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04 May 2020

Concept Note on Force Majeure Event in light of the COVID -19 Pandemic

The term ‘Force majeure’ literally translates from French as ‘superior force’. It’s a common clause in legal contracts that allows either party to limit their liability in the face of some unforeseeable, extraordinary event. In English, the term is often used in line with its literal French meaning, but it has other uses as well, including one that has roots in a principle of French law. It is related to the concept of an act of God, an event for which no party can be held accountable.

The novel Corona Virus (COVID-19) pandemic prevalent across the globe has created considerable havoc and India is not an exception. COVID-19 is highly contagious in nature and it is transmitting from human to human like wildfire impacting millions of lives adversely.

 

Considering the gravity of this adverse situation and to bring it under control, the Central Government has imposed a nation-wide Lock-Down, wherein the mobility of all (Citizens, Resident Indians, Non-Resident Indians, Foreigners, immigrants and so on) are restricted. Under this scenario, the questions before all landlords and tenants are whether this untoward and unprecedented situation would qualify as an irresistible force and fall under the category of a Force Majeure event? If so, what remedies do the landlords and tenants have in such an event?

There are a plethora of instances where epidemic/pandemic situations have been adjudged as Force Majeure events such as the Ebola epidemic in West Africa where it was declared a Force Majeure event for the purpose of continuing business operations and performing obligations of the concluded terms of contracts. Similarly, Courts in China interpreted the outbreak of Severe Acute Respiratory Syndrome (SARS) as a Force Majeure event where contracts could not be performed owing to the epidemic. Compared to them, the Covid-19 pandemic is much adverse in its impact as well as severity and has resulted in a global crisis. Hence, COVID-19 would most likely be listed as a Force Majeure event in India on demonstrating that the performance of a contract had become impossible during the existence of the pandemic and the consequent lockdown.

 

Contracts that have a Force Majeure clause that mentions an epidemic/pandemic situation would be governed by the terms therein i.e. the parties may seek amnesty under the Force Majeure clause. Similarly, in the event, a contract has the requisite Force Majeure clause embodied in it but explicitly excludes a situation like COVID -19 shall be dealt in accordance with the contract i.e. the Parties shall be disentitled from invoking COVID -19 as a Force Majeure event and seeking any reprieve out of it. However, in the event a contract does not contain a Force Majeure provision, the affected party may nevertheless be able to rely on the prevailing law. In this regard, it is crucial that we shall refer to Section 56 of the Indian Contract Act, 1872 and Section 108 (B) (e) of the Transfer of Property Act, 188.

The relevant portions of the aforesaid provisions are reproduced hereunder for ready reference: 

 

Section 56 of the Indian Contract Act 1872:

“56. Agreement to do impossible act.—An agreement to do an act impossible in itself is void. —An agreement to do an act impossible in itself is void.” Contract to do act afterwards becoming impossible or unlawful.—A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.1 —A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.2″ Compensation for loss through non-performance of act known to be impossible or unlawful.—Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise. —Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise.”

This section incorporates the Doctrine of Frustration which deals with those cases where the performance of a contract has been frustrated i.e. the performance of obligations has become impossible due to any unavoidable reason or condition. The doctrine will apply where an unforeseen event either renders a contract impossible to perform or makes the outcome of the performance radically different from what was envisaged by the parties at the time the contract was formed. Although the frustration principle is subject to a very high threshold, it may be possible to envisage a range of factual circumstances in which COVID-19 and the ensuing governmental response measures could be construed as a frustrating event.

However, Section 56 does not ideate a situation wherein a Lessee is restrained to use a Demised Premise temporarily due to the occurrence of a Force Majeure event. The treatment of such a lease agreement (temporary frustration of the contract) will depend on the Court’s interpretation. It is therefore upon the Court/s to adopt a liberal interpretation of Section 56 to include the situation of temporary shutdown due to the current pandemic. Moreover, it would be in the benefit of the majority if the Courts in India liberally interpret the Force Majeure clause as well as liberally apply Section 56.

One needs to understand that the COVID 19 situation being universal in nature, has made both the Lessor and the Lessee victims of the situation and led to cascading adverse impact affecting both the parties in the performance of their respective agreed obligations. Like the Lessee, the Lessor has the right to invoke Section 56 of the Contract for non-performance on his part due to frustration of the contract in the absence of a contract stating otherwise.

Besides the doctrine of frustration, one may also invoke Section 108 (B) (e) of the TP Act to a limited extent to cover COVID -19 situation as explained below.

 

Section 108 (B) (e) of the Transfer of Property Act, 1881:

“108. Rights and liabilities of lessor and lessee.—In the absence of a contract or local usage to the contrary, the lessor and the lessee of immoveable property, as against one another, respectively, possess the rights and are subject to the liabilities mentioned in the rules next following, or such of them as are applicable to the property leased:—

(B) Rights and Liabilities of the Lessee

(e) if by fire, tempest or flood, or violence of an army or of a mob, or other irresistible force, any material part of the property be wholly destroyed or rendered substantially and permanently unfit for the purposes for which it was let, the lease shall, at the option of the lessee, be void: Provided that, if the injury be occasioned by the wrongful act or default of the lessee, he shall not be entitled to avail himself of the benefit of this provision;”

Upon careful reading and strict interpretation of the foregoing provision, one will notice that Section 108 provides “other irresistible force” as one of the events qualifying as a Force Majeure event. If the Demised Premises becomes unfit to occupy (any material part of the Demised Premises be wholly destroyed or rendered substantially and permanently unfit for the purposes for which it was let) due to the said event, the Lessee at his option can terminate the Lease Agreement without being liable to pay any damages/penalties.

Therefore, for application of the foregoing provision, a liberal interpretation of ‘other irresistible force’ would be required to cover the COVID-19 situation. Moreover, the application of the provision would depend on the demonstration of the effect the pandemic has on the property i.e. only if a situation arises consequent to the pandemic and the lockdown which destroys the Demised Property or renders it unfit for the purpose it was let, the provision would apply. Further, whether a situation where the Lessee is restrained to use the Demised Premises temporarily due to the pandemic and the treatment of such a lease agreement would entirely depend on the Court’s interpretation.

One needs to appreciate the fact that a contract concluded based on mutual agreements shall supersede the application of Section 108 of the TP Act. Accordingly, any contracts having the requisite Force Majeure clause embodied in it shall be dealt in terms of the said contract. If the Contract provides for Force Majeure clause but does not specifically provide for COVID -19 situation, one has to rely on a liberal interpretation of the Force Majeure clause and examine whether one can conclude that the COVID-19 situation is implied in the Force Majeure clause provided in the contract. However, the impact of the Force Majeure event cannot be generalized and shall vary depending on the nature of the transaction and its impact on the same. The High Court of Bombay in its decision dated 8 April 2020, in the matter of Standard Retail Private Ltd Vs GS Corp & Others, dealt with the COVID-19 claim and held that Force Majeure cannot be invoked by the purchaser in making payments when the seller has performed its part of the contract.

One needs to bear in mind that the COVID -19 situation is absolutely unprecedented and unenforceable. We all need to accept the hard reality that the World is not the same as it was in December 2019. We are living in an arbitrarily changed scenario and we need to adapt accordingly to this new world order.


Image Credits: Anastasiia Chepinska

https://unsplash.com/photos/OBmBHmrc3pw

 

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