is deliberately high. Indian courts have consistently held that performance is not excused merely because it has become commercially burdensome.
Thus, if shipping routes remain open, but war risk insurance premia increase making LNG cargoes more expensive, the supplier would still be required to perform the contract. In contrast, when vessels cannot safely transit due to hostilities or government restrictions, the disruption may prevent performance of contract.
Price Escalation, Price Review, Hardship and other clauses
Most long-term trade and LNG contracts anticipate volatility through price escalation or review mechanisms rather than force majeure clauses. These stipulations allow price adjustments linked to oil or market benchmarks; renegotiations when market conditions diverge materially from pricing assumptions; and pass through of certain logistical costs.
In the current disruption, reviewing these clauses may be as important, if freight rates, insurance premia or transport costs rise exponentially. In fact, stipulations other than force majeure often determine how risk may be distributed in cases of supply disruption.
Change in law clauses may be triggered when sanctions, export restrictions or other regulations are imposed. Shipping Incoterms, i.e. whether the contract is structured on an FOB or delivered basis, may also determine which party bears the risk. Equally, contracts allowing rerouting cargoes to alternative markets may affect whether the loss from disruption could have been mitigated.
Volatile markets may also prompt parties to build in hardship clauses in long term contracts. Such clauses permit renegotiations when performance becomes excessively onerous. In India, such clauses make sense since courts apply Section 56 strictly and will not re-write contracts.
The “Back-to-Back” Risk
A practical challenge for Indian intermediaries is the back-to-back structure of supply arrangements. For instance, QatarEnergy, an upstream supplier, may invoke force majeure against the importer due to disruption of shipments. The importer may then seek to invoke force majeure under its downstream contracts with buyers such as GAIL.
This creates a potential contract mismatch risk. If the downstream contract contains a narrower definition of force majeure, lacks equivalent pricing, or pass through mechanisms, the intermediary may be excused upstream but remain exposed downstream. In such situations, scrutiny of the entire contractual framework becomes critical.
Practical Steps for Affected Parties
For entities facing supply disruptions, several steps are critical to preserving contractual protections. Most force majeure clauses require notice within a specified period. Parties must also examine mitigation obligations, including alternative shipping routes, substitute cargoes, or other logistical adjustments. Where alternatives are not viable, the assessment should be documented.
Where the contract identifies a particular source or terminal, disruption affecting that source may support a force majeure claim. Conversely, where the contract requires delivery of LNG without specifying origin, the buyers may argue that alternative sourcing options should have been explored.
Parties should also determine whether the price review or escalation clauses allow for adjustments to reflect logistical or other costs and ensure contractual alignment across the supply chain.
In practice, modern energy contracts rely on a combination of force majeure clauses, change in law provisions, pricing mechanisms and material adverse clauses which allocate risk to manage volatility. As this volatility increases, the question in board rooms may increasingly be whether force majeure is enough? Or is it time for hardship clauses to be standard in long term contracts?
