COVID 19Op EdsOP. ED.

COVID -19 dropped itself like a bomb on industries, consumers and economies. The world is still putting itself together from this crisis. The business fraternity however, has never really anticipated any sort of complication or even for that matter, viewed their ‘force majeure’ clauses seriously. Now, that many contracts hinge on ‘force majeure’, a series of questions arise on its invocation. This article looks to condense available material on ‘force majeure’ and looks at the steps ahead.

Force Majeure and general clause:

The term ‘force majeure’ originates from the Code Napoléon of France, that translates to mean ‘superior force’ or ‘greater force’. Ordinarily, this means a drastic or a fundamental change to the substance of the contract that is brought about by an event that was neither anticipated by the parties nor under their control, resulting in non-performance of their contractual obligations. 

In India, since the concept of force majeure is not codified into law, it would be necessary to coin this as part of the contract. Scores of precedents have held that the contract overrides the law and therefore ‘force majeure’ clauses are now part of the standard clauses in any contract along with confidentiality and dispute clauses.

Several examples of force majeure clauses exist. One such instance is as under:

a. The event of ‘force majeure’ such as an act of God, fire, earthquake, flood, accident, an act of governmental authority, lockout or any event beyond the reasonable control of any of the parties that hinder the performance or render it impossible;

b. The duration of force majeure event – typically between 15-60 days;

c. The manner in which this clause needs to be invoked including notices etc.;

d. Suspension or termination of agreement in case the event continues beyond the stipulated period.

Most often, drafting a ‘force majeure’ clause lacks inclusion of details. For instance, majority of the ‘force majeure’ clauses, do not specifically mention ‘pandemic’ or even ‘epidemic’ for that matter, as an event.

Indian Contract Act & Force Majeure:

Although the term ‘force majeure’ finds no presence under the Contract Act, 1872 (“the Act”), its doctrine can be found embodied under Section 32[1] of the Act which renders a contract void when an event upon which performance of contract is contingent becomes impossible.

Essentially, COVID-19 will find a mention in contracts in the form of epidemic, pandemic, or even natural calamity. However, it is noteworthy that where the failure to perform an obligation is primarily due to lockdown implemented by the Government, the force majeure clause must also contain term ‘lockdown’, for it to be invoked. One can also argue that since the lockdown is a result of COVID- 19 and the pandemic, reliance can be placed on the term pandemic in a ‘force majeure’ clause.

The COVID-19 pandemic or the resultant lockdown, will not be treated as ‘force majeure’, if there are other methods of performing the terms of the contract. Having said that, performance of the contract may be suspended during the operation of ‘force majeure’ event and performance may be suitably extended. Parties have the option of renegotiating and modifying the contractual terms, termination is the last step if the force majeure event continues beyond the time prescribed under the contract.

Therefore, construing COVID-19 lockdown a ‘force majeure’ event will depend on the contractual obligations binding the parties and the manner of its performance. 

Several questions have been raised on the fact that some contracts do not stress on ‘pandemic’, ‘epidemic’, ‘disease’ etc. While some parties may rely on the general phrase ‘any other unforeseeable event, not under the control of either of the parties’, a reference may be drawn to some Government notifications and departmental circulars across board, which have declared COVID- 19 and the lockdown as a natural calamity/disaster.

The Ministry of Finance has for instance, by way of an office memorandum dated February 19, 2020[2] with respect to ‘Manual for Procurement of Goods, 2017’, clarified and declared the disruption in supply chains which is a result of COVID-19 from China or any other country, such a disruption will be covered as ‘force majeure’.

The Ministry of New & Renewable Energy with respect to solar project developers, vide office memorandum dated March 20, 2020[3] has declared that parties can invoke the force majeure clause to avoid financial penalties if they miss the contractual obligations on account of COVID-19.

The Karnataka RERA Authority, through its Circular dated April 06, 2020 extended the registration of all real estate projects by a period of three months, in cases where registration is expiring after March 15, 2020 and has also extended the timelines for compliance of the RERA Act by a period of three months.

The Ministry of Electronics and Information Technology[4] has decided to provide rental waiver to small housed in STPI premises (MSMEs, Start-ups) in the country from March 1, 2020 till June 30, 2020 i.e. for 4 months period as of now.

While these notifications, memorandums and circulars do not have a binding effect for all contracts, these will have some persuasive value to bring COVID- 19 and the lockdown under the ambit of force majeure, if there are specific terms in the clause.

Doctrine of Frustration under Indian Law

Where a contract does not feature a ‘force majeure’ clause, Section 56[5] of the Act in the context of doctrine of frustration will be examined. Section 56 creates 2 kinds of impossibilities: (1) Impossibility existing at the time of the making of the contract, and (2) A contract, which is possible and lawful when made, but becomes impossible and unlawful thereafter due to some supervening event. Para 2 of Section 56 above, will have a relevance given the pandemic and lockdown.

For such a clause to be invoked, the following are the requirements:

a. a valid and subsisting contract between the parties;

b. there must be some part of the contract yet to be performed; and

c. the contract becomes impossible of perform.

The consequences of the ‘force majeure’ event will have to be assessed to determine whether it renders the contract impossible, unlawful, or impractical to perform and thereby frustrate its performance. Where it is established that the conditions have materially affected the parties and their obligations and where there is no way to perform the contract during the existence of such conditions, the contract is annulled and both contracting parties are discharged of their subsequent obligations. Under these circumstances, neither party has the right to sue the other party for breach of such contract.

The Supreme Court had interpreted the concept of ‘force majeure’, in Satyabrata Ghose v. Mugneeram Bangur & Co.[6], under Section 56 of the Contract Act. The Supreme Court in this case held that the word “impossible” ‘has not been used here in the sense of physical or literal impossibility’[7]. The determination of whether a ‘force majeure’ event has actually occurred, does not centre around its impossibility alone – a mere ‘impracticality of performance’ (given the subject-matter of the contract), will also suffice. When an ‘untoward event’ or ‘unanticipated change of circumstance’ changes the very foundation of the contract between the parties, this event will be considered a ‘force majeure’ and the contract therefore impossible to perform.

While there have been many judgments on this issue and scores of articles on this topic, we look at one recent decision of the Supreme Court in  Energy Watch Dog v. CERC[8] to buttress the fact that “economic hardship” cannot be considered a ‘force majeure’ event. The judgment also has various other aspects, which are extracted as under:

“37. It has also been held that applying the doctrine of frustration must always be within narrow limits. In an instructive English judgment namely, Tsakiroglou & Co. Ltd. v. Noblee Thorl GmbH[9], despite the closure of the Suez canal, and despite the fact that the customary route for shipping the goods was only through the Suez canal, it was held that the contract of sale of groundnuts in that case was not frustrated, even though it would have to be performed by an alternative mode of performance which was much more expensive, namely, that the ship would now have to go around the Cape of Good Hope, which is three times the distance from Hamburg to Port Sudan. The freight for such journey was also double. Despite this, the House of Lords held that even though the contract had become more onerous to perform, it was not fundamentally altered. Where performance is otherwise possible, it is clear that a mere rise in freight price would not allow one of the parties to say that the contract was discharged by impossibility of performance.

38. This view of the law has been echoed in ‘Chitty on Contracts’, 31st Edition. In paragraph 14-151 a rise in cost or expense has been stated not to frustrate a contract. Similarly, in ‘Treitel on Frustration and Force Majeure’, 3rd Edition, the learned author has opined, at paragraph 12-034, that the cases provide many illustrations of the principle that a ‘force majeure’ clause will not normally be construed to apply where the contract provides for an alternative mode of performance. A more onerous method of performance by itself would not amount to a frustrating event. The same learned author also states that a mere rise in price rendering the contract more expensive to perform does not constitute frustration.”

The term impossibility and frustration are often used interchangeably. In a situation where there is no force majeure clause, Section 56 and doctrine of frustration comes to rescue. Frustration is a common law doctrine. It is concerned with the change in circumstances that can wholly destroy the object or foundation of the contract or make performance fundamentally different from what the parties contemplated in the beginning. Hence under English Law, one needs to establish functions by the English Code and under Indian Law, impossibility or frustration has been statutorily covered under Section 56 of the Act. If a party can prove that an unforeseen event has destroyed the object of the contract, or fundamentally changed the nature of performance, then the contract would be said to be frustrated and it would automatically come to an end. 

Evidence of force majeure:

It should be noted that the Courts in India follow the contract strictly in terms of force majeure clauses. In a case where the contract must be rescinded on account of a force majeure event, the burden to prove is on the party claiming force majeure. Unless there is compelling evidence that a contract cannot be performed under any circumstance, the Courts do not favour parties resorting to frustration of contract and termination.

The following may form as evidence for invoking force majeure:

  1. National and State Government notice and guideline imposing restriction of trade,
  2. News articles related to COVID-19 outbreak, quarantines, restricted travel and mandatory shutdown of airports, trains stations and seaports,
  3. Cargo booking and freight agency agreement,
  4. Cancelled flight or train ticket or anything other documents relating to travel itinerary, and
  5. Cancelled visa or rejected visa application.

Judicial Precedents during Lockdown

Bombay High Court – Pledge of Shares: Rural Fairprice Wholesale Ltd.  v. IDBI[10], March 30, 2020

Rural Fairprice Wholesale Limited (RFWL) has raised INR 670 crores in debt via insurance of NCDs – secured by shares held by Future Corporation Resources Private Limited (FCRPL)  in future retail limited (pledged shares):

  • Due to COVID-19 pandemic and the subsequent fall in the stock market, the value of the pledged shares fell – debenture trustees accelerated payments and invoked the pledged shares;
  • RFWL approached the Court seeking restraint of sale of pledged shares – contented fall in value of the pledged shares caused by COVID-19 pandemic and fall in stock market;
  • Bombay High Court granted interim relief restraining action in furtherance of the sale notice issued by debenture trustee.

Delhi High Court – Classification of NPA: Anant Raj Ltd v. Yes Bank[11], April 6, 2020

  • Borrower approached the court seeking restraint against lender from downgrading its asset classifications from SM A – 2 to NPA, on the basis of RBI’s COVID-19 regulator package;
  • Defaulting instalment fell due January 01, 2020;
  • Delhi High Court held statement of development and regulatory policies issued by RBI on March 27, 2020 along with regulatory package intended to maintain status quo as on March 01, 2020;
  • Asset classifications can be altered – status code to be maintained;
  • Time granted for payment of January instalment.

Bombay High Court – Invocation of LC’s: STANDARD RETAIL PVT. LTD. V. G.S. GLOBAL CORP[12]. , APRIL 8, 2020

  • Steel importers approached Court seeking restraint of encashment of letters of credit provided to Korean based exporters – claimed lock down hand rendered performance of contract impossible;
  • Bombay High Court refused the injunction:
  1. letters of credit are independent contracts with the bank;
  2. distribution of steel was recognised by government advisories as an essential service no restriction on movement;
  3. the lockdown was for from limited period;
  • The force majeure clause was only to aid exporters and not importers.

Bombay High Court — Transcon Iconica Pvt Ltd.  v. ICICI Bank[13] , April 11, 2020

  • Writ petitions filed by Transcon Sky City and Trancscon Iconica which had availed financing facilities from ICICI Bank defaulted on payments due on January 15, 2020 and February 15, 2020;
  • Determination of whether the moratorium is excluded for NPA classification;
  • Bombay High Court held (i) the period from March 01, 2020 to May 31, 2020 during which there is a lockdown will stand excluded until the lockdown is lifted, (ii) the reprieve is predicated on the lock down and not RBI moratorium, (iii) the borrower was put to terms as a consequences for non-compliance.

Delhi High Court: Invocation of Bank Guarantees: Halliburton Offshore Services Inc. v. Vedanta Ltd.[14] , April 20, 2020:

On an application filed by Halliburton Offshore Services Inc., which sought to restrain Vedanta Ltd. from encashing 8 bank guarantees issued in its favour to secure performance of obligations under a contract to drill petroleum wells, the Delhi High Court granted interim relief observing that the petitioner is not engaged in, stricto sensu, in the production of petroleum, but is, rather, engaged in drilling of wells, which activity is substantially impeded by the imposition of the lockdown and thereby an ad interim injunction, restraining  invocation or encashment of the bank guarantees, till the expiry of exactly one week from May 3, 2020 was granted.

Delhi High Court: Ramanand  v. Dr. Girish Soni[15], May 21, 2020

Application made by the petitioner (tenant), seeking suspension of rent on account of ’force majeure’ due to COVID-19 lockdown, the Single Judge observed that:

  • There is no rent agreement or lease deed between the parties, Section 32 of the Contract Act has no applicability.
  • The subject premises is governed by the provisions of the Delhi Rent Control Act, 1958 hence, Section 56 of the Contract Act does not apply to tenancies.
  • The petitioners have not urged that the tenancy is void under Section 108 (B)(e) of the TPA.
  • Considering factors such as nature of the property, financial and social status of the parties, amount of rent, any contractual condition(s) (relating to non-payment or suspension of rent), protection under any executive order(s) by the MHA, the application of the petitioners was rejected while granting postponement or relaxation in the schedule of payment of rent. However, it was clarified by the court that doctrine of frustration of contract or impossibility of performance does not apply to lease agreements.

**Authors are Founder and Senior Associate respectively with Shivadass & Shivadass (Law Chambers). The contents and comments of this document do not necessarily reflect the views/position of  Shivadass and Shivadass (Law Chambers) but remain solely of the author(s). For any further queries or follow up, please contact admin@sdlaw.co.in.

[1] Section 32, Contract Act, 1872  

[2] Noti. No. F.18/4/2020-PPD

[3] Noti. No. 283A8/2020-GRID SOLAR 

[4] Months’ Rental Waiver to the IT Companies Operating from (STPI) dt. 16-4-2020 

[5] Section 56, Contract Act, 1872  

[6] 1954 SCR 310

[7] See, para 9 of Satyabrata Ghose v. Mugneeram Bangur & Co., 1954 SCR 310

[8] (2017) 14 SCC 80

[9] [1961] 2 WLR 633 : 1961 (2) All ER 179 

[10].Rural Fairprice Wholesale Ltd.  v. IDBI, 2020 SCC OnLine Bom 518

[11] Anant Raj Limited v. Yes Bank Limited, 2020 SCC OnLine Del 543

[12] Commercial Arbitration Petitions Nos. 404 to 408 of 2020, judgment dated 08.04.2020

[13] 2020 SCC OnLine Bom 626

[14] 2020 SCCOnLine Del 542

[15] RC. REV447/2017, order dated 21-5-2020

COVID 19Op EdsOP. ED.

The financial stability of the aviation industry has been severely crippled due to COVID-19 pandemic. As the “big bird” is an expensive affair, most of the aviation industries resort to take aircrafts on lease rather than purchasing them. Across the globe, nearly 70% of the air fleets are grounded, which has hampered their ability to satisfy their obligations[1] and fulfil the requisites stipulated under aircraft lease agreements. Further, the decline in passenger revenue and demand which is also expected to mitigate by USD 8.8 billion and 36% respectively[2], together with various other taxes, levies and aeronautical charges, have created a burden on the lessee forcing them to file for bankruptcy. For escaping this liquidity crunch one may argue to bring in the “Force Majeure” or “Doctrine of Frustration” or “illegality clause”. But as far as the aviation industry is concerned, the above-mentioned tenets have a very little say. It is due to the general practice of incorporating “hell and high water clause” (herein referred to as ‘HOHW’) in aircraft lease agreements. The HOWH clause will play a pivotal role for understanding the implications of COVID-19 on the aviation industry as this clause renders the lessee unconditionally and entirely responsible for payment of the rent, irrespective of the unforeseen circumstances which have affected the airline’s operations. The authors in this article will ponder upon various facets of HOWH clause in tandem with other provisions of contract. Further, emphasis will be laid upon the extent to which the clause is enforceable. Lastly, suggestions and futuristic approach for the lessee will be dealt with.

 INTERPLAY BETWEEN VARIOUS TENETS OF CONTRACT LAW AND   HOWH CLAUSE

In India, most of the aircraft lease agreements are governed by common law. It is pretty evident to apply common law, especially, English Law, for regulating the lease agreement. The only thing worth noting is that the rights arising out of the lease, which the parties are trying to enforce through English Law should not be in derogation with the public policy or any other law of India[3]. As per the current standards, the lease agreements are characterised by two principal features. The first principle feature is the delivery of the aircraft in ‘as is, where is’ basis whereas the second feature relates to the ‘HOWH’. Both the features when clubbed together leave the lessee helpless in situations such as Covid-19, where the fulfilment of obligations is severely curtailed. However, there are certain tenets of contract which may act as a safe haven for the contracting parties.

Under the contract law, force majeure is a provision which makes the performance of a contract impossible and absolves the party from non-performance of contractual obligations which is caused by circumstances or events out of the parties’ control. If an aircraft lease has incorporated force majeure—which in itself would be rare—then the corona virus pandemic could eventually qualify as a force majeure event. It is important to note that the relevancy of this tenet is dependent upon its express mention in a lease agreement; no automatic or implied assumption of force majeure is permissible. Therefore, it is highly unlikely that a court would impliedly infer force majeure in an aircraft lease where the parties had not expressly provided for one. The aircraft leases are typically  HOWH agreements which further overshadow the invocation of force majeure making its imposition even less likely.

Alternatively the lessee can invoke the Doctrine of Frustration emphasising upon the fact that grounding of aircraft fleet due to the orders of the government has made the performance of the contract impossible. As per the doctrine, if some unforeseen circumstance occurs during the performance of a contract which makes it impossible to perform, in the way that the fundamental basis of the contract requires, it need not be further performed, as insisting upon such performance would be unjust [4].

The bar or the threshold for claiming Doctrine of Frustration has been kept very high which could be a problematic contention to make for the airlines, therefore the fact that COVID-19 has made a dent upon the stability of many business entities would not, by itself, frustrate a contract[5] to which that entity was a party.

Another potential alternative for the airline companies can be “price negotiation” clause or the “illegality event” clause. The former clause is not much in practice under the English Law governed contracts due to the general principle[6] that an agreement to agree is not enforceable. However, if the parties have included the price negotiation clause in their contract, then it can certainly be a relief for the airlines as a mishap of COVID-19 will definitely fall under it.

Under the latter clause, the illegality is occurred due to change in law or any scenario for that matter by the government intervention, which makes the performance of the contract impossible for the lessee. In the current scenario, the standard operation of flying aircraft has been changed due to the pandemic; the obligation of the lessee towards the lessor of paying rent has not been affected. Accordingly, this pandemic is, therefore, unlikely to fall under the definition of an “illegality event” or constitute a “change in law”.[7]

It is now pretty evident that the  HOWH is rigid, in comparison to other tenets of contract, leaving the lessee helpless.

ENFORCEABILITY OF THE HIGH AND HELL WATER CLAUSE

It is a well-confirmed postulation of common law that HOWH place an absolute, irrevocable and unconditional obligation on the lessee to make the necessary lease payments, notwithstanding the happening of any circumstance of any nature whatsoever[8]. In Olympic Airlines v. ACG[9], the rigidity of the clause was further strengthened by the court after stating that the risks which are inherent in the aircraft lease have to be borne by the lessee and the clause will forbid him to claim force majeure or frustration of contract.

The flexibility of the clause is not apparent prima facie, due to the rigid meaning to the clause. However, flexibility in the clause can be inferred from different views of courts wherein some have restricted the application of the clause whereas, some have sustained it. In Equitex, Inc. v. Ungar[10], the Court disregarded the HOWH and held that permitting the hindering party to benefit from its intentional or wilful wrongful act would violate public policy and thereby will be unenforceable.

On the other hand, the HOWH clause was enforced against a lessor of copiers whose equipment was damaged when Hurricane Sandy flooded FPL’s Long Island offices. The Court, in this case, rejected the argument that the lessee could not have assumed the risk of loss because Hurricane Sandy was not reasonably foreseeable, concluded that “the contract explicitly assigns to the assessed risk of loss from ‘any cause whatsoever’ and requires FPL to make monthly payments regardless of whether the copiers get damage.”[11]

SOLUTIONS TO THE PRESENT STATE OF AFFAIRS

It is well within the fundamental principle of contract to have an entitlement of being paid. However, if the liquidity of the lessee (airline) is crippled it will not be in the interest or favour of the lessor to drive them against the wall. It must be kept in mind that many other industries depend upon the aviation[12] industry for their survival like travel and tourism; the stubbornness of the  HOWH clause can lead to the liquidation of many airlines causing a ripple effect. There are two options left for the contracting parties, the first one is to allow the lessee to commit default where the lessor will assume the possession of the aircraft in ‘as is, where is’ basis, whereas the second option is to renegotiate the payment obligations disregarding the clause and deferring the entire payment including inter alia a standstill for an agreed period along with an agreed repayment plan.

THE WAY FORWARD

The risk allocation of the aircraft operating leases is asymmetric in nature due to the fact that the obligations of lessors are limited in comparison to lessee. The extensive obligations of lessee to meet the payment under any circumstance further refute the scope of “rental holiday” by virtue of “HOWH” clause. Post-pandemic crisis, the parties (especially the lessee) should bear in mind to have some mechanisms in place which can be of assistance during such unforeseen events. The operating lease should be drafted in such a manner which can allow the airline to implement a consensual restructuring at times of distress. It should involve the rescheduling the debt which will have the potential of alleviating the liquidity pressure at times such as COVID-19 through Scheme of Arrangement or Company Voluntary Arrangement[13]. Further, price negotiation clauses can also act as potential option which will allow the contractual parties to competently set some temporary standards of transactions. At last the aviation industry have to learn aftermath the pandemic, that whether championing an airline at times of perturbation will improve their financial stability post the crisis or whether the benevolence of giving room for the lessee to survive was futile and accordingly should revamp their future as well as present leases.


*4th Year Student, Institute of Law, Nirma University, Ahmedabad

**4th Year Student, Dr. Ram Manohar Lohiya National Law University, Lucknow

[1] Global COVID-19 Airport Status  

[2] Livemint , “Over 20 lakh jobs at risk in Indian aviation, dependent sectors: IATA”

[3]Chambers and Partners, “Aviation Finance & Leasing 2019”, Nitin Sarin, Syed Tamjeed Ahmad, Ritesh Agarwal https://practiceguides.chambers.com/practice-guides/aviation-finance-leasing-2019/india

[4] Taylor v. Caldwell, [1863] EWHC QB J1

[5] Dentons, “Dentons Aircraft Finance Briefing on COVID-19 related frustration and force majeure issues

[6] Lexology, “Force Majeure in Aviation Contracts”, Winston & Strawn LLP – Ben Bruton, Daniel R. Meagher, Mark Moody and Alison Weal

[7] Lexology, “Navigating the terms of an Aircraft lease agreement amidst the COVID-19 pandemic”, Tay & Partners – Yip Jia Hui and Michelle Pauline Lim

[8] Rhythm Hues, Inc. v. Terminal Marketing Company, Inc., 01 Civ 4697 (DAB) (GWG) (SDNY May 4, 2004).

[9] Olympic Airlines v. ACG, [2013] EWCA Civ 369.

[10] P.3d 746, 750 (Colo. App. 2002

[11] In General Electric Capital Corp. v. F.P.L. Services Corp., 986 F Supp 2d 1029, 1036 (ND Iowa, 2013).

[12] The Hindu,“Will the aviation industry recover from the pandemic?”, Murali N. Krishnaswamy 

[13] CMS Law-Now, “COVID-19 Challenges for the Aircraft Leasing Industry