By Rudra Law
With the onset of COVID-19 pandemic, businesses across the globe have reduced or shut down operations caused due to Government enforced lockdowns or reduced labour and demand. Consequently the need to cut losses has gained importance, majorly out of the rental arrears. This has led to two classic outcomes; need to terminate lease agreements, by tenants/ lessees based on the principles of ‘Force Majeure’ or ‘Doctrine of Frustration’; and recovery of arrears by landlords/ lessors.
The principle of frustration is an aspect of the discharge of a contract. Under the statute, the doctrine which Courts adopt in India is that of intervening impossibility or illegality as laid down under Section 56 of the Act. Per-contra, if the contract contains implied or expressly a term according to which it would stand discharged on the happening of certain contingencies, the dissolution of the contract would take place under the terms of the contract itself and such cases would be outside the purview of Section 56 of the Contract Act 1872. These would be dealt with under Section 32 of the Act and are termed as a “Force Majeure” clause.
WHY ‘FORCE MAJEURE’ AND ‘DOCTRINE OF FRUSTRATION’ ARE THE MOST RELEVANT, NOW THAN EVER?
The purpose of a force majeure clause is to relieve a party of liability for inability to discharge its contractual obligations due to circumstances beyond that party’s control, or beyond its reasonable control. The need for such clauses arises because courts generally treat contractual obligations as absolute, in the absence of express provisions to the contrary.
In the absence of a force majeure clause, as per the Indian Law exemplar, a party may avail the common law doctrine of frustration to relieve itself of contractual liability, where it is unable to perform the same due to circumstances beyond its control.
The Ministry of Finance ("MoF"), in its office memorandum dated February 19, 2020, interpreted the 'force majeure clause' in the Manual for Procurement of Goods ("Manual") issued by the MoF and observed that the term "natural calamity" in para 9.7.7 of the Manual can be interpreted to include the disruption of the supply chain due to the spread of Coronavirus.
Moreover, In a recent case decided on May 29, 2020; 'M/s. Halliburton Offshore Services Inc v Vedanta Ltd & Anr', High Court of Delhi inter alia, held that "The question as to whether COVID-19 would justify non-performance or breach of a contract has to be examined on the facts and circumstances of each case." The High Court further observed that "The outbreak of a pandemic cannot be used as an excuse for non-performance of a contract for which the deadlines were much before the outbreak itself.”
In agreements containing a force majeure clause, a court would examine the same in light of Section 32 of the Contract Act. A force majeure clause could be differently worded in different contracts as there is no standard draft, application or interpretation. The fundamental principle would be that if the contract contains a clause providing for some kind of waiver or suspension of the rent, only then could the tenant claim the same.
The two-judge bench of Supreme Court in 2017, in the case of Energy Watchdog v. CERC & Ors. set aside the APTEL and CERC rulings and observed that the ambit of force majeure cannot be stretched to a probable difficulty or loss caused to the entity obligated to perform the contract. From the point of view of the Electricity Act, the Court also made it clear that prices once bid for cannot be escalated or subsequently changed as the stage for determining the prices is only during the process of bidding and allocation of tenders.
In Satyabrata Ghose v. Mugneeram Bangur & Co., during unstable times of war, the parties had agreed on the development of a land, which was later requisitioned by the government. The defendant stated that this made the contract impossible to perform, in a suit for specific performance by the plaintiff. The Court held that the requisitioning made it difficult but not impossible to perform. It stated "'The Courts have no general power to absolve a party from the performance of its part of the contract merely because its performance has become onerous on account of an unforeseen turn of events."
When a contract between parties abstains for a Force Majeure clause, party may seek to relieve itself from liability for inability to discharge its contractual obligations under Section 56 of the Contract Act, 1872. However, it may be noted that it is a settled law that Section 56 of the Contract Act does not apply to leases. In Raja Dhruv Dev Chand v. Raja Harmohinder Singh, the Hon'ble Apex Court held that “.... the completed transfers are outside the scope of Section 56 of the Contract Act. There is a clear distinction between a completed conveyance and an executory contract, and events which discharge a contract, do not invalidate a concluded transfer. By its express terms, Section 56 of the Contract Act does not apply to cases in which there is a completed transfer as in the case of concluded lease.”
DOCTRINE OF ‘SUSPENSION OF RENT’
The doctrine of suspension of rent was first discussed in the Privy Council case of Katyayani Debi v. Udoy Kumar Das . In this case, the Privy Council held that the doctrine was applicable when the tenant was not put in possession of part of the premises leased. The doctrine was later discussed by the High Court of Calcutta in Nilkantha Pati v. Kshitish Chandra Satpati and Others . In this case, the Calcutta High Court held that where the landlord’s acts are tortuous in nature, it is for the Court to consider whether the rule of equity for total suspension of rent should or should not be applied.
There have been various cases thereafter, where the courts have applied the doctrine, but the circumstances of its applicability have largely been restricted to scenarios when the landlord/lessor had voluntarily interfered with the possession of the tenant and where due process of law has not been followed.
In the case of Alopi Parshad & Sons Ltd. v. Union of India, court observed that payment of lease rental is not contingent upon the health of the business operating from the leased premises but is purely for the exclusive use of the leased premises. Thus, it cannot be contended that since the lessee is not able to operate its business from the leased premises thereby not generating revenue therefore, it is not liable to pay the lease rental. Such a contention would not stand the scrutiny of law inasmuch as it is a settled law that commercial hardship/onerous condition is no ground not to perform the obligations under any contract.
In context to a contract of a profit sharing arrangement between parties or that of monthly payment on the basis of sales turnover, the High Court in the case of Ramanand & Ors. v. Dr. Girish Soni & Anr held the tenant/lessee may be entitled to seek waiver/ suspension, strictly in terms of the clause. The High Court took the view that in such cases, the entitlement of the lessor is not governed by any overriding force majeure events but by the consequence of the force majeure event, being that there were no sales or profits.
In the case of MEP infrastructure Developers Ltd. v SDMC & Ors., while the High Court of Delhi granted relief on account of existence of force majeure condition relying on the Circular (dated 19.02.2020 ) issued by the Ministry of Road Transport Highways (MORTH) which notified that the COVID-19 pandemic was a force majeure occurrence, earlier, In M/s Polytech Trade Foundation Vs. Union of India & Ors., the Court rejected the Petitioner's reliance on advisories issued by Government and held that,"..Thus, it is very clear from the above circulars that these are in the form of advisories and are not directory in nature and do not mandate respondent no.3 to 6 not to charge ground rent, penal charges/ demurrage etc..."
Thus, what emerges is that Government circulars/guidelines/advisories recognizing the COVID 19 pandemic would apply where the relief sought is against a government entity but cannot be pressed into service against a private entity to compel it to give up its rights arising from a contractual arrangement.
In 'M/s. Halliburton Offshore Services Inc v Vedanta Ltd & Anr', the case pertained to restrain on invocation of bank guarantees. While granting interim relief on the invocation of bank guarantees, the Delhi High Court observed that the country wide lockdown was prima facie, in the nature of force majeure. Therefore, it could be said that special equities do exist, as would justify grant of the prayer, to injunct invocation of the bank guarantees.
The general rule of thumb that emerges is that if there is prior or continuing breach by a party, then the doctrine of force majeure cannot be pressed into service to justify the same and the party would be bound by the consequences of the said breach. On the other hand, if a party can establish from record that it had been steadfast in its performance under the contract and it is only the intervening force majeure event which has made the performance of the same virtually impossible, then arguably such a party would be likely to succeed in its invocation and reliance on the force majeure clause.
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