Frustration of Lease in COVID-19 Times

Introduction

The year 2020 has been the most unexpected and the year of most unprecedented events in the history of the world. The COVID-19 pandemic, as declared by the World Health Organization (WHO), has caused several businesses to fall apart and has brought all other industrial sectors to a halt. The consequence of this pandemic has been a plethora of contractual disputes among the parties. Nevertheless, the government had been constantly trying to aid the commercial sectors with exhausting resources in managing the losses amidst the worldwide lockdown.

COVID-19 has made the performance under contractual obligation either impossible or difficult amidst worldwide lockdowns, giving recognition to the doctrine of frustration. The rule can be traced to the Indian Contract Act, 1872, and the Transfer of Property Act, 1882 (TOPA) under relevant provisions. The inter-related provisions of these laws help in ascertaining the remedies in the situation where a party cannot perform the obligation under the contract because of the circumstantial inabilities.

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Through this article, we will look into the impact of COVID-19 on the contractual beneficiaries under the Indian Laws and assessment of the jurisprudential limitations in such situations.

Doctrine of Frustration

The concept of the Doctrine of Frustration can be traced to English law. Earlier, English Law practised the concept of “absolute contract” where the parties were bound by the contract without any recourse for breach due to uncertain circumstances. The doctrine of Frustration was incorporated in English law as a remedy in the cases where the defendant was at no fault since the purpose of the contract become unattainable yet the defendant was held liable for the breach of contract.[1]

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The Indian contract law envisages the doctrine as – An agreement becomes impossible when the defendant is unknown of the circumstance or could not prevent the unfortunate events. It is arbitrary to enforce such agreement in the court of law as and thus stands void. The reason under the law

The Supreme Court has even stated that impossibility and frustration are often used as interchangeable expressions. The impossibility for the performance of the contract absolves the parties from a further performance as they did not contract to perform impossibilities.[2]

Section 56 of the Indian Contract Act identifies the circumstances where the performance of a contract is suspended or discharged because of the impossibility of the objective. The term “impossibility” is not limited to human limitations but also the impracticability of the performance and other circumstantial factors as well.[3]

Most times contracts have a clause mentioning the suspension of obligations during certain circumstances. Under Section 32 of the Indian Contract Act, a contingent contract can only be enforced if a certain event occurs otherwise the contract becomes void. In other words, if a contract stating a certain condition for the performance of the obligation then unless that “condition” occurs, the contract cannot be enforced in the court of law.

To invoke Section 56 of the contract law, the party to a contract has to prove certain things:

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a) Whether the event which caused non-performance included in the clause (under Section 32);

b) Whether there existed no alternative mode of performance; and

c) Whether the non-performance was the result of that event.

Events Beyond Apprehension

At times, a contract might not include any clause where the performance under a contractual obligation becomes impossible due to the act which by their very unprecedented nature are beyond any control and apprehension or rather cannot express it in words, here is when the concept of force majeure or the Act of God comes into the play.

According to the Black’s Law Dictionary, force majeure is defined as- An event or effect that can be neither anticipated nor controlled. The law cannot regard a promise to do something impossible as of any value and therefore such promise has no consideration.

The concept of force majeure and Doctrine of frustration was laid down in the Satyabrata Ghose vs. Mugneeram Bangur & Co., in which the court analyzed that to determine whether the unprecedented event has resulted in the frustration of the contract, it is supposed to include some clause or any implied condition stating the discharge of obligation during such event with mutual consent.[4]  Otherwise, the non-performance is deemed as a breach of the contract.

Generally, force majeure clauses operate during adverse times where the obligation to a contract has to be temporarily seized or suspended due to the hitherto inability of performance.

Frustration of Lease

The definition of ‘Lease’ is mentioned in the Transfer of Property Act, which says that –

A lease of immovable 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 periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms.”

A person transfers their right over their property to another person in consideration of a price, promise, or any valuable material, such arrangement is somewhat similar to the obligation under the Contract Act.[5] Section 108(e) of TOPA reads –

“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”

this makes it obvious that the frustration rule is indeed applicable under the transfer of property laws.

In Dhruv Dev Chand vs. Harmohinder Singh & Anr, the Supreme Court, while examining the applicability of Section 56 to the lease under the TOPA observed that the section has a limited application to covenants under a lease. Nonetheless, the transfer of property resulting from the lease cannot be declared void subjected to the discretion of the lessee.[6]

Contemporary Actions

Amidst this pandemic, to protect the tenant rights, the UK government had promulgated special legislation – Coronavirus Act, 2020. Under section 82 & 83, the act protects the business tenancies until the situation is mitigated. It states that on account of non-payment of the rent, the landlord cannot forfeit the commercial premise till 30th June 2020 or later in case of further notifications.[7]

Although, in India, no such order or legislation has been promulgated, however, the Government had been constantly trying to lessen the burden. One such instance was on 19th February 2020, the Finance Ministry issued an internal Office Memorandum in which it said that the COVID-19 pandemic should be considered as a case of natural calamity and should be subjected to the Act of God or the force majeure clause.

“Coronavirus should be considered as a case of natural calamity and force majeure may be invoked, wherever considered appropriate, following the due procedure…a force majeure clause does not excuse a party’s non-performance entirely, but only suspends it for the duration of the force majeure.”

The notification also envisaged that if the reason for the delay due to the Act of god exceeds 90 days, it is at the discretion of either of the party terminate the contract completely without any financial ramifications. The notification was more of a recommendation than any sort of binding for the contracting parties.

In a recent case, the Delhi High Court observed that temporary non-usage of property under the rental lease will not make the lease void under Section 108(e) of TOPA and held that the entitlement of a client in a rental agreement does not govern by any overriding force majeure event but by the subsequent consequences of the said event.[8]

Another such instance was by the Home Affairs Ministry vide order dated 17th& 24th March 2020, directed the State government and all the Union Territories to take requisite actions as to ensure compulsory payment of wages to the workers and waiver of the rental dues by the landlords for a month. However, no such steps were advanced by the State in consideration of the backlashes from the real state community, employer communities, and landlords.

Conclusion

The outbreak of COVID-19 has certainly led the world economy to a standstill situation. Curfews, nationwide lockdown, to contain the virus has resulted in a cash crunch in many sectors. Such an event has its ramifications such as supply chain payment defaults, non-payment under the rental lease agreement. Amidst all the above challenges the judicial interpretations and State notifications have been a silver lining for the businesses involving commercial lease and license arrangements.

Although the pandemic has hit the commercial industries very hard, however, considering the fact that every person has been a victim of the catastrophe and to mitigate one’s burden the State cannot lade another person with the liabilities or vice versa. The question of whether COVID-19 can be considered as an act under the force majeure clause is still unsettled, however, the consequences of the pandemic resulting in economic collapse are certainly causing several disputes in light of the impossibilities of performance of the contractual obligation.

Although the State is in constant function to mitigate the burden of the contractual parties, it is also advisable that the contracting parties, while entering into an agreement, should explore wide enough possibilities under the doctrine of frustration to cope with any such unprecedented situations.

Endnotes

[1]See in Chapter IV of Pullock & Mulla The Indian Contract Act; pg. 323

[2] Satyabrata Ghose vs. Mugneeram & Co.; 1954 AIR 44

[3]Ibid.

[4]Ibid.

[5] Sec. 4 of the Transfer of Property Act, 1882

[6]1968 AIR 1024

[7]See in the Coronavirus Act, 2020;

https://www.legislation.gov.uk/ukpga/2020/7/part/1/enacted

[8] Ramanand & Ors vs. Dr Girish Soni & Anr; RC. Rev. 447/2017

References

  1. Pollock & Mulla The Indian Contract Act; 4th Edition
  2. Nishith Desai – “Impact of COVID-19 on Contracts” http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research_Papers/Impact_of_Covid-2019_on_Contracts.pdf
  1. https://www.thehindu.com/news/national/mha-drops-order-on-wages-for-lockdown-period/article31616858.ece
  2. https://www.bloombergquint.com/law-and-policy/covid-19-temporary-non-use-wont-make-rental-lease-void-delhi-high-court-says

This article is authored by Adv. Sakshi Shairwal & Saransh Awasthi (Intern) of Sakshar Law Associates, New Delhi. For further information on this topic, please contact Advocate Sakshi Shairwal by email at [email protected] The website of Sakshar Law Associates can be accessed at www.saksharlawassociates.com.

Adv. Sakshi Shairwal, Head, Sakshar Law Associates


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