Force Majeure Clause in Contracts: Impact on Lease Agreements

As we grapple with the Coronavirus pandemic, it has become increasingly clear that the commercial world will suffer from an extraordinary event or circumstance beyond the control of the parties. The force majeure event has already caused substantial commercial loss and has obstructed the performance of many contracts for no fault of either party. This therefore, leads us to a discussion about the much-forgotten Force Majeure clause with focus on this contractual clause with respect to lease agreements.

‘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. The principle of force majeure is recognized in express terms in most civil jurisdictions, and the force majeure clauses are contained within in contracts to safeguard the interests of the parties where they are unable to perform their obligations due to unforeseeable situation.

This concept has been adequately detailed in the Indian Contract Act via Section 32 and Section 56. A landmark decision clarifying this position comes in the case of Satyabrata Ghose v. Mugneeram Bangur & Co , the court in this case held that: “In deciding cases in India, the only doctrine that we have to go by is that of supervening impossibility or illegality as laid down in section 56 of the Contract Act taking the word ‘Impossible’ in its practical and not literal sense.

This was further reiterated in Energy Watchdog v. CERC, where the court reproduced a statement from the Satyabrata case: “The performance of an act may not be literally impossible but it may be impracticable and useless from the point of view of the object and purpose of the parties. If an untoward event or change of circumstance totally upsets the very foundation upon which the parties entered their agreement, it can be said that the promisor finds it impossible to do the act which he had promised to do.”

This principle was further summarized by a bench comprising of Justice P.C. Ghosh and R.F. Nariman,. Some key principles that were laid down by the Hon’ble Court are as hereunder:

  • If an express or implied ‘force majeure’ clause exists in a contract, the same will be exercised over and prior to the principle enshrined under Section 56;
  • Application of Doctrine of Frustration must always be with narrow limits and implication;
  • A mere rise in cost or expense does not come under the ambit of Doctrine of Frustration;
  • Doctrine of Frustration will not apply so long as the fundamental basis of the contract remains the same.

FORCE MAJEURE CLAUSE IN THE LEASE AGREEMENT

Relief from payment of rent due to a ‘Force Majeure’ event can only be availed if such a relief is explicitly provided under the lease agreement. In most of the, lease agreements excuse the lessees from payment of rent during a Force Majeure event if there is a damage or destruction of the property leading to its unavailability for use by the lessee, however, they do not provide blanket waiver from payment of lease rentals on occurrence of every Force Majeure event. As Force Majeure is a contractual right, the express wordings of the clause have to be carefully assessed and the lessee cannot, as a matter of right, invoke non-payment due to a Force Majeure event in the absence of a supporting clause and/or a specific rent waiver agreed under the contract. If the lease agreement does provide for stoppage of rent or suspension of all obligations during a Force Majeure period without any qualifications or riders, then the lessee should immediately exercise its right by issuing a letter to the lessor invoking Force Majeure event and intimating cessation of its obligation to pay lease rental during the period the Force Majeure event continues.

FORCE MAJEURE CLAUSE IF NOT IN THE LEASE AGREEMENT

While Force Majeure is not specifically covered under the Indian Contract Act, reference to the concept of force majeure can be derived from Section 32 and Section 56. 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. 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 IC Act. But it is pertinent to note that Section 56 is applicable only if the contract does not have an explicit Force Majeure clause.

The Indian courts have generally taken the view that Section 56 is not applicable when the rights and obligations of the parties arise under a transfer of property under a lease. The doctrine of frustration belongs to the realm of law of contracts and it does not apply to a transaction where, not only privity of contract but a privity of estate has also been created in as much as lease is the transfer of an interest vis-à-vis the immovable property within the meaning of Section 5 of the Transfer of Property Act, 1882.

In view of the foregoing, in the absence of a Force Majeure clause under the lease agreement, it is unlikely that a lessee can claim frustration of contract (which eventually leads to termination of the contract and may, therefore, not assist the lessee in the long run) and seek waiver of lease rental as consequence of a Force Majeure event.

CONCLUSION

However, given the unprecedented nature of the widespread outbreak of COVID-19 and/or the response of the government across the globe, it is highly probable that COVID-19 would constitute a force majeure event under many contracts having such clauses. The official memorandum dated 19-02-2020 headed as “Force Majeure Clause (FMC)” issued by Ministry of Finance, Department of Expenditure Procurement Policy Division clearly states that spread of Coronavirus (COVID-19) should be considered as a case of natural calamity and FMC may be invoked, wherever considered appropriate, following the due procedure.In the context of the COVID-19 outbreak, the issues that will arise for consideration are whether alternative ways of performing the contractual bargain were possible or not and were explored or not; whether the contractual bargain could have been performed albeit with difficulty or at a higher cost; or whether a party’s non-performance is rather and in fact, attributable to some other delay or deficiency. Further, the party claiming relief from performing the contract would also be required to notify the other party of the occurrence of such an event and its efforts to remedy the same. In contracts bereft of any force majeure clause, the parties may resort to the statutory provisions of Section 56 of the Indian Contract Act, as already stated hereinbefore.

— Ananya Agarwal intern at Ravindra Vikram Law Associates

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