Layoffs, Contracts and Lawyers: Connecting the Dots

In recent weeks, there has been a lot of news about startups laying off employees. Edtech companies like UnAcademy and Vedantu, used car sales companies like Cars 24 and E-commerce players like Meesho have all reportedly laid off people. As many as 8000 people have been laid off in the first four months of 2022. The irony is that this is happening even as the startup ecosystem raised more than US$10 Billion in capital during the Jan-March 2022 quarter. IVCA-EY data indicates that in April 2022, the capital raised was around US$1.6 Billion- less than half the sum in the corresponding period in 2021. Last year saw a record number of Indian unicorns emerge.

It is not that there is a sudden scarcity of risk capital. What is happening is that VC funds and other investors are taking a long hard look at business models and valuations. Cash burn rates and unit economics, which were always important elements of valuation, have become front and centre again, after a prolonged period of time that saw some investors take their eyes off the ball as they frenetically looked for ventures to invest in. This long bull run for startups also encouraged many executives to throw their hats into the ring; they relied on their personal expertise and experience to attract investors.

There are also external factors whose unfortunate confluence in the last couple of months has contributed to this situation and exacerbated the stressors. The Ukraine invasion has undoubtedly impacted energy prices; the lockdown of large Chinese cities including Shanghai and Beijing has further disrupted global supply chains that were already affected due to the pandemic. These have thrown unit economics out of gear. Inflation rates around the world have soared- in some countries, the prevailing inflation is at the highest level in over a decade or even longer. In response, central banks around the world have raised interest rates; in India too, the RBI raised interest rates more than anticipated and ahead of when such action was expected. Further increases in interest rates are expected, as central banks seek to suck out the money supply to cool inflation. This means that in the short term, growth expectations will need to be moderated. This affects valuations (something that is also visible in how stock prices of listed companies are fluctuating).

Investors and company managements are therefore looking for ways to cut costs. Rationalizing the workforce is one way to achieve this goal. During a euphoric phase, businesses tend to hire more than they need, often at higher compensation levels than are sustainable. Many companies that have laid off their people continue to advertise extensively on national television. Logically, cutting down on TVCs and using lower-cost digital marketing will be another cost-cutting lever. As the market tightens, business plans will need to be revised. Growth will moderate, and high valuations will get harder to defend. The lack of clarity surrounding when various events will be resolved adds to the uncertainty around when an economic rebound will occur and what the new operating environment will look like. Indeed, Y Combinator, the highly successful Silicon Valley accelerator has advised founders of the companies in its portfolio to “plan for the worst” and focus all efforts in the next month on extending their runway. They are advising ventures to ensure survival even if fresh funds cannot be raised for 24 months.

Sometimes, there are contractual constraints on implementing cost-cutting actions. While some of these clauses may be legitimate and the result of deliberate negotiations between the parties, I have also seen “cut-paste” clauses in contracts; these are taken directly from other contracts downloaded from the internet or obtained in other ways. Many entrepreneurs succumb to taking this shortcut because it saves them the lawyer’s fees for drafting customized contracts. While some money can be saved, doing so creates risk because the business context in which a contract is drafted varies- and blindly lifting clauses can render the entire contract meaningless, hard to implement or leave entities open to expensive litigation.

Founders and leadership teams need to make better-informed decisions around every facet of their business strategy and operations. This includes the kind of capital to be raised, the timing, quantum and terms. Depending on the nature of business, expensive office space may not be needed; the savings on rentals/lease payments can be deployed elsewhere. Hiring frenzies must be avoided just because someone good is available. If the candidate is indeed likely to add value to the venture, maybe the compensation can be structured differently, so that risk of losing a good resource is reduced. Lawyers and Business Advisors who understand business- especially in the world of startups- can guide entrepreneurs so that they don’t pay a high price later, since a stitch in time saves nine!

Image Credits: Photo by aymane jdidi from Pixabay 

Founders and leadership teams need to make better-informed decisions around every facet of their business strategy and operations. This includes the kind of capital to be raised, the timing, quantum and terms. Depending on the nature of business, expensive office space may not be needed; the savings on rentals/lease payments can be deployed elsewhere. Hiring frenzies must be avoided just because someone good is available. If the candidate is indeed likely to add value to the venture, maybe the compensation can be structured differently, so that risk of losing a good resource is reduced. 

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Force Majeure: Evolution of Jurisprudence in India Post COVID-19

The extraordinary outbreak of the Covid–19 pandemic has had staggering effects on the economy, health and commerce of about 110 nations across the globe. Even after almost a year, the situation is far from normal. In addition to the massive pressure on the health and medical segments, several other unprecedented factors played crucial part in the whole system, economy, commerce, or business. Given the present situation of disruption of supply chain, disruption of assured manpower, uncertainty of future planning, inadequacy of security as well as the forced restraints in free commercial activities, numerous commercial contracts have either been interrupted, delayed or cancelled. The present situation has thrown light on several important questions with respect to the jurisprudence of the force majeure clause in various commercial contracts or frustration of contracts.  

 

Force Majeure Typically in Law

 

The term force majeure which seems to have been borrowed from the Code Napoleon had received interpretation in several decisions of the English Courts in earlier years. In Matsoukis v. Priestman and Co.[i] . Justice Bailhache opined that force majeure would include strikes and break-down of machinery but not bad weather, or football matches, or a funeral. In Lebeeaupin v. Crispin[ii] Justice McCardie had observed: “A force majeure clause should be construed in each case with a close attention to the words which precede or follow it, and with due regard to the nature and general terms of the contract. The effect of the clause may vary with each instrument.”

In the Indian context, the Supreme Court has considered, interpreted and decided the events of force majeure in various judicial precedents, inter-alia from Satyabrata Ghosh vs Mugneeram Bangur[iii] to Energy watchdog vs CERC[iv] The Court has maintained a strict yet flexible approach towards the concept of force majeure and frustration of contracts. In the case of Alopi Prashad and Sons vs. UOI[v] the Supreme court had observed that commercial hardship shall not be a just and reasonable ground to support frustration of contract and excuse performance.

As we find in the commercial world, contracting parties have generally been incorporating the force majeure clause in their contracts since ages, to absolve themselves of any liability arising out of events beyond their reasonable control. However, in this discussion we would focus the force majeure arising out of Covid-19 pandemic.

 

COVID 19 and Application of Force Majeure

 

There was a difference of opinions and questions were raised over the fact that some contracts though having a force majeure clause, do not stress on the word ‘pandemic’, ‘epidemic’, ‘disease’ etc. , while majority of the contracting parties rely on the general phrase ‘any other unforeseeable event, not under the control of either of the parties.’

 
Executive Interpretation:
 

Alike the private sector, the Government contracts and the Public Sector transactions also started suffering on account of the pandemic and declaration of lockdown throughout the country. To address the situation fairly, the Ministry of Home Affairs came out with Notification No. F. 18/4/2020 PPD dated 19-02-2020 with respect to Manual for Procurement of Goods, 2017 declaring that the interruptions in supply chain due to Covid 19 from China or any other country shall be covered under the ambit of force majeure, and that force majeure shall be invoked whenever considered appropriate following the due process of law.

While the power of the Ministry to bring certain events within the ambit of force majeure under clause 9.7.7 of the Manual for Procurement of Goods, 2017 by a simple notification, may be a different issue, but as it appears, by this notification the Corona Pandemic was brought within the meaning of force majeure as defined in the Manual for Procurement of Goods, 2017 and tacitly, this event certainly becomes applicable in respect of all government and/or public sector contracts irrespective of application of the Manual for Procurement of Goods, 2017.  It may be noted that this Memorandum of 19th February 2020 was issued prior to Covid-19 affecting operations in India, recognizing the difficulty faced by the contracting parties regarding import of materials from other countries which were impacted by the pandemic.

Similarly, on account of various representations and submissions made by various Renewable Energy (RE) Developers and RE Associations, and considering the prevailing situation, the Ministry of New and Renewable Energy vide Office Memorandum No. 283/18/2020-GRID SOLAR dated March 20, 2020 declared Covid-19 as a force majeure event. The Ministry vide the said order granted time extensions in scheduled commissioning date of RE projects, in light of disruption of supply chain due to the pandemic.

The Ministry of Roads Transport and Highways also in its Circular dated 18.05.2020 inter-alia classified the pandemic as a force majeure event. In addition, the Ministry of Home Affairs by its Order no. 40-3/2020(D) dated 24 March 2020 expressed that the country was threatened with the spread of Covid 19 virus and therefore has considered to take effective measures to prevent its spread across the country and therefore in exercise of powers under section 10(2)(I) of the Disasters Management Act 2005 issued various guidelines for immediate implementation. Subsequently, by Office Memorandum dated 13 May 2020 the Ministry of Finance, Department of Expenditure referred to its earlier memorandum dated 19 February 2020 and also referred to the Manual of Procurement and recognized inter-alia that in view of the prevailing restrictions, it may not be possible for the parties to the contract to fulfill contractual obligations. Therefore, after fulfilling due procedure and wherever applicable, parties to the contract could invoke force majeure clause for all construction / works contracts, goods and services contracts, and PPP contracts with Government Agencies up to a certain period and subject to certain conditions. Therefore, officially the Government of India recognized Covid-19 Pandemic as an event of force majeure applicable in relation to contracts with Government Agencies, in effect resulting inclusion of Public Sector Undertakings also.

While the specific acceptance of force majeure in relation to Government sector contracts may not have any binding effect on the contracts outside the scope of the explicit instances or in relation to purely private contracts between two private parties, they probably offered an explanatory value to bring Covid 19 and the forced restraints imposed on account of lockdowns, within the ambit of force majeure.  

 
Judicial Interpretation:
 

In the Indian judicial scenario the court would rely on the terms of force majeure clause in the contracts or on principles of frustration under section 56 of the Contract Act. This means, unless there is compelling evidence for non-performance of contract the courts do not favor parties resorting to frustration or termination of contract. On account of the enormous devastative effects the Pandemic created on the commercial and economic environment in the country, different Courts had to come forward and grant relief to different contracting parties who were severely affected by the Pandemic.

The Delhi High Court considered the matter in June 2020 in the case of MEP Infrastructure Developers Ltd vs. South Delhi Municipal Corporation and Ors[vi]. The court essentially relied on the Ministry of Roads Transport and Highways (MORTH) circular and observed that:

“27(i) The respondent Corporation itself referred to Circular dated 19.02.2020 which notified that the COVID-19 pandemic was a force majeure occurrence. In effect, the force majeure clause under the agreement immediately becomes applicable and the notice for the same would not be necessary. That being the position, a strict timeline under the agreement would be put in abeyance as the ground realities had substantially altered and performance of the contract would not be feasible till restoration of the pre-force majeure conditions.” 

The court also expounded on the continuous nature of the force majeure event and held that the subsequent lockdown relaxations given by the central government and the state government shall not amount to abatement of the force majeure event, at least in respect to major contracts such as road construction projects. The court also identified the distinct effects of the lockdown, independent of the effects of the pandemic and its implications on various contracts which many be affected by the force majeure conditions.  

In the case of Standard Retail vs G.S Global Corp Pvt. Ltd[vii] steel importers had approached the Bombay High Court seeking restraint on encashment of letters of credit provided to Korean exporters in view of the COVID-19 pandemic and the lockdown declared by the Central/State Government citing that the contracts between the parties were unenforceable on account of frustration, impossibility, and impracticability. The Bombay High court by its order dated 8 April 2020 rejected the plea inter-alia on the grounds: 

  1. The Letters of Credit are an independent transaction with the Bank and the Bank is not concerned with underlying disputes between the buyers and the sellers.
  2. The Force Majeure clause in the present contracts is applicable only to one respondent and cannot come to the aid of the Petitioners.
  3. The contract terms are on Cost and Freight basis (CFR) and the respondent had complied with its obligations and performed its part of the contracts and the goods had already been shipped from South Korea. The fact that the Petitioners would not be able to perform its obligations so far as its own purchasers are concerned and/or it would suffer damages, is not a factor which can be considered and held against the Respondent.

The court also observed that:  

“The Notifications/Advisories relied upon by the respondent suggested that the distribution of steel has been declared as an essential service. There are no restrictions on its movement and all ports and port related activities including the movement of vehicles and manpower, operations of Container Freight Station and warehouses and offices of Custom Houses Agents have also been declared as essential services. The Notification of the Director General of Shipping, Mumbai, states that there would be no container detention charges on import and export shipments during the lockdown period.

In any event, the lockdown would be for a limited period and the lockdown cannot come to the rescue of the Petitioners so as to resile from its contractual obligations with the Respondent No. 1 of making payments”.

Therefore, even if the event is a force majeure, contracts may not be avoided if the event does not affect performance of the entire contract or affect every aspects of any contract. The event has to be specific to the failure.

In the Halliburton case[viii] , decided on May 29, 2020, the Delhi High court was of an unequivocal opinion that:

“62. 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. Every breach or non-performance cannot be justified or excused merely on the invocation of COVID-19 as a Force Majeure condition. The Court would have to assess the conduct of the parties prior to the outbreak, the deadlines that were imposed in the contract, the steps that were to be taken, the various compliances that were required to be made and only then assess as to whether, genuinely, a party was prevented or is able to justify its non- performance due to the epidemic/pandemic”.

Further, while discussing the scope of the force majeure clause in contracts it was observed by the court that:

“Para 63. It is the settled position in law that a Force Majeure clause is to be interpreted narrowly and not broadly. Parties ought to be compelled to adhere to contractual terms and conditions and excusing non-performance would be only in exceptional situations. As observed in Energy Watchdog it is not in the domain of Courts to absolve parties from performing their part of the contract. It is also not the duty of Courts to provide a shelter for justifying non- performance. There has to be a ‘real reason’ and a ‘real justification’ which the Court would consider in order to invoke a Force Majeure clause”.

The Madras High Court in the case of Tuticorin Stevedores’ Association vs The Government of India[ix], dated 14 September 2020, observed that the question as to whether on account of the pandemic outbreak of Covid-19, the parties can invoke the principle of force majeure need not detain us. The calamitous impact and disruption caused by Covid-19 on the economic front has been recognized by the Government itself.

In Confederation for Concessionaire Welfare & Ors. vs Airports Authority of India & Anr[x] the Hon’ble Delhi High Court observed on 17 February 2021 inter-alia that the court has perused the clauses relating to Force Majeure. There can be no doubt that the pandemic is a force majeure event. Since the Petitioners wish to terminate/exit from their respective agreements, while directing completion of pleadings and while the issues are under examination by this Court, there is a need to reduce the risk to both parties as simply postponing the exit by the Petitioners would also make it impossible for the AAI to re-allot the spaces to willing concessionaires and the outstanding against the Petitioners would continue to mount. Accordingly, as an interim measure the Hon’ble Court directed certain processes to be followed.

In another case of Ramanand vs. Dr. Girish Soni RC.[xi], an application came under consideration of the Delhi High Court which raised various issues relating to suspension of payment of rent by tenants owing to the COVID-19 lockdown crisis and the legal questions surrounding the same. By order dated 21-5-2020 the Delhi High court while determining whether lease agreements are covered under the ambit of section 32 and section 56 of the Act and even though it was held that suspension of rent on the grounds of force majeure is not permissible under the circumstances, the court allowed relaxation in the schedule of payment of the outstanding rent owing to the lockdown.

The Hon’ble Supreme Court in the case of Parvasi Legal Cell and Ors. Vs Union of India and Ors., observed that the pandemic was an ‘unusual’ situation, that had impacted the economy globally. This case revolved around the liability of the airlines to compensate passengers who faced cancellation of flights due to government-imposed lockdowns and restrictions on inter-state and international travels. The court relied on the office memorandum issued by the Ministry of Civil Aviation dated 16th April 2020 to dispose of the petition.

In the case of Transcon Iconia Pvt. Ltd v ICICI Bank[xii], the Bombay High Court while determining whether moratorium period would be excluded for NPA classification observed inter alia as under:

‘38… the period of the moratorium during which there is a lockdown will not be reckoned by ICICI Bank for the purposes of computation of the 90-day NPA declaration period. As currently advised, therefore, the period of 1st March 2020 until 31st May 2020 during which there is a lockdown will stand excluded from the 90-day NPA declaration computation until — and this is the condition — the lockdown is lifted’.

Yet, in another judgment passed in R. Narayan v. State of Tamil Nadu & Ors.[xiii] the Madras High Court directed the Municipal Corporation to waive the license fee for running a shop at a bus stand, and observed that:

“…this Court would be justified in treating the “lock down” as a force majeure event which will relieve the licensee from performing his obligation to the corresponding extent.” The Court also observed that … “The respondents (The Government of Tamil Nadu & Ors.) themselves have chosen to treat the lock down restrictions as a force majeure event. But they have relieved the licensees from the obligation to pay the fees only for two months. The reason for granting waiver for the months of April and May would equally hold good for the entire “total lockdown” period.”

Therefore, as it appears, most of the High Courts relied on the government orders that classified pandemic as force majeure, although the relief granted in each case has been subjected to restraint based on the accompanying facts and circumstances. The common observation however remained that the Covid-19 pandemic is a force majeure event.

 

Key Takeaways

 

Hence, it can be summarized that, commercial hardship shall not be a just and reasonable ground to support frustration of contract and excuse performance. The Courts have no general inclination 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. Parties are at an obligation to complete their part of the contract against all odds, within a reasonable and practical limit. However, where the contract itself either impliedly or expressly contains a term according to which performance would stand discharged under certain circumstances, the dissolution of the contract would take place under the terms of the contract itself and such cases would be dealt with under Section 32 of the Act. If, however, frustration is to take place de hors the contract, it will be governed by Section 56.

The following preliminary conditions are emerging to be sine quo non to invoke covid-19 as a valid defense for non-performance:

  1. The contract is rendered impossible to perform: To establish pandemic as a force majeure occurrence de hors the contract the parties must demonstrate how the pandemic has disturbed the fundamental basis on which the obligations and agreements of the parties rested [Naihati Jute Mills Ltd. Vs Khayaliram Jagannath[xiv]]. This principle was also adequately elaborated upon by the Bombay High Court in Standard Retail vs G.S Global Corp Pvt. Ltd. A mere invocation of the force majeure clause in light of the pandemic does not absolve the parties from discharging their contractual obligations. A prima facie case has to be built justifying the reason for inability and seeking such an exemption.
  1. Prior conduct of the parties: While pleading the defense of force majeure, it is highly pertinent for the concerned party to ensure that, prior to the outbreak of the pandemic, the party was discharging its functions in a bona fide manner within the stipulated conditions of the contract. Additionally, as enumerated in the Halliburton case by the Delhi High Court, the concerned party should have demonstrated a bona fide attempt at undertaking all reasonable measures to execute its obligations in light of the situation and was genuinely prevented to act upon the same due to the collateral effects of the pandemic.
  1. Collection of documents capable of corroborating the claim of force majeure: It is crucial for the party invoking the force majeure clause to corroborate their claims with valid documents applicable to the specific instance, given the unusual and unprecedented situation. In the present scenario, these documents can include the abovementioned government circulars and guidelines, local medical reports, news reports, announcements etc. It needs to be kept in mind that generic documents howsoever crucial they may be, might not be enough in any specific case. While citing such documents, the affected party also has a duty to carry out a due diligence to ensure such exemptions and relaxations are strictly applicable to their case as observed in Standard Retail vs G.S Global Corp Pvt. Ltd.

 

No Straitjacket Formula                     

 

As can be summarized, different Courts in India have upheld the defense of frustration of contract and the defense of force majeure sparingly in every case. Even though the Covid 19 pandemic and its consequent lockdown can be generally covered under the ambit of force majeure, but there can’t be any straitjacket formula and its invocation strictly and solely shall depend upon the facts of each case, previous conduct of the parties and the prevailing circumstances in the specific scenario. If there are alternate modes of performing contractual obligations, the liable party shall not have the luxury to hide behind the comfort of doctrine of frustration or the doctrine of force majeure and absolve themselves of their duties. Accordingly, it would need a very careful examination of the whole situation before any ground is taken for avoidance of obligations under a concluded contract.

References:

[i] (1915) 1 K.B. 681

[ii] (1920) 2 K.B. 714

[iii] [1954 SCR 310]

[iv] [(2017)14 SCC 18].

[v] [1960 (2) SCR 793]

[vi] W.P.(C) 2241/2020

[vii] Commercial Arbitration Petition (l) no. 404 of 2020

[viii] Halliburton Offshore Services Inc. v. Vedanta Ltd. O.M.P (I) (COMM.) No. 88/2020 & I.As. 3696-3697/2020

[ix] WP(MD)No.6818 of 2020 and WMP(MD)No.6217 of 2020

[x] W.P.(C) 2204/2021 & CM APPL.6421-22/202

[xi] REV447/2017

[xii] 2020 SCC OnLine Bom 626

[xiii] Case No.19596 of 2020 and W.M.P.(MD)Nos.16318 & 16320 of 2020

[xiv] AIR 1968 SC 552

Image Credits: Photo by Medienstürmer on Unsplash

The Courts have no general inclination 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. Parties are at an obligation to complete their part of the contract against all odds, within a reasonable and practical limit.

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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 to the benefit of the majority of the Courts in India to 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 impacts affecting both 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 immovable 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 consequently 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 them shall be dealt with 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 on Unsplash

For the 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

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