Courts & Contracts – Equity & Enforcement In The Current Situation
G. Kalyan Jhabakh & Prashant Alai
29 May 2020 8:11 AM GMT
Over the past few weeks, the Indian Contract Act, 1872 (hereinafter referred to as the "Act") has been discussed exhaustively and many have attempted to clarify the legal intricacies surrounding the impact of COVID-19 on 'performance of contracts'. Non-performance of a contract due to a force majeure event is governed by the provisions of Section 32 and Section 56 of the Act. We discuss how the courts are interpreting these statutes during the ongoing pandemic including the hardships faced by parties in performing their obligations due to increase in prices, inability to pay rent, change in laws, general reluctance amongst workers, etc.
Force Majeure clauses within Contracts
Most contracts have a force majeure clause expressly specifying the circumstance for relieving parties from their obligations under the contract only upon the happening of such events as mentioned under the clause. A party is relieved from performance of its obligation upon the occurrence of the force majeure event and the clause may provide alternative reliefs. For example, the clause may provide an option to the parties to renegotiate their contract or specify that upon the continuation of the force majeure event beyond a particular period of time either party may terminate the contract. If a contract does not have an express force majeure clause, parties will be governed by the principles laid down under Section 56 of the Act
Guiding principles laid down by the Courts
The jurisprudence surrounding force majeure and the doctrine of frustration has developed extensively over the past century. Paving the way through the case of Satyabrata Ghose v. Mugneeram Bangur[i], the Apex Court held that 'impossibility' to perform a contract may not mean that the contract's performance has become impossible in a literal sense but had become impractical or redundant from the point of view of the object and purpose with which the parties had entered into the contract due to an untoward event or change in circumstances which destroys the foundation on which the parties had rested their bargain.
There are numerous instances where the courts have refused to hold a contract as being frustrated. The doctrine of frustration will not be applicable merely because the circumstance under which the contract was made gets altered or becomes onerous.[ii] A landmark case dealing with the doctrine of frustration is Tsakiroglou & Co. Ltd. v. Noblee Thorl GmbH[iii], wherein the House of Lords held that although the ships were unable to use the Suez Canal to transport goods from Africa and had to take the longer (and more expensive) route around the Cape of Good Hope, that in itself would not amount to frustration of the contract as the contract was not fundamentally altered. An increase in the cost of performance of a contract or a change in law will in itself not be a force majeure event.[iv] Also, invocation of the doctrine of frustration under Section 56 of the Act is not allowed when it arises from the act or election of a party.[v]
Parties must have already clarified either personally or with their legal advisers if they can invoke the force majeure clauses under their contracts during the ongoing pandemic. It is necessary to immediately put the other party on notice if a party wishes to invoke the relief under a force majeure clause in a contract or otherwise. Depending on the force majeure clause, the contract may be terminated, performance of obligations may be deferred, terms of the contract may be renegotiated, etc. All such acts will be governed under Section 32 of the Act if the contract expressly or impliedly provides for pandemic as a force majeure event. If the occurrence of the force majeure event is found to be outside the scope of the contract, it will be governed by Section 56 of the Act.[vi] The Supreme Court has also held that a commercial contract is to be read as per its express terms.[vii] Courts will apply the doctrine of frustration only if it can be proved that the foundation on which the contract was negotiated between the parties has been destroyed.
Recent interpretations of the impact of COVID – 19 on performance of contracts
The Delhi High Court in the case of M/s Halliburton Offshore Services Inc. v. Vedanta Limited[viii] held that the COVID-19 lockdown was prima facie a force majeure event and granted an interim injunction against the invocation of the bank guarantees by the respondents. Interestingly, the petitioner was engaged for extraction of petroleum which was categorized as an essential commodity. The Court stated that although petroleum was an essential commodity the petitioners' ability to extract petroleum was impeded due to the lockdown.
The Bombay High Court in the case of Standard Retail Pvt. Ltd vs Gs Global Corp[ix] has observed that during the COVID-19 lockdown, there are no restrictions on the performance of obligations under contracts dealing with essential services. The Court further went on to hold that the COVID-19 lockdown is merely a temporary measure imposed by the Governments and the Petitioners' arguments on frustration of the contract under Section 56 of the Act were rejected.
Adjudicating on disputes arising out of a tenancy agreement during the ongoing lockdown, the Delhi High Court in the case of Ramanand & Ors. v. Dr. Girish Soni & Anr.[x] held the following:
- Section 32 of the Act would govern agreements providing a force majeure clause. The tenant can claim the reliefs provided under the clause. The clause may allow for the tenant to claim the agreement as void due to the force majeure event and surrender the property. If the tenant wishes to retain the premises in the absence of such a clause, the rent would be payable.
- Section 56 of the Act cannot be invoked since a leased premise would be considered as "completed conveyance". A lease agreement is an "executed contract" and not an "executory contract". Therefore, the doctrine of frustration under Section 56 cannot be claimed.
- Section 108(e) of the Transfer of Property Act cannot be invoked to hold the lease agreement void due to the temporary non-use of the premise during the COVID-19 lockdown. For claiming relief under the said provision, there should be complete destruction of the property and it has to be permanent in nature.
- The Hon'ble High Court invoking the principle of 'equitable jurisdiction' and analyzing the facts and circumstances of the case allowed for postponement of the payment of rent.
- A tenant may seek waiver or suspension of payment if the parties are engaged in a profit sharing arrangement or an agreement for monthly payment on the basis of sales turnover and such claims will be strictly governed by terms of the contract. The right of a party will not be governed by the force majeure event but by the consequence of the said event i.e. there being no sales or profits due to the lockdown.
Another case is that of Indrajit Power Private Limited v. Union of India[xi] before the Delhi High Court, where the Petitioner sought the stay on invocation of bank guarantees by the Respondents and also an extension of time for completing the project contracted to them by invoking the force majeure clause (which included pandemics). The Court shot down the arguments made by the Petitioner by observing that an extension of 12 months was already provided to them by the Respondents and the default on behalf of the Petitioner was not attributable to the lockdown or the pandemic since they were not meeting the milestones set in the agreement since April 2018.
As seen from the precedents which are already emerging during the course of the COVID-19 pandemic, the main take away from these cases is that the facts of each case are vital for seeking the relief of force majeure. The principle of 'equitable jurisdiction' as observed in the case of Ramanand is an interesting one and may be invoked by High Courts to adjudicate on contractual disputes in the absence of a contract or contractual stipulation during the ongoing pandemic. The concept is explained as follows:
"In modern practice the High Court exercises both a legal and an equitable jurisdiction, and may grant all remedies, legal or equitable, to which the parties may appear properly entitled."[xii]
Although the impact of COVID-19 is unprecedented and has had an adverse impact on ability to perform contractual obligations, a party invoking the force majeure clause will have to establish causation[xiii] i.e. there should be a causal nexus between the pandemic and the party's inability to perform its obligations under the contract.
Most contracts will still be enforceable inspite of the hardships caused by the pandemic. Force majeure clauses will be reasonably construed by the judiciary to provide temporary reliefs wherever possible but these temporary reliefs will not amount to the contract being unenforceable as a whole. Even fewer contractual relationships will stand frustrated due to the pandemic as the lockdown imposed by the Government is only temporary in nature and will soon be lifted. Assuming a contract is found to be frustrated owing to the pandemic, the party which received the benefit under such a contract will be liable to return it to the other party under Section 65 read with Section 56 of the Act.[xiv] Increase in costs and delay in performance of obligations owing to the lockdown are issues which need to be revisited by the courts. Precedents laid down by the Supreme Court clearly establish that these factors alone would not amount to the frustration of a contract. A party invoking the force majeure clause under a contract must satisfy the courts that it had taken sincere steps towards performance of its obligations.[xv]
The COVID-19 lockdown will lead to perpetuation of the problems faced by the heavily burdened judicial institutions and may lead to longer pendency of cases. Thus, parties should pursue renegotiation and settle disputes by arriving at a mutual compromise wherever possible. Help of professional mediators is advisable to resolve and find out of the box solutions for these issues. Avoiding lengthy and costly litigations may be a more practical move on behalf of parties. The COVID-19 pandemic has highlighted the importance of cooperation among individual members of the country for restricting the spread of the pandemic and now there is a need for cooperation among parties for successfully transitioning into the post COVID-19 reality.
The article is authored by Mr.G. Kalyan Jhabakh (Partner) & Mr. Prashant Alai (Associate) at Surana & Surana International Attorneys. Author's views are personal.
[i] AIR 1954 SC 44
[ii] Alopi Parshad and Sons Ltd. v. Union of India, AIR 1960 SC 588; Naihati Jute Mills Ltd .v.Khyliram Jagannath, AIR 1968 SC 522
[iii]  2 All ER 179
[iv] Coastal Andhra Power Limited v. Andhra Pradesh Central Power Distribution Co. Ltd.,2019 (1) ArbLR 434
[v] Boothalinga Agencies v. V.T.C. Poriaswami Nadar, AIR 1969 SC 110
[vi] Energy Watchdog v. Central Electricity Regulatory Commission, (2017) 14 SCC 80
[vii] Nabha Power Ltd. (NPL) v. Punjab State Power Corporation Ltd., (PSPCL) (2018) 11 SCC 508
[viii] (O.M.P. (I) (COMM) & I.A. 3697/2020) (Delhi High Court)
[ix] Commercial Arbitration Petition (Lodging) No. 404 of 2020 dated 08.04.2020 (Bombay High Court)
[x] CM APPL. 10848/ 2020 & CM APPL. 10847/2020 in RC. REV. 447/2017 (Delhi High Court) dated 21.05.2020
[xi] W.P.(C) 2957/2020 & CM Nos.10268-70/2020 (Delhi High Court)
[xii] P. Ramanatha Aiyar's, Advanced Law Lexicon, 5th Edition, 2017, at page no.1797.
[xiii] Pollock & Mulla, The Indian Contract and Specific Relief Acts, 16th Edition 2019, at page no.1169.
[xiv] IMC Ltd. v. Tuticorin Port Trust. 2017-2-LW 289
[xv] Samina Venkata Sureswara Sarma v. Meesala Kota Muvullayya, AIR 1996 AP 440