Op EdsOP. ED.

Swiftness of the Coronavirus induced disruptions surely would have prevented any viable pre-preparation on part of those most affected. Resultantly, almost all businesses/industries/manufacturing units are likely to, as many already do, face unprecedented upheavals and alterations in their supply chains/workforce/expansion. It is in this background that industrial and manufacturing units, regardless of functioning via a written agreement or not, must prime themselves vis-à-vis the laws of frustration, contingency and force majeure.

In India, the law pertaining to contingency[1] and frustration[2] must be treated  as rules of positive law that oblige and outline specific rights and obligations thereof. On the other hand, force majeure is a derivation of civil law, particularly French Law, whereby it pertains to any supervening event or happenstance as may obviate and affect the ability of a party to the agreement from performing it. In India, ‘force majeure’ usually finds place in a contract thereby allowing for a certain degree of flexibility and play in contractual relations thereof. Though a lot is dependent on the actual language and construction of the said clause, the courts in India have leaned in favour of placing ‘force majeure’ within the umbrella of contingency.

The courts have in their wisdom expounded upon force majeure as an exclusionary clause being part of a mutual agreement between parties thereof. In such a scenario, operation of such a clause is to be found under, and has been limited to (albeit incorrectly as per me), the chapter dealing with ‘contingency’ rather than ‘frustration’.[3] It is conceded that the presence of a ‘force majeure’ clause clearly postulates that the parties were in the know of an event or several events (being exclusively a function of that particular clause) and agreed upon the same so as to render the agreement non-performable thereof. Contingency in a contract rests on (1) agreement between parties, (2) postulated upon a future uncertain event(s)/condition(s), (3) being collateral to the contract thereof, and (4) happening (or not) of such event/condition.[4] Therefore, having regard to the same, one would be hard-pressed to disagree with the law as laid down in the seminal judgment of Satyabrata Ghose v. Mugneeram Bangur and Co. [5] when it adjudges that:

“In cases, therefore, where the Court gathers as a matter of construction that the contract itself contained impliedly or expressly a term, according to which it would stand discharged on the happening of certain circumstances 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 altogether….In such a scenario it would be a derivative of Section 32.”

Though the Supreme Court has labelled ‘force majeure’ as a function of contingency, it is my submission that in essence such a clause is ex abundati cautela and in that it traverses the thin grey area between contingency and frustration. Furthermore, it has authoritatively been held that the presence of such a clause as specifies conditionalities vide which parties would stand discharged of their contractual obligations dispenses with application of the positive law rule enshrined in Section 56.[6] However, this is where I stand in disagreement with the law as laid down in Satyabrata Ghose (1954) and followed thereafter in Energy Watchdog (2017).

In effect, both the judgments as cited herein above have given primacy to the rule of construction premised on ‘intention of parties’ whereby, regardless of Section 56, a party may agree (albeit devoid of any undue influence and coercion) to honour a contract despite occurrence of circumstances as may fundamentally alter its scape; effectively allowing the contracting parties to override a statutory enactment in going ahead with their commitment despite disappearance/obliteration/fundamental alteration of the very object thereof. Surely such a construction leads to an anomalous situation whereby the statutory scope of ‘subsequent impossibility’ is smothered.

Take for instance Illustration (e) to Section 56 as per the Act, 1872;

“(e) A contracts to act at a theatre for six months in consideration of a sum paid in advance by B. On several occasion A is to ill to act. The contract to act on those occasions becomes void.”

 Evidently, as per this illustration, A’s illness is considered to be serious enough such as to excuse performance on the basis that it fundamentally alters the object of the said contract. Collating the said illustration to the situation prevailing currently whereby say ‘A’ is suffering from COVID-19 induced illness and is mandated by policy to isolate and quarantine for a certain time period. In this background, suppose the contract between ‘A’ and ‘B’ consists of a ‘force majeure’ clause such as to exclude an illness from rendering the contract void. As per the law contained in the above cited judgments, said clause would override Section 56 impossibility and despite the COVID-19 induced SARI, ‘A’ would be held liable to for breach.

The above approach, albeit in accordance with the law as at present, is not in harmony with public policy in such aberrant times. On the other hand it may be worth considering that if ‘A’ can prove that COVID-19 fundamentally prevents him/her from carrying out the object of the contract, then the lower threshold of the ‘force majeure’ clause must fall through in the face of an express statutory obligation and frustration induced discharge ought to follow. In conclusion, having regard to the above noted averment, ‘force majeure’ cannot and must not be treated as solely a function of contingency simply because of the argument resting on intention of parties and ensuing foreseeability (or not) of the event thereof.


*Author is a practising Advocate in Delhi

[1] See Chapter III, Contract Act, 1872

[2] See Chapter IV, Contract Act, 1872

[3] Energy Watchdog  v. CERC , (2017) 14 SCC 80

[4] See Section 30, Act 1872

[5] 1954 SCR 310

[6] Satyabrata Ghose v. Mugneeram Bangur and Co., 1954 SCR 310; followed thereafter in Energy Watchdog v. Central Electricity Regulatory Commission , (2017) 14 SCC 80

COVID 19Op EdsOP. ED.

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 

[9] (1968) 3 SCR 339

[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 

[12] 1962 SCC OnLine Mad 102 

COVID 19Op EdsOP. ED.

The COVID-19 pandemic forced the Central Government on 24-3-2020 to issue a lockdown order under the Disaster Management Act, 2005 imposing a 21-day lockdown of the entire country as a preventive measure to stop the spread of COVID-19 wherein commercial establishments have been directed to be shut.

COVID-19 scenario has also generated a lot of discussion among practitioners and academicians on how will it impact the contracts specifically from the perspective of invoking force majeure clauses under the executed contracts, if there exists a clause to that effect or otherwise whether a party can resort to Section 56 of the Contract Act, 1872 (“the Contract Act”) to invoke frustration.

This article focuses on lease deeds and analyses whether force majeure would be applicable to lease deeds where a force majeure clause has been specified under the lease deed. If there is no force majeure clause specified in the lease deed, whether the parties can invoke validly the doctrine of frustration under the Contract Act or are there any other remedies or scenarios which parties in a lessor-lessee relationship need to bear in mind.

FORCE MAJEURE CLAUSES AND LEASE DEEDS

In the event there is a force majeure clause that has been agreed between the lessor and lessee and documented in a lease deed, the invocation of force majeure clause would depend upon the wording and scope and ambit of the definition of a force majeure event.

If the parties have specifically included a pandemic/epidemic, then invocation of force majeure may be easier. However, typically force majeure clauses would provide for act of God and natural calamities but may not specifically provide for a pandemic/epidemic. In such a setup, the invocation of force majeure must be carefully analysed to see whether the force majeure clause can be triggered or not.

On account of the central lockdown for twenty one days, the lessees may be also able to resort to and invoke force majeure on account of the lockdown provided if the lease deed provides for government orders/action preventing the occupation of the premises to be a ground for invocation of force majeure clause. Again, this must be analysed carefully, and lawyer’s advice should be sought ideally before resorting to invocation of force majeure.

Further, one must also analyse the consequences of force majeure as may be specified in the lease deed. Normally, the parties could have provided for suspension of obligations including non-payment of rent for the days when the premises have been rendered unfit for use. In such a scenario, the parties would not have the liberty to invoke termination of the lease deed but suspension of payment obligations under the lease deed for the period the premises were rendered unfit for usage. Also, the clause might provide an additional right to termination in the event the force majeure scenario subsists and continues for an ongoing period. In that eventuality, termination may be exercisable in addition to suspension of obligations under the lease deed only in the event such force majeure persists and not otherwise.

The parties need to be careful before terminating lease deeds as in the event the Court/arbitrator decides that the termination was wrongful then the party who has terminated the lease deed may have to pay damages for wrongful termination.

DOCTRINE OF FRUSTRATION AND ITS APPLICABILITY TO LEASE DEEDS

In the event there is no force majeure clause specified in a contract, then the parties normally resort to the doctrine of frustration which is embodied in Section 56 of the Contract Act to see whether it can be applied to argue that the contract has become impossible to perform. However, the question that arises for consideration is, can the parties resort to such a mechanism for lease deeds.

The Supreme Court was dealing with this issue in Raja Dhruv Dev Chand v. Raja Harmohinder Singh[1] where the Court was called upon to decide on whether Section 56 of the Contract Act is applicable when the rights and obligations of the parties have been enshrined under a lease deed. The three- Judge Bench of the Supreme Court speaking through Shah, J. held that frustration won’t apply to lease deeds. The Court went on to observe as follows: (SCR para 17)

“17. Under a lease of law there is a transfer of right to enjoy that land. If any material part of the property be wholly destroyed or rendered substantially and permanently unfit for the purpose for which it was let out, because of fire, tempest, flood, violence of an army or a mob, or other irresistible force, the lease may, at the option of the lessee, be avoided. This rule is incorporated in Section 108(e) of the Transfer of Property Act and applies to leases of land, to which the Transfer of Property Act applies, and the principle thereof to agricultural leases and to leases in areas where, the Transfer of Property Act is not extended. Where the property leased is not destroyed or substantially and permanently unfit, the lessee cannot avoid the lease because he does not or is unable to use the land for purposes for which it is let to him.

(emphasis supplied)

Subsequently, the Supreme Court in Sushila Devi v. Hari Singh[2] followed the principle laid down in Raja Dhruv Dev Chand[3] and went on to hold that Section 56 of the Contract Act only applies to a contract. The Bench of the Supreme Court speaking through Hegde, J. observed as follows: (SCC para 8)

“8….Section 56 applies only to a contract. Once a valid lease comes into existence the agreement to lease disappears and its place is taken by the lease. It becomes a completed conveyance under which the lessee gets an interest in the property. There is a clear distinction between a completed conveyance and an executory contract. Events which discharge a contract do not invalidate a concluded transfer — see Raja Dhruv Dev Chand v. Harmohinder Singh[4]. In view of that decision the view taken by some of the High Courts that Section 56 of the Contract Act applies to leases cannot be accepted as correct.”

(emphasis supplied)

 ANALYSIS

 If the parties have not provided for a force majeure clause in the lease deed, then parties cannot resort to Section 56 of the Contract Act but rather the lessee would have to go by the provisions of the Transfer of Property Act, 1882. Section 108(B)(e) of the Transfer of Property Act, 1882 provides that,

“(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;”.

(emphasis supplied)

Accordingly, in the absence of a force majeure clause, a lessee would have to demonstrate and comply with the threshold provided in the Transfer of Property Act which can be argued to be much higher than the threshold set out under the Contract Act.

In the present scenario, it has to be demonstrated by the lessee in the absence of a force majeure clause cumulatively that COVID-19 and/or its consequences would qualify as an irresistible force and that material part of the property has been wholly destroyed or rendered substantially and permanently unfit for the purposes for which it was let out.

When there is a force majeure clause documented in the lease deed, the lessee would have to carefully see if it can rightfully invoke it to either suspend payment of rent or to terminate the lease deed or for both depending on what is provided for in the force majeure clause.

Lessors/landlords should also be pragmatic while dealing with requests for rent suspension/ reduction taking into account practical exigencies and circumstances to avoid disputes which can be avoided and amicably resolved between the parties.


*Jeevan Ballav Panda,  Partner, Khaitan and Co.

**Satish Padhi, Senior Associate, Khaitan and Co. (Disclaimer: Views are personal and cannot be attributable to the Firm.)

[1] (1968) 3 SCR 339 .

[2] (1971) 2 SCC 288.

[3] Raja Dhruv Dev Chand v. Raja Harmohinder Singh, (1968) 3 SCR 339 

[4] Ibid.