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Covid-19: Force Majeure and ‘Frustration in Frustration’ in discharge of contractual obligations

In our legal system, the courts apply the law and grant reliefs in balancing the equities between the parties.

Bhagabati Prasad Padhy

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2:28 am IST

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The present situation where law requires tenants to pay rent for use of commercial premises even though such premises are not used due to lockdown, where a party to a contract who is unable to perform his contractual obligation due to lockdown has to approach the court for redressal of his grievances; amounts to “Frustration in Frustration”.

Professor I. C. Saxena’s article ‘Frustration in Frustration’ (JILI, Vol-10,1972) while analysing the judgement of the Supreme Court in Raja Dhruv Deb Chand vs Raja Harmohinder Singh & Anr (AIR 1968 SC 1024) has commented that economic injustice is bound to happen when the legislature fails or delays to provide solutions to the problems which apparently are not governed by the existing law. The said case settles the law that the doctrine of frustration does not apply to lease of immovable properties.

The apex court decided the case against the lessee who was unable to use the land which fell in Pakistan after Partition. Today, in view of lockdown as a consequence of Covid-19, it becomes imperative to examine the existing law vis-a-vis economic hardship.

Force Majeure

Force Majeure in common parlance used as an Act of God which refers to an “unexpected event such as war, crime, or an earthquake which prevents someone from doing something that is written in a legal agreement” (Cambridge Business English Dictionary).

The Indian Contract Act, 1872 (ICA) does not define force majeure but the courts often refer to Black’s Law Dictionary which defines it as “an event or effect that can be neither anticipated nor controlled”. A force majeure is a clause in a contract stipulating a list of events and in happening of such events, parties can excuse themselves from performing their contractual obligations. It is a settled position of law in India that the courts while interpreting a clause in a contract cannot rewrite the contract. Force majeure being a creature of contract and in the absence of stipulating a specific of event covering a Covid-19 situation, the performance of obligation cannot be excused.

The Delhi High Court on 20.4.2020 while deciding an interim injunction application against encashment of bank guarantee for non-completion of a contract on time, prima facie considered the national lockdown in the nature of a force majeure. The said opinion is based on the principle of equity arising out of the peculiar facts of said case.

The Doctrine of Frustration

Doctrine of Frustration enshrined in Section 56 of the ICA recognises supervening impossibility as an excuse to render the contract as void.

Unlike force majeure, the rule enshrined in Section 56 of ICA is a positive law which means even in the absence of a force majeure clause in a contract, the parties can excuse the performance of obligations in the event of the happening of an event which is beyond their control. Over the years, the apex court settled the law that impossibility to perform must be of the nature of practical impossibility [AIR 1954 SC 44 :Satyabrata Ghose v. Mugneeram Bangur & Co] and practical impossibility cannot be interpreted as economic unviability.[ (2017) 14 SCC 80:Energy Watchdog v. Central Electricity Regulatory Commission].

The courts normally try to protect the contract and the lockdown resulting in suspension of business operation due to Covid-19 for a temporary period may not satisfy the test of practical impossibility even a party faces severe economic hardship in performing contractual obligations. The Bombay High Court in a recent case [ Order dated 8.4.2020 in Standard Retail Pvt. Ltd. v. M/s. G. S. Global Corp & Ors] where a party wanted to resile from its contractual obligation in making payment under a contract due to Covid-19 to avoid losses, declined to pass an injunction and observed that the protection under Section 56 of the ICA shall be available to the other party.

Lessees Liability

The law is well settled that rights and liability of the lessee are governed by the Transfer of Property Act, 1882 (TPA) and the doctrine of frustration is not applicable to lease deeds. Unless an event of lockdown following Covid-19 is stipulated in lease deed, the TPA only excuses a lessee in discharging his obligation in event of a force majeure which made the property destroyed or made unfit for the purposes for which it was let.

The High Court of Delhi in the latest judgement [Rc.Rev. No.447 of 2017: Ramanand & Ors vs.Dr. Girish Soni & Anr decided on 21.5.2020 ] while reiterating the settled law, opened a window for tenants who can seek exemption from paying rent due to temporary non-use of the premises by invoking equitable jurisdiction. The said observation is very useful to the present situation.

Economic Hardship

In our legal system, the courts apply the law and in exercise of equitable jurisdiction the courts while taking note of the factual situation grant reliefs in balancing the equities between the parties.

It is only before the Supreme Court, there is a greater scope for interpretation/declaration of law to meet the peculiar facts of the case. Taking into account the hierarchy of the courts, a desired judgement of the Supreme Court cannot mitigate the immediate economic loss to affected parties and to avoid litigations. Justice R.V. Raveendran, a former judge of the Supreme Court in his blog, urged for framing of laws to meet and deal with the exigencies and problems of the society at any given point of time (Some Anomalies in Law and Justice, SCC Online dated 25.4.2020 ) which is relevant to the Covid-19 situation.

The Singapore legislation i.e The COVID-19 (Temporary Measures ) Act, 2020 serves as a useful guide to meet the plight of the parties who face genuine economic hardships in discharging the contractual obligations and avoid unnecessary litigations.

Bhagabati Prasad Padhy is an Advocate-on-Record of the Supreme Court of India and also practises in the High Court and District Courts of Delhi.

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