Use of clause by GAIL, IOC expected to end in disputes

The decision by several consumer companies to invoke the force majeure clause, in the wake of the Covid-19 crisis, is likely to end in disputes, according to experts. A majority of the players are of the opinion that a final decision on this should come from the government.

Consumers had opted for force majeure notices to gas marketers like GAIL, Indian Oil (IOC) and Gujarat State Petroleum Corporation (GSPC), after their commercial operations and factories were shut following the lockdown. After this, GAIL, too, had issued similar notices to its suppliers like ONGC, Oil India and Petronet.

IOC, too, has declared force majeure on crude purchases from four of its biggest suppliers — Saudi Arabia, Iraq, UAE and Kuwait — as refinery run rates have been cut down in view of the plummeting fuel demand. A senior executive from an oil firm said, “Whether Covid-19 will come under force majeure clause is disputable. It is not any act of god or unnatural circumstance. Consumers should have anticipated this commercial impact in advance.”

Force majeure is a part of contracts in India, which excuses companies from paying penalties for non-performance, in case of an unforeseen event outside their control.

“This will definitely open up a legal minefield. A lot will depend on how a contract has defined force majeure. If invoked by one firm, it will have a ripple effect across the sector,” said Debasish Mishra, partner at Deloitte Touche Tohmatsu.

Following the lockdown, there was a huge drop in demand. According to reports, gas demand has dropped by 15-20 per cent due to the closure factories, excluding fertiliser, power and refineries. “The key question will be whether businesses or persons are directly impacted by the pandemic. Not all indirect effects of the pandemic will be treated as force majeure events,” said L Badri Narayanan, partner, Lakshmikumaran & Sridharan Attorneys.

An ONGC official said that the company has already cut gas production and some wells are shut. GAIL, too, is expected to see a 15-20 million standard cubic meter per day decline in marketing volumes, said an Emkay report.

A senior GAIL official said, “If the factories are shut down, how will we procure from ONGC, Petronet or Gazprom? If a product is not consumed, we will be facing storage difficulty too.”

This comes at a time when firms were facing the heat of lower domestic gas prices. The price of domestic natural gas was cut by 26 per cent on Wednesday for six months. “For ONGC only, the impact will be ~5,000 crore while the impact on industry would be close to ~8,000 crore,” said an ONGC source.