Antitrust Analysis of Termination and Force Majeure Clauses in Agreements

Introduction

Covid-19 has disrupted demand and supply chains across the country. Even at early stages of the nationwide lockdown in March 2020, 53% of Indian businesses faced losses with sectors such as tourism, hospitality and aviation being hit the hardest[1]. Stressed supply chains have made it difficult for parties to perform their obligations under contracts. As a result, businesses have started exercising force majeure clauses in their contracts. Force majeure clauses are contractual clauses which alter parties’ obligations and/or liabilities under a contract upon the occurrence of an extraordinary event or an event beyond the parties’ control. These clauses may have a variety of consequences and often include the right for a party to terminate the contract. In this article, we review the likely antitrust scrutiny of force majeure or termination clauses and suggest some mitigating measures to stay compliant with competition laws.

CCI’s Scrutiny of a Force Majeure or Termination Clause

As a general matter, disputes between parties are resolved based on the dispute settlement mechanism provided under the agreement. However, if an agreement is in violation of the Competition Act, 2002 (‘Act’), the Competition Commission of India (‘CCI’) will have jurisdiction to review the terms of the agreement. The CCI is empowered to initiate an inquiry on its own accord, on receipt of any information or on the basis of a reference received from the Central or State Government or a statutory authority. If the CCI finds a contravention, it can levy a penalty of up to 10% of an enterprise’s average relevant turnover for the previous 3 financial years (calculated from the date of the CCI’s decision).

Termination/ exit clauses are generally reviewed by the CCI under Section 4 of the Act which prohibits abuse of dominant position. More specifically, Section 4 prohibits dominant enterprises from imposing unfair prices or terms in their contracts. If a termination/ exit clause is viewed as the dominant entity imposing an unfair or ‘one-sided’ term on its contracting partner, the CCI has the power to impose penalties. By the same token, a force majeure clause that is unreasonably in favour of the dominant entity may be viewed as an unfair condition imposed on the other party. This type of conduct is regarded in antitrust literature as an ‘exploitative’ abuse of dominant position where consumers are harmed directly by the dominant firm. By contrast, an ‘exclusionary’ abuse affects competitors and consumers due to exclusion of competitors (for example, through loyalty rebates or tying and bundling products).

CCI’s Decisional Practice in Reviewing Force Majeure and Termination/ Exit Clauses

We set out below the key takeaways regarding the CCI’s approach to force majeure and exit clauses.

1.    Whether the drafting of a termination clause is in favour of a dominant entity?

As a first step, the CCI is likely to consider whether the drafting of the termination clause provides an undue advantage to the dominant entity. For instance, in Faridabad Industries Association[2], Adani supplied gas sourced from its upstream suppliers to downstream consumers. The termination clauses in the gas sale agreements with Adani’s upstream supplier and its consumers provided different time periods for compliance in case of a default. The CCI held that such clauses amounted to imposition of unfair conditions, in contravention of Section 4(2)(a)(i) of the Act.

Similarly, in Naveen Kataria v Jaiprakash Associates Limited[3], the CCI held that a clause making a dominant entity the sole judge on whether any event was force majeure allowed no leeway to the other party regarding an arbitrary decision made by the dominant entity and was therefore, an abuse of dominant position. By contrast, in Saurabh Tripathy v CCI[4], the Delhi High Court upheld a termination clause as being fair since it provided for termination of a contract on the failure of the other party in performing its material obligations. Further, the CCI is also likely to review the bargaining power of the parties in analyzing if a termination clause is in favour of a dominant entity[5].

2.     Whether the dominant entity is justified in exercising the termination clause?

The second issue that the CCI may consider is if the exercise of the termination clause was in good faith and necessary. In CCI v Fast Way Transmission Private Limited[6], the Supreme Court held that the termination of a broadcast agreement before its expiry without following the applicable telecom regulations amounted to an abuse of dominant position. However, since the broadcast agreement was terminated due to poor performance of the broadcaster, the illegal termination was found to be justified and no penalty was imposed.

Similarly in ONGC, the CCI observed that a ‘termination for convenience’ clause will not generally be construed as unfair or abusive unless it is used in an unfair manner, without meeting the tests of ‘good faith’ and ‘change in circumstances’. Here, the exercise of the clause in order to renegotiate the contract to bring it in line with prevailing competitive prices, was held to be an exercise in good faith. Similarly, the CCI noted that the use of termination clause was prompted by change in circumstances due to a drastic fall in crude oil prices that impacted projects in oilfield activities.

3.     Whether the exercise of the termination clause causes an effect on competition in the market?

The competition authority in the European Union i.e. the European Commission is likely to review effect on competition in the market before a finding that a termination clause amounts to an abuse of dominant position. The CCI has not considered the effect on competition in a majority of the cases it has reviewed with respect to termination clauses. However, in Tata Power Delhi Distribution Limited v NTPC Limited[7], the allegations against NTPC involved imposition of unfair conditions in power purchase agreements (‘PPA’) and not providing an exit clause to power distribution companies in the PPAs. The CCI observed that in cases of abuse of dominant position, the seminal issue is what harm is caused to the end consumer due to the behaviour of the dominant player. Applying this test, the CCI noted that the presence of a sectoral regulator in this case meant that no harm could be caused to the consumer through increased tariffs for electricity.

Conclusion

In sum, competition laws can apply if a dominant enterprise is viewed as using its position to impose unfair conditions on its contracting partners. To avoid scrutiny, dominant enterprises (or enterprises with market shares in any market) should ensure that the drafting of termination clauses with business partners do not appear skewed in their favour. Similarly, the exercise of a termination clause should be objectively justified and clearly communicated to the other party.

[1] See http://www.ficci.in/ficci-in-news-page.asp?nid=20956.
[2] Faridabad Industries Association v. Adani Gas Limited, Case 71 of 2012, order delivered on 3 July 2014.
[3] Naveen Kataria v. Jaiprakash Associates Limited, Case No. 99 of 2014, order delivered on 9 August 2019.
[4] Saurabh Tripathy v. CCI, W.P.(C) 2079/2018, order delivered on 10 October 2019.
[5] Indian National Shipowners’ Association v. Oil and Natural Gas Corporation, Case 1 of 2018, order delivered on 2 August 2019 (‘ONGC’).
[6] CCI v. Fastway Transmission Pvt. Ltd., Civil Appeal No. 7125/2014, order delivered on 24 January 2018.
[7] Tata Power Delhi Distribution Limited v. NTPC Limited, Case No. 20 of 2017, order delivered on 12 October 2017

Published In:Inter Alia Special Edition - Competition Law - June 2020 [ English
Date: June 10, 2020