The COVID-19 pandemic has clearly raised many complex questions of law in relation to the rights and obligations of parties when faced with substantial variation in circumstances in the context of which their commercial contracts were negotiated. This is particularly true for agreements relating to commercial leases as commercial properties all over India have largely remained unused in the past few months due to the pan-India lockdown imposed by the Government of India.
It is precisely in such circumstances that the concept of Force Majeure comes into picture. A Force Majeure Clause essentially incorporates in a contract the understanding of the parties in relation to an unforeseen event in the future and consequentially provides for relaxations to the party suffering the consequences of such unforeseen event. Such relaxation could vary from termination of the commercial contract to the suspension of payment obligations for a certain period of time till the Force Majeure Event persists.
The law on Force Majeure in India is, however, far from being uniform or straightforward in any manner. The law relating to the invocation of Force Majeure in commercial leases clearly takes the front seat on this puzzle. It is a matter of common knowledge now that the Supreme Court of India (“Supreme Court”) in its ruling in Raja Dhruv Dev Chand v. Raja Harmohinder Singh had categorically stated that the Indian law relating to frustration of contracts incorporated in Section 56 of the India Contract Act, 1872 (“ICA”) would not apply to lease agreements and the obligations arising thereto. Such non-applicability is primarily based on the premise that subsequent to the execution of the lease, the rights and obligations of the parties do not fall within the ambit of and are no longer governed by the ICA. The ICA covers executed contracts and not completed conveyances, and accordingly the Transfer of Property Act, 1882 (“TOPA”) becomes the cardinal legislation governing the rights and liabilities of parties under a lease agreement. Section 56 of the ICA, being applicable to rights and liabilities of the parties within the framework of a contractual domain, accordingly becomes non-applicable to completed transfers such as lease agreements.
Further, Section 56 of the ICA governs fields where contract is frustrated and there is nothing further that needs to be performed by the parties or the parties stand discharged from the performance of their reciprocal promises. However, in the case of lease agreements, the performance may not have become impossible or unlawful on the happening of an event and there could be scope for performance of reciprocal promises after passage of a particular time frame. Accordingly, the frustration of the contract is not in entirety but limited to a particular time period when the subject property is not in a condition to be utilized or put to use. In such a scenario, the applicability of Section 56 of the ICA completely loses its significance.
Additionally, the Supreme Court in its ruling in Satyabrata Ghose Vs. Mugneeram Bangur and Company and Ors. has clearly held that Section 56 of the ICA would only be applicable to situations where the contract does not contain impliedly or expressly a term which dictates the discharging / dissolution of the contract on the happening of certain events. Accordingly, as per Satyabrata Ghose which is the settled position of law now, Section 56 of the ICA could only be invoked where the contract between the parties does not contain a Force Majeure Clause and the contract has become frustrated on account of the fact that performance is unlawful or impossible. Clearly therefore on the basis of the above rulings, Section 56 of the ICA would be inapplicable when the parties are faced with unforeseen circumstances in relation to lease agreements where the contract is not frustrated and particularly when such commercial leases have a Force Majeure Clause in them.
A provision akin to Section 56 of the ICA can be found in Section 108 of TOPA. Section 108 (B)(e) of TOPA stipulates that if by an “irresistible force” any material part of the property which the Lessee is in possession of is ‘wholly destroyed or rendered substantially and permanently unfit” for purposes for which it was let out, then such lease agreements could be deemed void at the option of the lessee. However, multiple issues crop up if one would attempt to use this provision in relation to the present COVID-19 crisis.
While categorizing COVID-19 as an irresistible force would be a tough but not backbreaking task, proving the property to be wholly destroyed or rendered substantially and permanently unfit would clearly not be possible in most of the situations where the lessees of commercial leases are not able to use the premises due to COVID-19 although the premises have not been physically damaged or destroyed.
Additionally, it is pertinent to note that the usage of Section 108(B)(e) of the TOPA directly acts to render the lease agreement void. In most situations relating to COVID-19, the lessees would want exemption from their obligations, including payment obligations under the lease agreement for the period till COVID-19 lasts without completely doing away with the lease agreement, and therefore clearly Section 108(B)(e) would be of little help in such cases.
Accordingly, the invocation of the Force Majeure Clause in the respective lease agreement is the only legally cogent option which can be pursued by the parties.
The ongoing COVID-19 crisis and the constant invocation of Force Majeure Clauses in commercial leases, however, has made legal experts abreast with the inadequate language of most of these Force Majeure Clauses which do not seek to cover an event like COVID-19 and limit their scope to the ‘destruction’ of the property and/or to events where the property is ‘substantially and permanently unfit’, much on the lines of the aforementioned Section 108(B)(e) of TOPA. While the interpretation of certain such clauses in the right context could result in the inclusion of COVID-19 as a Force Majeure Event, in most cases such narrow wording has resulted in a complex turn of events with protracted unamicable negotiations and potential litigation. While this would surely serve as a wake-up call and reminder to legal experts for more cogent wording of Force Majeure clauses in the future, the situation being faced by tenants due to such inadvertent overlooking appears quite grim.
One aspect, however, that has largely been ignored is the statutory incorporation of COVID-19 as a Force Majeure Event due to the executive instructions issued by the Government of India which have the flavour of a statute. Such executive instructions, resulting in the lockdown and substantial restrictions in the usage of commercial premises would have the force of law and commercial leases would accordingly stand modified, revised and altered in consonance with such law.
EXECUTIVE INSTRUCTIONS IN RELATION TO COVID-19
The National Disaster Management Authority (“NDMA”) had issued an Order no. 1-29/2020-PP on 24.03.2020 under Section 6(2)(i) of the Disaster Management Act, 2005 (“DM Act”) directing all departments / ministries of the Government of India and State and Union Territories to take effective measure to prevent the spread of COVID-19. Section 8 of the DM Act calls for the constitution of a National Executive Committee which would assist the National Disaster Management Authority in its functioning. Such National Executive Committee comprises of officers of the post of Secretary to the Government of India at various departments and ministries. Presently, the Home Secretary of India serves as the Chairman of the National Executive Committee. Section 10(2)(l) entitles the National Executive Committee to lay down guidelines or give directions in relation to a disaster or a threatening disaster situation.
Subsequent to the issuance of the Order no. 1-29/2020-PP by the NDMA, The Ministry of Home Affairs on the same day, acting through the Home Secretary of India in his capacity as the chairperson of the National Executive Committee, issued Order No. 40-3/2020-DM-under Section 10(2)(1) of the Disaster Management Act, 2005 wherein guidelines / directions were given to State Governments, Ministries / Departments of Government of India etc. for ensuring social distancing to prevent the spread of COVID-19. The guidelines / directions specifically called for closing down of all commercial and private establishments. The lockdown is continuing till date in view of the subsequent extensions and amendments in the aforementioned order which continues to restrict the opening up of commercial and private establishments across India (together with such extensions and amendments, the “Central Government Order”). Further, any action in violation of the Central Government Order would be unlawful and attracts penal provisions under Section 51-60 of the DM Act and Section 188 of the Indian Penal Code, 1860.
EXECUTIVE INSTRUCTIONS HAVING THE FORCE OF LAW
With the statutory legal framework of India clearly lacking a cogent law besides the ineffectual Epidemic Diseases Act, 1897 to deal with a phenomenon like COVID-19, most of the actions of the Government to prevent the spread of COVID-19, as aforementioned, were taken through executive instructions issued by the Government under the DM Act. Accordingly. an important aspect to be considered when assessing whether COVID-19 could be used to invoke force majeure in lease agreement is to analyze and understand the legal nature of the executive instructions issued by the Government to prevent the spread of COVID-19.
The Supreme Court over the years has held that executive instructions which are issued by the Government under the authority of a Statute have the force of law. The ruling of the Supreme Court in G.J. Fernandez v. State of Mysore and Others is instructive in this regard. The Court in G.J. Fernandez categorically held that if the executive instructions have been issued under authority conferred on the Government by a certain statute or under a provision of the Constitution of India, 1950 (“Constitution”), then such executive instructions would have the force of statutory rules and thereby the force of law.
Similarly, the Supreme Court in its ruling in M/s Andhra Industrial Works v. Chief Controller of Imports and Others, while dealing with the impact of the Import Control Policy Statement on the rights of the Petitioner held that such a policy statement was not issued under a provision of a statute and accordingly did not have the force of law, thereby implying that issuance of such a document under a statutory provision would have given statutory force to such document. The Supreme Court, thereafter, in its ruling in Narendra Kumar Maheshwari v. Union of India and Others, while dealing with a set of guidelines issued by the Competition Commission of India held such guidelines to not be legally enforceable as they were not issued under statutory powers. The Court further held that where the guidelines are intended to clarify or implement the requirements and conditions on certain rights conferred in favour of citizens and a deviation from such guidelines directly affects the rights vested in such citizens, then the citizens have the right to approach courts for the breach of such guidelines. Accordingly, the Supreme Court linked the purpose of such guidelines to its nature, i.e. them being law or not, thereby further expanding the scope of such executive instructions obtaining the force of law.
The Supreme Court’s ruling in Syndicate Bank v. Ramachandran Pillai and Others also becomes important in this regard. While dealing with guidelines issued by the Central Government to prevent arbitrary use of power to prevent eviction of genuine tenants from public premises, the Court categorically held that for executive instructions to have the force of law, such instructions had to be issued under an authority conferred by the statute or the Constitution. Accordingly, instructions issued without such statutory powers are not law and the compliance of such instructions cannot be enforced through Courts.
HAVE LOCKDOWN ORDERS/GUIDELINES RELATING TO COVID-19 FORCE OF LAW?
The instructions relating to COVID-19, while having statutory backing and issued in terms of statutory prescription of NDMA Act, were majorly aimed at regulating the actions of the public during the present ongoing pandemic and any non-observance of such instructions on part of the public was backed by sanctions and penalties including sanctions under Indian Penal Code, 1860.
Further, such instructions were not limited to and/or intended for only a certain branch of the Government or a specific organization and/or were not in the nature of departmental guidelines. The instructions and guidelines of the Government were meant for the public at large having the effect of clarifying or modulating the requirements and conditions on certain rights conferred in favour of citizens including right to movement and accessing the commercial establishments. Accordingly, the instructions of the Government in relation to COVID-19 amply satisfy the requirements spelled out in the aforementioned judgments and could clearly be classified as executive instructions having the force of law.
CAN EXECUTIVE DIRECTIONS/LOCKDOWN ORDERS OVERRIDE EXISTING CONTRACTS?
Commercial leases are essentially commercial contracts between parties spelling out the rights and obligations of the parties with respect to the subject property for which the lease has been provided. As aforementioned, legal experts have been realizing lately that most of the Force Majeure clauses stipulated in lease agreements are too narrow to incorporate an event like COVID-19 within its ambit. While the present pandemic clearly fulfils every criteria of a crisis that one envisages while drafting Force Majeure Clauses, the inadequate wording of such clauses has resulted in making their invocation an arduous task. In this background, we would now examine whether executive orders having the force of law can override the existing contract and by statutory incorporation alter and modify the existing contracts. The Supreme Court in its ruling in PTC India Limited v. Central Electricity Regulatory Commission , while dealing with regulations framed by the Central Electricity Regulatory Commission, held that the enactment of regulations having force of law would have effect of altering, amending or modifying the existing contracts between the parties and accordingly would have the effect of aligning the terms of the existing contract with such regulations. Another essential question, that needs to be addressed is whether the rights and obligations spelled out in such commercial leases can be contrary to law.
The Supreme Court’s ruling in Union Territory, Chandigarh, ADMN. And Ors. v. Managing Society, Goswami, GDSDC becomes instructive in this regard. The Supreme Court, while dealing with a property dispute wherein the fixation of rent for the land allotted to a society was contrary to Rule 13 of the Chandigarh Lease-hold of Sites and Buildings Rules, 1973, held that any contract between the parties needs to be interpreted in accordance with law and any contrary interpretation would not be legally enforceable.
The aforementioned rulings of the Supreme Court makes it rather clear that the agreements that have already been executed at the time when the executive instructions were issued would stand modified, altered and/or revised in a manner that they are in consonance with law. Accordingly, clauses of such agreements which go against the settled position of law would be deemed to be otiose and a counteracting Force Majeure clause would be deemed to be incorporated in the agreement for such purposes.
The executive instructions issued in relation to COVID-19, which as elaborated in the previous section have the force of law, had directed for a complete lockdown in the initial months of the pandemic in India, resulting in non-utilization of the benefits of the commercial lease. It is a further of record that the extension of such instructions from time to time resulted in substantial restrictions on commercial activities for months. In view of such instructions, the lessees could barely use their leased premises, particularly those who has taken such premises for commercial purposes in light of statutory orders restraining the usage of such commercial premises. Accordingly, in view of the aforementioned judicial rulings in Union Territory, Chandigarh, ADMN. and PTC India Limited, the law as stipulated through the executive directions would have to be reflected in the lease agreements.
Such incorporation of law in the lease agreements as stipulated through the executive instructions would have the effect of a deemed incorporation of counteracting clauses in the such agreements which counteract the effect of the clauses of such agreements that direct payment of rent even during the lockdown period and/or do not take into account the non-usage of the leased premises due to COVID-19 for purposes of payment of rent. This would essentially transpire in the following ways:
In the event a lease agreement already has a Force Majeure Clause, COVID-19 as a Force Majeure event would be deemed to be incorporated in the wording of such clause; and
In the event a lease agreement does not entail a Force Majeure Clause, a Force Majeure Clause including COVID-19 as a Force Majeure Event would be deemed to be incorporated in such clause.
The Force Majeure clause which would be incorporated, as aforementioned, would act to excuse the lessee from its payments obligations arising from the lease agreement for the duration of the pandemic in view of the inability of the lessee to use the leased premises during the pandemic owing to the executive instructions of the Government directing the same. Accordingly, the payment obligations of the lessee would stand ceased during the force majeure event, i.e. COVID-19 and would only resume on the lifting of the lockdown restrictions vide the executive instruction of the Government in such regard.
In view of the above, it is rather clear that the commercial leases between parties would have to take into account the instructions issued by the Government in relation to COVID-19 in view of such instructions having the force of law. Clearly therefore, the lease agreements between the parties would stand modified to the extent that they incorporate COVID-19 as a Force Majeure Event, and any interpretation of such lease agreements which does not take into account such deemed incorporation of COVID-19 as a Force Majeure event would be contrary to law and liable to be rejected.
CONCLUSION
In view of the aforementioned position of law, it could be concluded that:
Executive Instructions issued by the Government in relation to COVID-19 would have the force of law.
The existing commercial leases between parties would have to be read in consonance with the executive instructions issued by the Government on COVID-19.
COVID-19 would be incorporated in such commercial leases as a Force Majeure Event.
The statutory incorporation of COVID-19 as a Force Majeure event could be a significant relief for tenants of commercial leases which do not have a Force Majeure Clause or in case the wording of their Force Majeure Clause is not broad enough to cover an event like COVID-19. The executive instructions of the Government in relation to COVID-19 have resulted in a nation-wide lockdown leading to closing of all commercial establishments resulting in such establishments becoming completely unfit for the usage for which the tenants had executed such commercial leases. Such statutory incorporation would clearly serve to provide an opportunity to the tenants to claim waiver of rent and allied charges and/or termination of the commercial leases in certain cases due to the occurrence of COVID-19.
The recent decisions of the Bombay High Court in Standard Retail Pvt. Ltd. v. M/s G.S. Global Corp and Ors, where the Bombay High Court on a petition filed under Section 9 of the Arbitration and Conciliation Act, 1996 held that the lockdown could not be used to resile from contractual obligations by the parties, and the Delhi High Court in Ramanand and Ors v. Dr. Girish Soni and Anr, where the Delhi High Court rejected the tenant’s application for suspension of rent on account of COVID-19, have clearly added to the legal difficulties of the tenants. Though there were several specific fact-based details which have to be taken into account in relation to said cases, the same have clearly added to the woes of tenants in these continuing times of a pandemic. Accordingly, the statutory incorporation of COVID-19 as a Force Majeure Event in such commercial contracts would give the much-needed relief desired by such tenants.
