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Covid-19: Rise of disappointed expectations and frustrated contracts

The lockdown’s multiple negative consequences, like reverse migration and disruption of supply chains, will further add to the woes of businesses after it is lifted.

Pankaj Vasani and K P S Kohli

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The times, they are a changing’. There is no better way to describe the Covid-19 pandemic than this famous song by Bob Dylan, which had become an anthem back in the day. For line it is drawn, the curse it is cast… resonate as the tremors of the pandemic are felt everywhere. With over 3/4th of the world population under some form of lockdown, there is hardly any economic activity that has not suffered at the hands of the ruthless Covid-19. 

To contain the pandemic, like many nations, the Government of India has also imposed a lockdown, currently until 31 May 2020, impeding the movement of the people and the hustle of businesses. Recently, the Government of Delhi announced that the revenue collection in April 2020 is merely Rs 300 crore, down from about Rs 3500 crore in the same month last year. This is not a standalone case. The world economies are suffering, alas small businesses, and individuals are paying a heavier price. Business survival and job cuts are the sad realities of Covid-19’s newly created world. Although, the Indian Government has partially lifted the lockdown and some of the business activities have begun to hum again, albeit, with caution, many businesses are still under lockdown.

There are multiple negative consequences of the lockdown, which will further add to the woes of businesses after the lockdown is lifted like reverse migration, disruption of supply chains, drop in discretionary spending, amongst others.  With the world being shut, disputes on account of delayed performance and/or non-fulfilment of contractual obligations would rise, so would legal wrangles for businesses post lifting of the current restrictions. Below are some of the common legal issues that business in India may face in the world overrun by the pandemic.

Non-fulfilment of contractual obligations

Although contracts vary in their nature and purpose, most contracts specify the time for completion of obligations therein and/or expressly state that time is the essence of the contract. However, the onset of pandemic and the preventive response of the national government have made it impossible for most of the contracting parties to meet their obligations. Such non-performance of contractual terms has made the defaulting party vulnerable to legal action and/or termination of the contact leading to more losses.

In a contract where time is of the essence, Section 55 of the Indian Contract Act, 1872 (Contract Act) governs, as it provides for the effect of failure to meet the specified timeline. However, the intention of the parties has to be looked at and not the letter of the clause. The time is generally considered to be of the essence of the contract: 1. Where the parties have expressly agreed to treat time as the essence of the contract; 2. Where any delay would operate as an injury to the opposite party; & 3.

Where the nature and necessity of the contract require it to be so construed. However, the law in certain situations permits an extension of time to the defaulting party. Such conditions are generally subject to damages for loss incurred due to the delay. However, in case of failure to perform, even in the extended period(s), the aforementioned rigours of Section 55 of the Contract Act would be invoked against the defaulting party. In a contract where time is not the essence, upon delay in performance, the innocent party may sue the defaulting party for any loss that may be caused due to the delay. Thus, each agreement has to be looked into carefully to study the cause and effect and the remedy available to a party for non-performance.

Force Majeure

Force majeure is a legal doctrine that gives refuge to a party to escape the consequences of failure in the performance of contractual obligations, due to reasons and circumstances beyond its control. Although not defined under the Contract Act, the essence of the doctrine of Force Majeure is imbibed in Section 56, which, interalia, provides for the effect of an unforeseen event(s)/ circumstance(s) that may prevent a party to a contract from performing its obligations thereunder. 

Since the Contract Act does not provide for any particular form or condition for a force majeure clause, parties are free to define the events and conditions that may be covered by the force majeure clause. Thus, it is imperative that each force majeure clause or in the absence of the same, the entire contract is understood distinctly to define the parameters of force majeure under each agreement and to test if the travesties of Covid-19 would be included or not.

In any event, if a party is unable to perform its contractual obligations, it must take immediate steps; by first and foremost, notify the other party of the force majeure event. Delay in notifying the force majeure clause robs the efficacy of the same, as the opposite party may allege afterthought on part of the non-performing party.  The onus of proving that the contract has fundamentally altered due to the occurrence of the Force Majeure event(s) is on the party invoking the doctrine. The defaulting party is under an obligation to mitigate damages, wherever possible, during the entire Force Majeure event(s). 

Government Order – Covid-19 is Force Majeure

In the melee of orders/directions passed by the Central and the state governments to give urgent reliefs to businesses, an Office Memorandum dated 19 February 2020 by the Department of Expenditure, Procurement Policy Division, Ministry of Finance has been quoted extensively, as the same provides that Covid-19 would be covered in the force majeure clause of the Manual for Procurement of Goods, 2017 issued by the Department and serves as a guideline for procurements by the Government.

The said Office Memorandum is in relation to the procurement contracts of the Government of India for goods and services and is not applicable to the interpretation of the force majeure clauses under private contracts. As stated, each contract has to be examined independently to determine if Covid-19 is a force majeure event under its ambit. However, the effect of the Government, administrative, and legislative actions have to be considered, even if not expressly stated in the contract. Thus, the effect of lockdown should be considered, while evaluating any default/breach of contract on account of Covid-19. 

Doctrine of Frustration

In contracts where there is no Force Majeure clause, a party may rely on Section 56 of the Contract Act which provides for the frustration of contract, if: 1. Performance of the obligations under the contract becomes impossible or unlawful due to change of circumstances beyond the control of the parties after the contract has been executed; 2. The object of the contract is lost. 

The courts in India have time and again held that the Doctrine of Frustration is applicable only in cases where the contract has altered materially due to the occurrence of an event(s) and cannot be applied merely because of the performance under a contract has become onerous or costly.  It is impossible to lay down an exhaustive list of situations on which the doctrine of frustration can be applied. However, destruction of subject matter, non-occurrence of the contemplated event, death or incapacity of a party, etc. could be certain grounds for invoking the doctrine of frustration of a contract. 

Here again, in order to claim that a contract is frustrated, it must be established by the party claiming frustration that the performance of the contractual obligation(s) has become impossible by reason of an event(s) which the parties had not anticipated at the time of entering into the agreement.

To sum up

At present, it is impossible to comprehensively assess the consequences of Covid-19 on contracts, but it would not be incorrect to state that the performance of contractual obligations has been delayed and, in most instances, have also become onerous, if not impossible.  Thus, all the businesses preparing to restart in the world marred with pandemic must safeguard against the inevitable legal wrangles by taking timely positions under their contract(s). 

The first step is to evaluate the contract clauses to ascertain the rights and liabilities and secondly, while proactively adopting all measures to mitigate the liability, in time invoke the correct legal doctrine of either seeking extension by claiming Force Majeure or complete pardon from the performance by invoking Doctrine of Frustration.  The preventive measures to control the march of the virus have caused an existential crisis for businesses and contraction in consumption demand should be the least of the worries.

However, as the saying goes, there’s always light at the end of the tunnel. Here’s hoping that the light shines sooner and shows us the path to a better and more promising future. 

Pankaj Vasani, Chartered Accountant (India, England & Wales), CPA (Australia) and lawyer, has served as Executive President & Group CFO, South Asia, Publicis Groupe & member, Board of Directors, Vodafone. KPS Kohli is a Partner with Dhir & Dhir Associates.

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Legally Speaking

GAUHATI HIGH COURT QUASHES NO-CONFIDENCE MOTION AGAINST GRAM PANCHAYAT PRESIDENT CITING PARTICIPATION OF MEMBER DISQUALIFIED FOR HAVING THREE CHILDREN

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The Gauhati High Court in the case Jugitawali Pawe v State of Assam and 15 ors observed and quashed a resolution expressing no-confidence in the petitioner – the President of a Gram Panchayat, as a result of which she as removed from office. It was stated that it is as per the citing no compliance with Assam Panchayat Act, 1994, reading with Rule 62 of the Assam Panchayat (Constitution) Rules, 1995.

It was preferred by the petitioner to the materials available on record to argue that one of the members of the Gaon Panchayat, the respondent. The respondent voted against the petitioner and had given birth to her third child the previous year. Moreover, by virtue of Section 111(2)(a) of the Assam Panchayat Act, 1994, reading with Rule 62 of the Assam Panchayat (Constitution) Rules, 1995, the petitioner stood automatically disqualified on the date of voting. Following, which her vote was taken by passing No-confidence motion.

It was prayed by the petitioner in the plea for setting aside the impugned resolution and for issuance of a direction to restore his client back in the office. Thereafter, to initiate fresh proceedings, liberty should be granted to the respondent, following the due process.

It was agreed by the Counsel representing for the respondent that the said member of the panchayat had been disqualified but retained on the ground that the disqualification would have no bearing on the petitioner’s case, as the impugned resolution was passed before the declaration of petitioner disqualification.

In the present case, It was noticed by Justice Suman Shyam the member had voted against the petitioner and without her vote. The petitioner would not have been ousted from office. Justice Shyam also found no dispute about the fact that the member had incurred disqualification under the law prior the date of adoption of the impugned resolution. Justice Shyam found it unnecessary to delve into other aspects of the matter which includes the procedural formalities for declaring the member a disqualified candidate.

It is observed that the impugned resolution was declared to be vitiated and liable to be set aside. Further, the Court restored the petitioner to the office of the President of the Bongalmara Gaon Panchayat with immediate effect and it was stated by the court that the order will not stand in the way should the authorities or any member of the Gaon Panchayat propose a fresh motion of “no-confidence” against the petitioner and the due process of law needs to be followed.

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Halt DDA’s demolition action against jhuggis in Nizamuddin’s Gyaspur area, orders Delhi High Court

As per the JJ Rehabilitation and Relocation Policy 2015 and the Delhi Urban Shelter Improvement Board, the residents who can establish their residence prior to 01.01.2015 are eligible for rehabilitation under the JJ Rehabilitation and Relocation Policy 2015.

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plea in Delhi High Court seeking repatriation of 56 pregnant nurses

The Delhi High Court in the case Manoj Gupta & Ors. v. DDA & Ors observed and has ordered status quo on the Delhi Development Authority’s proposal to demolish jhuggi clusters in city’s Gyaspur area in Hazrat Nizamuddin. The vacation bench comprising of Justice Neena Bansal Krishna observed in the petition filled by the residents and the court granted an interim relief.

It was ordered by the court status quo till July 11, the next date of hearing.

The bench orally remarked that a ten-day delay in demolition won’t make a difference but if today it is demolished and later, we come to know that they were entitled, who’s going to… the bench will consider it on July 11, 2022 but in the Meanwhile, some protections are entitled them. Adding this, Status quo be maintained. If since 1995, they have been there, heavens won’t come down if for 10 more days they are protected.

In the plea the petitioner stated that the T-Huts settlement in the area, which was stated by the authorities to vacate. It has been in existence for almost two decades and compromise of 32 jhuggis or households.

In the plea it was alleged that the bulldozers have been parked around the camp and a DDA official has orally asked them to vacate the area and it is noted that till date no proper notice have been sent to them nor has DDA conducted any survey of the area.

Furthermore, the DDA did not provide any alternate arrangement for their rehabilitation which resulted in extreme distress among the residents.

Moreover, it was admitted by the petitioner that the land in question belongs to DDA and they may seek that status-quo to be maintained at the site. It was urged that the residents should not be physically dispose or evicted from the demolition site until the survey is conducted and rehabilitation is provided to the residents as per the DUSIB policy of 2015.

As per the JJ Rehabilitation and Relocation Policy 2015 and the Delhi Urban Shelter Improvement Board. The residents who can establish their residence prior to 01.01.2015 are eligible for rehabilitation under the JJ Rehabilitation and Relocation Policy 2015.

It is observed that in the case Ajay Maken v. Union of India, Reliance is placed on the Supreme Court decision and the High Court decision in the case Sudama Singh & Ors. v. Government of Delhi & Anr, it was held in the case that that removal of jhuggis without ensuring relocation would amount of gross violation of Fundamental Rights under Article 21 of the Constitution. Further, it was held that the agencies conducting the demolitions ought to conduct survey before undertaking any demolition.

It is submitted that these observations would apply across the board, in the entire NCT of Delhi.

Advocates Vrinda Bhandari, Shiyaz Razaq, Kaoliangpou Kamei, Jepi Y Chisho and Paul Kumar Kalai, represented the petitioner.

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TELANGANA HIGH COURT: PLACE OF RESIDENCE OF THE ARBITRATOR WOULD NOT BE THE SEAT OF ARBITRATION

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The High Court of Telangana in the case M/s S. Square Infra v. Garneni Chalapathi Rao observed and held that the place of residence of the arbitrator would not determine the seat of arbitration.

The Single bench comprising of Justice P. Sree Sudha observed and held that merely because an arbitrator residing in Hyderabad has been appointed, it does not mean that only the Courts at Hyderabad would have the jurisdiction to decide all the matters arising out of arbitration agreement.

Facts of the Case:

In the present case, after the dispute arouse between the parties, the respondent sent a letter to the petitioner for nomination an arbitrator who is residing in Hyderabad. To its said notice, petitioner replied and declined the appointment of the arbitrator for the reason that there was no dispute which required the appointment of an arbitrator.

A suit was filled by the respondent before the VII Additional District Judge Sangareddy, seeking for relief of permanent injunction. An application was filled by the petitioner under Section 8 of the Arbitration & Conciliation Act and the parties referred to the arbitration.

An application was filled by the respondent under section 9 of the Arbitration & Conciliation Act before the Principal District Judge, Sangareddy, Subsequently, an application was filled by the petitioner for transferring the application from the Court at Sangareddy to Court at Hyderabad.

Contentions made by Parties:

On the following grounds, the petitioner sought the transfer of application.

An arbitrator residing in Hyderabad was nominated to respondent. However, only the courts in Hyderabad would have the jurisdiction to decide all the matters arising out of the arbitration.

It was stated that the nomination of an arbitrator residing in Hyderabad amounted to designating Hyderabad as the Seat of Arbitration.

On the following grounds, the respondent countered the submissions of the petitioner:

An application was filled by the petitioner under Section 8 of the A&C Act before the Court at Sangareddy. However, in terms of Section 42 of the A&C Act, only the court at Sangareddy would have the jurisdiction to decide all the matters arising out of arbitration.

Court Analysis:

The Court held that the seat of arbitration would not be decide by the place of residence of the arbitrator.

The argument of the petitioner was rejected by the court that since the respondent had initially nominated an arbitrator residing in Hyderabad, the Hyderabad Court would have the jurisdiction.

The court stated that merely because a party has nominated an arbitrator who resides in Hyderabad, the same would not designate Hyderabad as the Seat of arbitration in absence of any designation of the seat under the arbitration agreement.

It was further stated by the court that the application filled by the petitioner filled under Section 8 application before the Court at Sangareddy consequent to which the parties were referred to arbitration. Therefore, the Court would have the jurisdiction, in terms of Section 42 of the A&C Act.

The Transfer petition was dismissed by the Court.

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DELHI HIGH COURT REMANDS IN THE MATTER BACK TO ASSESSING OFFICER AFTER SETTING ASIDE: JUST 3 DAYS’ TIME GRANTED TO RESPOND TO THE INCOME TAX NOTICE

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plea in Delhi High Court seeking repatriation of 56 pregnant nurses

The Delhi High Court in the case Shubham Thakral Vs ITO, the Delhi bench comprising of Justice Manmohan and Justice Manmeet Pritam Singh Arora observed and remanded the matter back to the assessing officer as just 3 days’ time was granted to respond to the income tax notice.

In the present case, the petitioner/assessee assailed the notice under Section 148A (b) of the Income Tax Act, 1961 and the order passed under Section 148A (d) for the Assessment Year 2018–19.

It was contended by the assessee that only three days’ time was granted to the assessee to respond, as against the mandatory statutory period of at least seven days. However, despite of the fact that the annexure attached to the notice gave the petitioner eight days to respond, the e-filing submission portal was closed earlier, in violation of Section 148A (b) of the Income Tax Act.

Furthermore, the petitioner relied on the decision of Delhi High Court, in the case of Shri Sai Co-operative Thrift and Credit Society Ltd versus ITO, the Delhi High Court in the case held that under Section 148A (b), a minimum time of seven days has to be granted to the assessee to file its reply to the show cause notice.

No objections were raised by the department/respondent to the matter being returned to the Assessing Officer for a fresh decision in accordance with the law. Accordingly, the court set aside the order passed under Section 148A (d) for the Assessment Year 2018-19. The Assessing officer was directed by the court to pass a fresh reasoned order in accordance with the law after considering the reply of the petitioner, which was directed to be filed within a week.

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ALLAHABAD HIGH COURT: ADVOCATES SHOULDN’T ADVISE CLIENTS TO REAGITATE MATTERS IF THERE IS NO ERROR APPARENT ON FACE OF RECORD

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The Allahabad High Court in the case Malhan and 17 Others Vs. State Of U.P. And Another observed and stated that an advocate should be given such a piece of advice when there is no error apparent on the face of the record nor was there any reason why the matter be re-agitated it was finally decided.

The bench comprising of Justice Dr. Kaushal Jayendra Thaker and Justice Vivek Varma observed while dealing with the civil review application wherein the bench observed the concerned advised his client to make a chance by filling the instant review application after a period of six year.

In the present case, a civil review petition was filled along with the application under section 5 of the Limitation Act, 1963., the application was filled for seeking condonation of delay in filling the application, the application was filled with a delay of six years i.e., 1900 days.

It was stated by the applicant that the review application could not be filled due to the blockage of public transportation on account of the COVID-19 guidelines.

Moreover, the court observed that the appeals were disposed of by the Apex Court in the year 2016 and only in 2020-2021, the pandemic struck India and furthermore, it cannot be said that due to the COVID guidelines the public transportation was blocked and however, the applicant could not come to Allahabad Court to file review.

Further, it was stated that the court asked the counsel for the review applicants to explain the delay in filling the review application, to which the council gave a strange reply that the counsel had advised the clients that they must take a chance by filling this review application after a period of six years.

Following this, the Court observed:

The court noted that an advocate should not give such an advice when there is no error apparent on the face of record nor was there any other reason that when the matter was finally decided, why the matter be re-agitated.

It was stated that the court has no reason to condone the delay of six years as the same was not explained as to why this review application is filed after such an inordinate delay.

The Court opined that the lapse in approaching the court within the time is understandable but a total inaction for long period of delay without any explanation whatsoever and that too in absence of showing any sincere attempt on the part of suiter, this would add to his negligence and the relevant factor going against him.

The court observed that careless and reckless is shown by the review applicant in approaching the court and due to the condemnation of delay in the application with a token cost of Rs.10,000/, the court dismissed the application.

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SUPREME COURT CRITICISES HIGH COURT: POSTING ANTICIPATORY BAIL PLEA AFTER TWO MONTHS CAN’T BE APPRECIATED

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The Supreme Court in the case Sanjay versus The State (NCT of Delhi) & ANR observed and stated that in the case where personal liberty is involved, the court is expected to pass orders at the earliest while taking into account the merits of the matter in one way or other. Further, the top court observed that posting of an application for anticipatory bail after a couple of months cannot be appreciated by the court.

The bench comprising of Justice C. T. Ravikumar and the Justice Sudhanshu Dhulia was hearing a June 2 SLP against the Delhi High Court in a petition filed under section 420, 467, 468, 471, 120-B, 34 of the Indian Penal Code, 1860 for seeking anticipatory bail in a 2022 FIR, a notice is issued. It was stated that the learned APP for the state is present and accepts the notice and seeks time to file status report. The High Court in the impugned order stated that Let the status report be filed by the state prior to the next date with an advance copy to the learned counsel for the petitioner. The matter is to be list on 31.08.2022.

It was noted by the bench comprising of Justice Ravikumar and the Justice Dhulia that in the captioned Special Leave Petition, the grievance of the petitioner is that the application for anticipatory bail moved by the petitioner, being Crl. M.A. No. 11480 of 2022 in Bail Application No. 1751 of 2022 without granting any interim protection, was posted to 31.08.2022. on 24.05.2022, the bail application was moved on.

However, the bench asserted that the bench is of the considered view that in a matter involving personal liberty, the Court is expected to to pass orders at the earliest while taking into account the merits of the matter in one way or other.

It was declared by the bench that at any rate posting an application for anticipatory bail after a couple of months cannot be appreciated by the court.

Further, the bench requested to the High Court to dispose off the application for anticipatory bail on its own merits and in accordance with law expeditiously, preferably within a period of three weeks after reopening of the Court. Adding to it, the bench stated that if the main application could not be disposed off, for any reason, within the stipulated time, relief sought for in the interlocutory and on and on its own merits, the application shall be considered.

While disposing of the SLP, the bench directed in its order that we grant interim protection from arrest to the petitioner herein, Till such time.

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