The national lockdown imposed in India due to the coronavirus outbreak has paralysed the economy and had a devastating effect on lives and livelihoods across the country. In light of the crisis, a number of commercial tenants and tenant associations have been seeking complete waivers of rents due to their landlords, and many have resolved not to pay the same. The Doctrine of Frustration/force majeure/Act of God has been invoked by the tenants to justify non-payment of rent. This article shall seek to analyse the Doctrine of Frustration and explore whether such an invocation is permissible in the context of lease agreements, and what may be the consequences thereof.
The Doctrine of Frustration
The Doctrine of Frustration finds place under Section 56 of the Contract Act – which provides that a contract may become void if it becomes impossible to perform due to reasons not preventable by the parties. This “frustration” or discharge of contract occurs immediately at the time of the occurrence of the event, and does not depend upon the whims of the parties to the contract [1] . Section 56 is the statutory provision that enshrines the principles of act of God, force majeure and impossibility in Indian Law for general contracts. The key elements necessary for invoking the doctrine are (a) the occurrence of an event that could not be prevented and (b) the impossibility of performing obligations under the contract due to the occurrence of that event.
The impossibility to perform under Section 56 is not limited to physical or literal impossibility but also includes practical impossibility [2]. However, practical impossibility is not to be read to mean economic unviability or unprofitability. A mere increase in the cost of performing the contract does not frustrate the contract [3]. The rule enshrined under Section 56 of the Contract Act is a positive law, and does not need to be specifically spelt out in a contract [4]. Therefore, even if a contract does not explicitly specify the existence of a force majeure clause, the parties to the contract can still claim frustration of contract for the occurrence of an event beyond their control.
A number of experts trace the doctrine of force majeure back to Section 32 of the Contract Act that deals with the enforcement of contingent contracts. In this author’s opinion, such reliance is misplaced. The doctrine of force majeure (from civil law) is most similar to the Doctrine of Frustration under common law, and both work as an exception to the ordinary rule of absolute liability for contractual obligations. These doctrines come in effect to excuse parties from a contract on occurrence of an “unforeseeable” event. Contingent contracts on the other hand are contracts which come into effect on the occurrence of a foreseeable, yet “uncertain” future event. The mere existence of such a contingent, force majeure clause, does not automatically entitle a party to invoke it, nor does it automatically disentitle a party to seek discharge of obligation by claiming frustration under Section 56.
The determination of rights of the parties will thus depend upon the facts of the individual case and the terms of the contract therein. The Doctrine of Frustration is distinct from a force majeure clause; as most commercial lease agreements in India do not contain a force majeure clause, the scope of this article is limited to the doctrine.
Delving into the History of Frustration
Ironically, it was a case concerning rent arrears in 1647, that eventually resulted in the birth of the Doctrine of Frustration. In Paradine v. Jane (1647) [5], the UK House of Lords – when faced with a dispute concerning a landlord who was denied rent on the grounds that the Royalist forces in the English Civil War had occupied the property and rendered the lessee landless – established a rule of absolute liability for contractual debts. The Court held while deciding in favour of the landlord that, ‘when the party by his own contract creates a duty or charge upon himself, he is bound to make it good, if he may, notwithstanding any accident by inevitable necessity, because he might have provided against it by his contract.’
In order to soften this rigid rule of construction, the Queens Bench – for the very first time in Taylor v Caldwell in 1863 [6] – carved an exception, and established the doctrine of common law impossibility. When the Contract Act, 1872 came into force 9 years later, this doctrine of impossibility was given statutory force under Section 56. Thus, while the frustration of contract remains a common law exception under English Law, under Indian Law it commands statutory force.
Frustration and Commercial Lease Agreements
The application of the Doctrine of Frustration to lease agreements was discussed as part of the celebrated Cricklewood decision [7], where the House of Lords decided that a 99-year building lease wouldn’t be frustrated and the lessee wouldn’t be discharged from his obligations merely due to a temporary disability in utilising the property. The Court opined that a lease could rarely, if ever, be frustrated, and would require a ‘vast convulsion of nature’. The Courts in England have since held on multiple occasions, that a mere suspension in possessory rights for a period of time does not operate to frustrate the lease or discharge the lessee from his payment obligations[8] .
In India, the Supreme Court in Raja Dhruv Dev Chand v. Raja Harmohinder Singh [9] observed that generally Indian courts were of the view that Section 56 of the Contract Act is not applicable when the rights and obligations of the parties are under a transfer of property. The Court held that the Doctrine of Frustration would not apply to a contract of lease when there was transfer of a property by way of lease under the Indian Law, owing to the transfer of right to enjoy the land as well. If any material part of the property was wholly destroyed or rendered substantially and permanently unfit for the purpose for which it was let out, the Court held that the lessee had the option of avoiding the lease under Section 108(e) of the Transfer of Property Act.
Mulla [10] echoed the findings of the Court, and opined that as far as leases were concerned, there was no scope for the Doctrine of Frustration to apply as the rights and obligations of the parties in such cases are settled (subject to a contract to the contrary) according to the terms of Section 108(e). Thus, it is clear that Section 56 and the Doctrine of Frustration have very limited (if any) applicability to lease agreements. However, the lessees can – in appropriate circumstances – seek protection under Section 108(e) of the Transfer of Property Act.
Can tenants avoid payment of rent due to COVID-19?
The Transfer of Property Act, 1882 – the law that deals with tenancy rights – provides the right to discharge a lease under Section 108(e). The obligations under a lease may be discharged, at the lessee’s option, when:
an unforeseen event destroys either the entire, or material part of the property; or
an unforeseen event that makes the property substantially and permanently unfit for the purpose for which it was let.
Unlike Section 56 which automatically and necessarily terminates the agreement on occurrence of a frustrating event, discharge under Section 108(e) only occurs when the lessee elects to void the lease. The burden to prove the occurrence of either event falls on the lessee, who must establish that either a material part of the property is destroyed or that the property has been rendered ‘substantially and permanently’ unfit for use by the lessee.
If a lessee is able to show that the conditions in Section 108(e) are met, a mere refusal to pay rent is not sufficient for the lessee to avoid his payment obligations. The lessee must notify the lessor of his intent to invoke his option to void the lease in terms of Section 108(e). It is important to bear in mind that relief under Section 108(e) voids the entire agreement, and consequently, a lessee cannot continue to use the property and must forthwith hand over peaceful vacant possession of the property to the lessor. If the lessee fails to hand over the property, he will be liable for rent on (implied) tenancy by holding over [11]. Therefore it goes without saying that once the option under Section 108(e) is validly invoked, the lease comes to an end and the lessee has no right to continue possession of the property. The Madras High Court in Alanduraiappar Koil Chithakkadu v. T.S.A. Hamid [12], rejected a tenant’s claim for remission of rent on account of two cyclones that had caused suspension of his business. The Court held that a temporary suspension of business caused by cyclones in a 5-year lease agreement would not frustrate the contract.
Thus, in the context of the coronavirus outbreak, tenants may not be able to rely on Section 108(e) to justify default on payment of rent. The enforced lockdown does not meet the criteria for invocation of Section 108(e). Neither the lockdown nor the pandemic can be said to have resulted in the destruction of leased property, nor can it be claimed that the lockdown has left the property permanently unfit for use. Furthermore, an enforced suspension of business for a limited period of time cannot be said to have rendered the property substantially unfit for the purpose of the lease.
Even while the pandemic and resultant lockdowns across the world have caused tremendous financial distress and precipitated a steep global recession, revenue losses alone cannot be the grounds for the tenants to avoid their payment obligations. Unless the lease agreement itself provides for a discharge of payment obligations, it may not be possible for a commercial tenant to unilaterally refuse payment of rent. Tenancy being subject to contract, the tenants can always seek waivers of rent or deferrals in payment from the lessors. Only through negotiation and mutual consent therefore, can a tenant be discharged from his obligations under the lease without forcing the tenant to permanently shut shop. Parties looking for a quick solution in the form of a rent default would do well to bear in mind the consequences of being found in breach of contract, a shoddy quick fix may only exacerbate their financial condition.
*Ramchandra Madan is an Advocate, based in New Delhi. He holds a Master in Laws from The London School of Economics & Political Science. He currently practices the law in the courts of Delhi. He can be reached at Ramchandramadan@gmail.com
[1] Hirji Mulji v. Cheong Yue Steamship Co. Ltd., (1926) AC 497
[2] Satyabrata Ghose v. Mugneeram Bangur & Co., 1954 SCR 310
[3] Tsakiroglou & Co. Ltd. v. Noblee Thorl GmbH, 1962 AC 93 : 1961 (2) All ER 179, Energy Watchdog v. Central Electricity Regulatory Commission, (2017) 14 SCC 80
[4] Supra Note 2
[5] Paradine v. Jane, [1647] EWHC KB J5
[6] [1863] EWHC QB J1
[7] Cricklewood Property and Investment Trust Ltd. v. Leighton’s Investment Trust Ltd.,[1945] A.C. 221
[8] Matthey v. Curling (1922) 2 AC 180 (HL) , London & Northern Estates Co. v. Schlesinger (1916) 1 KB 20 , National Carriers Ltd. v. Panalpina, 1981 AC 675
[10] Mulla DF, Mulla on Transfer of Property Act (Lexis Nexis 2013)
[11] Damodar Coal Co. Ltd. v. Harmook Marwari, 1915 SCC OnLine Cal 48
It’s an extremely well articulated article that even a lay man can understand