- Meaning of Force Majeure Clause
In Black’s Law Dictionary, the term Force Majeure (hereinafter referred to as “FM”) is defined as, “an event or effect that can be neither anticipated nor controlled. It is a contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event that the parties could not have anticipated or controlled.” A FM event can typically be anything which is beyond the control of the parties, for example, war, an act of God, terrorism, act of government, plague or even a pandemic like Covid-19. Essentially, for a party to plead FM in order to relieve themselves from the liability, a FM clause is necessary to be included in the contractual agreement.
- Applicability of Indian Contract Act, 1872
Although, the term FM has nowhere been defined, however, Section 32 of the Indian Contract Act, 1872 (hereinafter referred to as “ICA”), envisages that the contingent contracts which become impossible to perform, are void. Further, Section 56 of the ICA deals with the doctrine of frustration of Contract, which says, that an agreement to do an act impossible in itself is void. And a contract to do an act which become unlawful or impossible to perform, after the contract was made, such contract becomes void. This means, that a contract can be frustrated in its entirety when an event which the parties had not contemplated prior to the happening of such event which made the performance of the contract “impossible”. The same in the context of leases was elaborated upon in the case of Raja Dhruv Dev[1], it was clarified that the claim of FM under Section 56 was not valid for a lease agreement because (i) rights under a lease are not simply contractual rights but are instead governed under the provisions of the Transfer of Property Act, 1872 (hereinafter referred to as “TPA”) and (ii) the Court reasoned that Section 56 of the ICA does not apply to a concluded contract where no further performance was required.
- Applicability of Transfer of Property Act, 1882
Considering concepts such as frustration and impossibility belong to the realm of Law of Contracts, the concept of irresistible force under Section 108(B)(e) of TPA will be applicable. Irresistible force hasn’t been defined but the obiter in the case of Mishrilal[2] mentioned that it is not merely unreasonable wear and tear and it could be similar to the ambit allotted to FM. Moreover, it is settled law as held in the Airport Authority[3] case that, “10.14. Section 108(e) is based on the principle of frustration of contract and was enacted to safeguard the rights of the tenant in case of the total destruction of the property leased to him. It gives him the right to escape his liability as a tenant by declaring the lease void. However, if the tenant does not exercise the option under clause (e) that is, does not invoke the doctrine of frustration, the lease shall continue for the benefit of both the parties. It is the general rule that the rent continues to be payable notwithstanding that, in the case of a dwelling-house or flat, it is at the time of letting, or subsequently becomes, unfit for habitation; or in the case of land near the seashore, that it is of no value; or in the case of agricultural land, that it is unsuitable for the intended use; or that the premises are subsequently destroyed by fire, or carried away by a flood, or inundated by fresh water; or destroyed by enemy action; the premises have become useless to the tenant. It would thus appear that in case of the destruction of the leased accommodation though no fault of the landlord, the tenant can avoid payment of rent only if he declares the lease void under Section 108(e) of the Transfer of Property Act, but if he fails to do so, the lease will subsist for the benefit of both parties and the landlord is entitled to claim rent.”
Therefore, it is implied that that the concepts of irresistible force and FM are similar. Moreover, on a careful analysis of both legislations, when such an event happens; under TPA the contract is voidable on option of lessee whereas in the ICA, the contract immediately becomes void. Therefore, the TPA is considerably favorable to the lessee.
- Established thresholds
The legal threshold allotted to FM is not, highly enhanced onerousness[4]; or availability of delayed performance alternatives[5]. It cannot be used to avoid a bad bargain[6]. In essence the event should upset the foundation of the agreement and should render performance, useless[7]. Factually, instances such as massive increase in price of coal or ghee; or a land agreed to be developed but later requisitioned during war did not qualify. On the other hand, strikes and breakdown of machinery[8] have been cited to be instances of FM.
Considering, both concepts are implied to be similar; we shall delve into an analysis of both thresholds. Under TPA, a FM or irresistible force must render the property ‘substantially and permanently unfit for the purposes for which it was let’. Two important instances are mentioned below: –
- Demolition has been held to be an irresistible force[9].
- Eviction by plague authorities under the Epidemic Diseases Act, 1897 was not held by the authorities to render the property unfit[10].
- Obligations under the transfer of property act, 1882
When Section 108(B)(e) is invoked, the lessee has the option to treat the lease as void, and in absence of conveying their decision to lessor, the lessee must pay. Operative portions from judgments are mentioned below:
Trilok Chand case[11]
“ In Gandayalla Munuswamy v. Margu Muniramiah (A.I.R. 1965) Andhra Pradesh 167) it was observed: “Under Section 108 (e), Transfer of Property Act a lease is not automatically determined on the destruction by fire or irresistible force of a substantial portion of the property leased. It is a matter of option with the lessee to get rid of the tease or not. He could treat it as void if he so desired. But the law does not compel him to do so. This aspect of the matter makes it all the more necessary that an unambiguous declaration of the lessee’s intention to treat the lease as void must be communicated to the lessor. The lessor would not otherwise be able to take appropriate steps on the footing that the lease has come to an end and he is therefore at liberty to deal with the property as he chooses. What is even more important is that a mere declaration of intention to treat the lease as void is not sufficient. The lessee must also yield up possession of the property to the lessor as required by the provisions of Section 108 (q) of the Transfer of Property Act. He cannot continue in possession and yet declare that he has treated the lease as void. That would obviously be an inconsistent and impermissible position to adopt. So long as a lessee has not surrendered to his lessor the possession which he obtained from the latter at the time of the lease, he cannot rid himself of his obligations under the lease”.
The same principle is also followed in Amalgamated Bean Coffee Trading[12]. Also, the language of the FM clause in the lease deed must be read in conjunction with the TPA to construe the true intent of parties.
- Proportionality of payment
The case of Kishan Chand[13] summarizes the principle of a Supreme Court judgment. It holds that, “The Supreme Court has also observed in Surendra Nath Bibra v. Stephen Court Ltd, AIR 1966 Supreme Court 1361 that it would depend on each case whether a tenant would be entitled to suspend payment of the rent or whether he should be held liable to pay proportionate part of the rent when it is found that the whole of the premises were not in his possession and that a part of the premises were with the landlord. In that case, the landlord had failed to give possession of one out of the three bed rooms in the premises and yet it was held that the tenant was not entitled to suspend the payment of the rent, but was bound to pay a proportionate part of the rent. This was the decision even when the fault lay with the landlord. In the present case, the landlord was not to be blamed at all. It was the tenant who voluntarily surrendered a part of the promises. The tenant could not, therefore, unilaterally suspend payment of rent after such surrender. He continued to be liable for the whole of the rent until he obtained an order of the court or agreement of the landlord for the reduction of a proportionate part of the rent.”
Therefore, payment can be avoided if whole of the property is destroyed or demolished. However, in view of the lockdown, none of that can will be applicable as nothing has been destroyed.
- Conclusion
Although Covid-19 does not fulfil the threshold allotted to FM by case law, it will clear the threshold in view of Halliburton[14] and various government notifications. The case held that “the countrywide lockdown, which came into place on 24th March, 2020 was, in my opinion, prima facie in the nature of force majeure. Such a lockdown is unprecedented and was incapable of having been predicted either by the respondent or by the petitioner.”
FM in this case was granted and invocation of bank guarantees was stopped because the work would ordinarily be completed by 31st March 2020, however, because of the lockdown the work couldn’t be completed. So, although the case can be factually distinguished at this point, the abovementioned case law does indicate that the Court would take a liberal outlook while dealing with such cases. So, when applied to the present factual matrix, ie. the lockdown being used as a defense by the lessee to avoid their payment obligations. It is advisable that: -If you are the lessee and have a FM clause in your lease deed that includes pandemics, you should not be required to pay.
If you are the lessee and have a FM clause in your lease deed but it does not include pandemics; you will be covered under the government notifications stating that the lockdown is a FM event. However, under section 108(B)(e), you must intimate your lessor that the lockdown is a FM event and that accessing the property has become unlawful and therefore, you need to treat the lease as void/ or continue it (as you wish to do), and by way of such notice you are surrendering the possession of the property (symbolically) to him.
If you are a lessee and don’t have a FM clause in your lease deed; you can rely upon Section 108(B)(e) of TPA and follow the route mentioned above; wherein you have the option of treating the lease as voidable. Thereafter as your obligation under Section 108(B)(q) you must surrender the property’s possession to the lessor and accordingly determine the lease under Section 111.
- Additional remarks
Every good business is the end product of a good business relationship between both clients. In such an unprecedented event, one such as the lockdown it is evident that the economy and businesses as a whole shall take a huge hit. Therefore, all business must understand the same and the real solution will not be to play the waiting game in the Court, but to: –
- Stagger the amounts of rent over a period of time. Parties must negotiate the same depending on capacity to pay; or
- Agree on a lumpsum arrangement.
- In the event that one deals with a highly unreasonable client, only then taking the case to Court would make sense.
Originally published here.
[1] Raja Dhruv Dev Chand v. Harmohinder Singh and Anr: [1968] 3 SCR339
[2] State of Bombay v. Mishrilal Onkardas Joshi [1958] 60 Bom L R 560
[3] Airports Authority of India v. Hotel Leelaventure Ltd [2016] 159 DRJ 544
[4] M/s Alopi Parshad & Sons Ltd. v. Union of India [1960] 2 SCR 973
[5] Energy Watchdog v. Central Electricity Regulatory Commission [2017] All SCR 1004
[6] Airports Authority of India v. Hotel Leelaventure Ltd [2016] 159 DRJ 544
[7] Satyabrata Ghose v. Mugneeram Bangur & Co. [1954] AIR 44
[8] Dhanrajamal Gobindram vs. Shamji Kalidas & Co. [1961] AIR SC 1285
[9] Vidyawati Bhargava v. VIIIth Additional District Judge, Kanpur [2003] 50 ALR 61
[10] Merwanji v. Syed Sirdar [1899] 1 Bom L R 267; [1899] 1 Bom L R 739 742 DB
[11] Delhi High Court in Chamber of Colours and Chemicals Pvt. Ltd. v. Trilok Chand [1973] R.C.R. Rent 758
[12] Amalgamated Bean Coffee Trading v. Surjit Singh Jolly [2017] Delhi High Court FAO No. 189/2017
[13] Shri Kishan Chand Mehra v. Shri Ramesh Chander Nijhawan [1979] Rent LR 2 683 1969
[14] Halliburton Offshore Services Inc. v. Vedanta Limited & Anr [2020] OMP I COMM & IA 3697
