On September 5, the apex court reserved the judgement after a marathon hearing that went on for 16 days.
Once considered vestigial, the force majeure(FM) clause has suddenly captivated everyone’s attention. From tenants to contractors, everyone seems to be itching to invoke the force majeure clause to dodge a few payments they owe, to the party on the other side. With the Covid-19 pandemic having hit many pockets hard, their concerns are definitely plausible.
What is force majeure?
A “force majeure” or “superior force” clause, is a provision in a contract which, upon its invocation, is capable of effectively discharging parties from performing their contractual obligations, when circumstances beyond their control arise, making performance impossible. Whether Covid-19 can be used to absolve a party of their obligation depends upon the applicable law in each case, the type of agreement/ contract in question, and whether or not it contains an FM clause, followed by an assessment of the specificity in the wording of the FM clause itself.
What does this mean for various groups?
Employers and employees:
The relationship between employers and employees are not just governed by rules of contract but also by various State legislations which in most cases mandate a minimum notice period prior to termination. Therefore, unless the FM clause is specifically worded to include the current scenario, neither party can claim advantage of the same. In short, an employer cannot terminate services of an employee ignoring terms of notice under the excuse of Covid-19 unless the business is closing down and neither can an employee resign without serving prior notice or making payment to the employer in lieu thereof. The exception to this is cases of misconduct whereby, if the service rules provide for immediate termination and the State legislation also generally concurs, then the same can be done on those grounds.
Creditors and borrowers:
The Reserve Bank of India has announced an EMI moratorium on 27 March 2020. Several institutional moneylenders have subsequently announced EMI moratorium during subsistence of the lockdown. For non-institutional moneylenders, it is recommended not to force debtors to make payment if they seek a temporary moratorium on grounds of Covid-19. However, in every case a prior written request, on behalf of the debtor is necessary to mitigate risk of further disputes. Landlords and tenants: Unless expressly agreed upon in the agreement and as long as the premises are under the possession of the tenant, the obligation to pay rent cannot be evaded under the excuse of Covid-19. Recently, on 21 May 2020, the Delhi High Court, relying upon a Supreme Court ruling in Raja Dhruv Dev Chand v. Raja Harmohinder Singh & Anr has held that, lease agreements are executed contracts, therefore unless the possession is rendered ‘substantially and permanently unfit’ for which it was leased or let out, the lessee cannot even claim that the lease or contract stands voided (Ramanand vs Girish Soni). This means that, unless there is an explicitly worded FM clause, lessees including tenants cannot use the ground of Covid-19 to evade rent; they can however vacate premises upon serving due notice to the landlord according to the notice provision contained in the agreement.
Entrepreneurs and service providers:
Recently, vide notifications the Department of Expenditure, Procurement Policy Division under the Ministry of Finance, declared Covid19 as a natural calamity. According to these notifications, the Central Government acknowledged that the pandemic has affected multifarious commercial activities including manufacturing and distribution of goods, services and all transportation activities, which in turn has robbed contracting parties of their capability to perform their contractual obligations and for this reason has allowed parties the liberty to take advantage to the FM clause contained in their agreements or contracts. However in both cases, the benefit by way of recourse to FM clause will enure to cases where one of the procuring parties is a Central government entity or is a public-private partnership contract and for projects funded by the Central Government. Also, the FM claim will be valid only if the contracting parties were not in default of their obligations on 19 February 2020. What happens if your contract does not contain an FM clause? This in no way means that all hope is lost in cases where contracts or agreements do not include a FM clause, since Section 56 of the Indian Contract Act, 1872 provides for an alternative in the form of the “doctrine of frustration” whereby parties can claim frustration of contract before a Court of appropriate jurisdiction. The Supreme Court has in 2017, laid down in Energy Watchdog v. CERC that, contracts which do not contain a FM provision, Section 56 of the Indian Contract Act, 1872 which embodies the frustration doctrine will cover those circumstances (Energy Watchdog vs CERC). However, this can be tricky, since the threshold for interpreting frustration is very high and in order to successfully claim it, it is imperative that the party claiming frustration, must prove that the circumstances have made performance of the obligation impossible and hence, the contract itself stands terminated and all parties stand discharged of their obligations. For example, a contract to sell a part of land might be rendered impossible, if there is a war and the agreed plot is annexed by another State. In conclusion, an FM clause is the safest way to protect parties in times such as these. However, unless very painstakingly worded, a FM clause is no panacea for the economic pyrexia that has gripped a contracting party. Also, owing to the high threshold for proving “frustration” of contract under Section 56 of the Indian Contract Act, it is highly recommended that any contract or agreement, prior to its execution is thoroughly vetted by an experienced professional and entered upon lest either party is left remediless in the eye of a storm, or in this case, Covid-19.
(The writer is a lawyer qualified in international investment law and arbitration and is co-founder and partner at Seven Seas Partners LL.P. Advocates and Solicitors, International Lawyers and Legal Consultants.)