Force Majeure And Doctrine of Frustration in the wake of Covid-19: Application on Commercial Leases

Introduction:

It is an undeniable fact, today,that no segment of the society has remaineduntouched by the effects of the Covid-19 Pandemic, including commercial transactions viz. commercial leases and that parties to such agreements will take a hit despite their best contingency plans. The present Article is an attempt at exploring as to whether concepts such as Force Majeure and Doctrine of Frustration which emanate from the Law of Contracts can be utilized by the parties in the present scenario on commercial leases, so let's begin.

Force Majeure

Albeit the term 'Force Majeure'itself does not find a mention in the Indian Statutes, however, as per Black's Law Dictionary it is defined as, 'an event or effect that can be neither anticipated nor controlled'.The clause of 'Force Majeure' prior to the pandemic was not given much weightage in a contract, but has now gained great importance in interpretation of the contract clause and its obligations on the parties.

The term originated from the French language and finds its roots in 'Code Napoleon'. The said term, over the years of usage in the contractual sphere, is understood as 'an irresistible force or compulsion such as will excuse a party from performing their part of the contract'. It was established by the English Courts in Taylor v. Caldwell [EWHC QBJ1].

'Force Majeure' events relieve a party from performance of its contractual obligations, without any consequential breach of the contract, provided such performance is adversely impacted by events outside the control of an affected party such as act of God, natural disaster, war, strike, lockout, epidemic, Government orders, etc.

In India in the Hon'ble Supreme Court in the case of DhanrajmalGobindram vs. ShamjiKalidas, (1961) 3 SCR 1020 has held that :

'An analysis of rulings on the subject into which it is not necessary in this case to go, shows that where reference is made to "force majeure", the intention is to save the performing party from the consequences of anything over which he has no control. This is the widest meaning that can be given to "force majeure", and even if this be the meaning, it is obvious that the condition about "force majeure" in the agreement was not vague. The use of the word "usual" makes all the difference, and the meaning of the condition may be made certain by evidence about a force majeure clause, which was in contemplation of parties.'

The said term has found its teeth by being incorporated as a reference in the Statute under Sec 32 of the Indian Contract Act.

Doctrine of Frustration

Unlike the Force Majeure clause, Doctrine of Frustration, is embodied in the Indian Contract Act, 1872 by way of Section 56.The Doctrine of Frustration is applied when an act itself for which the agreement was entered becomes impossible to perform, it renders the agreement in itself void. This doctrine is usually relied upon for termination of the contract unlike the concept of Force Majeure which is for suspension of the obligations.

The Hon'ble Supreme Court of India while dealing with the Doctrine of Frustration has held that the word 'impossible' has not been used with respect to physical or literal impossibility. To determine whether the contract is frustrated, it is not necessary that the performance of an act should literally become impossible, a mere impracticality of performance, from the point of view of the parties, and considering the object of the agreement, will also be covered. Where an unexpected occurrence or change in circumstances decimates the very objective of the contract the same may be considered as 'impossibility' to do as agreed. [SatyabrataGhosh Vs. MugneeramBangur& Co. 1954 SCR 310(12)]

Difference between Doctrine of Frustration and Force Majeure

If 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 under Section 32 of the Act. If however, an untoward event or change of circumstance totally upsets the very foundation upon which the parties entered into their agreement, the contract can be held to be frustrated under Section 56 of the Act. [Energy Watchdog vs Central Electricity Regulatory Commission and Ors. (2017) 14 SCC 80].

A force majeure clause relieves one or both parties from liability to perform contract obligations when performance is prevented by an event or circumstance beyond the parties' control whereas Frustration would apply to a contract if its fundamental purpose is destroyed

Further,it has been held that when a contract contains a force majeure clause which on construction by the Court is held attracted to the facts of the case, Section 56 can have no applicationin SatyabrataGhose case [SatyabrataGhose v. MugneeramBangur& Co., MANU/SC/0131/1953 : 1954 SCR 310 : AIR 1954 SC 44].

Doctrine of Frustration and Force Majeure under the Indian Law:

While Force Majeure is not specifically mentioned in any Indian Statute reference to the concept of force majeure can be derived from Section 32 of the Indian Contract Act 1872. The said Act was drafted by Sir James Fitzjames Stephen who headed the 3rd Indian Law Commission during the British regime and was enacted on 25th April, 1872 [Act 9 of 1872] and came into force on the first day of September 1872. The essence of the India Contract Act therefore was modeled on that of the English Common Law. The said Act continued Post-Independence by the virtue of Article 372(1) of Indian Constitution.

The Indian Contract Act,1872 governs the contracts executed in India so that in the event of dispute, their legality or validity can be established and the judiciary has a uniform approach in adjudication the disputes arising.

Sec 32 of the Indian Contract Act reads thus:

"32. Enforcement of contracts contingent on an event happening- Contingent contracts to do or not to do anything if an uncertain future event happens cannot be enforced by law unless and until that event has happened.

If the event becomes impossible, such contracts become void.'

Thus, the essence of Force Majeure is seen in Sec 32 of the Indian Contract Act 1872.

Section 56 of the Indian Contract Act deals with Doctrine of Frustration

'56. Agreement to do impossible Act- An agreement to do an act impossible in itself is void.

Contract to do an 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.

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. '

Thus, the essential ingredients for application of Section 56 are as under:

(a) A valid and subsisting contract.
(b) There must be some part of the contract yet to be performed.
(c) The contract, after it is entered, becomes impossible to be performed.

Lease, Lessor, Lessee, Premium and Rent defined

That since the present Articles delves into the topic of Applicability of Force Majeure and Doctrine of Frustration on Commercial leases it is also relevant to know concepts such as Lease, Lessor, Lessee, Premium and Rent which are defined under various provisions of the Transfer of Property Act, 1882. The said Actcame into force with effect from 17thFebruary, 1882. The Act primarily deals with transfer of immovable property and interests in immovable propertyand seeks to complete the law of contract, as most of the transfers primarily arise out of a contract between the parties. The said Actwas also continued Post Independence by virtue of Article 372(1) of Indian Constitution.

A lease of an immovable property is a transfer of an interest in an immovable property entitling the lessee to the enjoyment of such immovable property which includes the right to possession thereof. An essential feature of the lease is that the transfer is for a consideration which is called premium or rent. The lease is defined in Section 105 of the Transfer of Property Act whereas the rights and liabilities of the lessor and the lessee are defined in Section 108.

'Section 105 - Lease defined

A lease of immoveable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodicallyor on specified occasions to be transferor by the transferee, who accepts the transfer on such terms.

Lessor, lessee, premium and rent defined

The transferor is called the lessor, the transferee is called the lessee, the price is called the premium, and the money, share, service or other thing to be so rendered is called the rent.'

Section 108 clause (l) of the Transfer of Property Act provides that the lessee is bound to regularly pay the rent/premium to the lessor. The liability of the lessee to pay the rent/premium is absolute and not subject to any commercial hardship faced by the lessee. Section 108(l) of the Transfer of Property Act is as follows:

'Section 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:-

xxx xxxxxx

(B) Rights and Liabilities of the Lessee

xxx xxxxxx

(l) the lessee is bound to pay or tender, at the proper time and place, the premium or rent to the lessor or his agent in this behalf' .

Application of Force Majeure on Lease Agreements

That today the unique problem that is presenting itself due to the strike of Covid-19 virusis that parties to a lease agreement of an immovable property will claim that since they are unable to earn much or in some situationsnothing at all, they would be unable to repay the rent/premium etc. they owe to the lessor in terms of the agreement entered.The situation may differ slightly in each case but basic crux of the problem emanating from such agreements would be the same that lessees are unable to uphold their end of the agreement and in these circumstances would want to claim either Force Majeure or Doctrine of Frustration.

However, such parties also ought to be aware of the fact that the successful application of these concepts is not that simple and they would have to cross a number of hurdles to prove them.

Firstly, to prove Force Majeure there has to be a Clause mentioned in the agreement for it and then it has to be satisfied that conditions were present for the Application of this clause, also if the contract contains clauses that relate to Sec 56 of the Indian Contract Act then also Force Majeure cannot be applied.

Even after crossing all these hurdles the lessee has an uphill task of overcoming the settled position of law in India on the matter, which only permits Force Majeure in cases of Leases on properties if it is completely damaged.Any loss of revenue or the contract becoming non-profitable is not a valid reason for invoking Force Majeure.Lets face it, Covid -19 might be an unprecedented situation, but it has only resulted in loss of revenue due to market conditions, and the properties are still intact. As a result, the lessees do not have a right to seek waiver or suspension of lease rentals in the absence of an explicit Force Majeure clause supporting such waiver/suspension and the same would only depend on the clauses of the agreement.

That under these circumstances, lessee has no other option but to send an appropriate notice to the Lessor explaining the situation and their inability to pay or seek termination of their agreement.

Application of Doctrine of Frustration on Lease Agreements

That if proving Force Majeure is difficult , then establishing the applicability of Doctrine of Frustration is an even more uphill task as the law qua Lease of properties is well settled that Doctrine of Frustration would not apply in such cases.

The view of the Hon'ble Supreme Court as well as numerous High Courts on this issue has been the same since time immemorial that Doctrine of Frustration would not apply to Lease agreements even if the contract has become onerous, non-profitable etc. It has been repeatedly held that the occurrence of a commercial difficulty, inconvenience or hardship in the performance of those conditions, can provide no justification for non-complying with the terms of the contract which they had accepted with open eyes.

The Hon'ble High Court of Delhi in the matter of Airports Authority of India v Hotel Leela Venture O.M.P. 1206/2012 dated 15.07.2016clearly culled out the law of the land on the aspect of applicability of Doctrine of Frustration on lease agreements and had held while allowing the challenge by the Petitioner on the applicability of the Doctrine of Frustration that Section 56 of the Indian Contract Act 1872 a contract is not frustrated merely because of its performance has become more onerous and burdensome namely because of abnormal rise and fall in prices, a sudden depreciation of currency, or an unexpected obstacle to the execution of the contract, as these are nothing but ordinary risks of business(AlopiParshad& Sons Ltd. v. Union of India AIR 1960 SC 588).

It was also held that while relying upon Raja DhruvDev Chand v. Raja Harmohinder Singh AIR 1968 SC 1024, the three-Judge Bench of Supreme Court that Section 56 of the Contract Act is not applicable when the rights and obligations of the parties arise under a transfer of property under a lease.

The judgment of T. Lakshmipathi v. P. Nithyananda Reddy (2003) 5 SCC 150,was also referred wherein the Supreme Court while relying uponRaja DhruvDev Chand (supra) held that doctrine of frustration belongs to the realm of law of contracts and it does not apply to a transaction where not only a privity of contract but a privity of estate has also been created inasmuch as a lease is the transfer of an interest in immovable property within the meaning of Section 5 read with Section 105 of the Transfer of Property Act.

The Hon'ble High Court was also pleased to hold that the doctrine of frustration did not apply where there is a lease whether the term is one for a fixed period or one which can be terminated by notice to quit, as the estate vested in the lessee by a lease is not extinguished by the order of requisition which is of a temporary nature. (TarabaiJivanlal Parekh v. LalaPadamehandAIR 1950 Bom 89)

The case of AlanduraiapparKoilChithakkadu by its Trustee M. RamanandaNainar v. T.S.A. Hamid,AIR1963Mad94was also referred wherein a lessee of a shandy tope agreeing to pay an annual rent for a period of five years was held not to be entitled to remission merely for the reason that the shandy was hit by two cyclones during the period of lease.

The Hon'ble Court had also held that the Maxim qui approbat non reprobate (one who approbates cannot reprobate) is applicable on Doctrine of Frustration.According to it, a party to an instrument or transaction cannot take advantage of one part of a document or transaction and reject the rest. That is to say, no party can accept and reject the same instrument or transaction. The judgment of New Bihar Biri Leaves Co. v. State of Bihar (1981) 1 SCC 537, at page 558, para 48, was also relied wherein the Supreme Court held that it is a fundamental principle of general application that if a person of his own accord, accepts or contracts on certain terms and works out the contract, he cannot be allowed to adhere to and abide by some of the terms of the contract which proved advantageous to him and repudiate the other terms of the same contract which might be disadvantageous to him.

Also the case of Track Innovations India Pvt. Ltd. v. Union Of India, 2010 (170) DLT 424, was referred wherein the Division Bench of the Hon'ble Delhi High Court was pleased to hold that there cannot be variation of the terms of a commercial contract, which has been acted upon. Government is not bound to ensure profit in every commercial contract more so when the contract had been awarded either by public auction or by floating tender or negotiations. The Division Bench further noted that a person cannot approbate and reprobate or accept or reject the same instrument.

Applicability of English Law on Doctrine of Frustration

It is also relevant to point out that English Law regarding Doctrine of Frustration is slightly liberal, however, is not applicable in India .The Hon'ble Supreme Court in SatyabrataGhose v. MugneeramBangur and Co., AIR 1954 SC 44, was pleased to hold that :

'It would be incorrect to say that section 56 of the Contract Act applies only to cases of physical impossibility and that where this section is not applicable, recourse can be had to the principles of English law on the subject of frustration. It must be held also that to the extent that the Indian Contract Act deals with a particular subject, it is exhaustive upon the same and it is not permissible to import the principles of English law dehors these statutory provisions. The decisions of the English courts possess only a persuasive value.'

Conclusion

In view of the legal precedents and the settled position of law in India it is difficult to see if lessees will be able to escape their contractual obligation under a lease agreement. The only option in such conditions left for the parties is to either send an appropriate notice informing the other party or seek termination of the agreement or perhaps, as a last resort, hope for some favorable Notifications from the Government of India pertaining to payment of rent in commercial leases.

The author is Managing Partner and Founder, Kalra & Co.