We have made an attempt through this literature to cover aspects including but not limited to present scenario of COVID-19 with perspectives and effects on various kinds of Contracts having consequential outcomes as a chain of sequence unfolding from measures adopted by Govt. of India issuing Circulars/ Orders from time to time encompassing various legal Statutes and The Reserve Bank of India issuing Circulars/Statements/Notifications in relation to monetary guidelines for various sectors of industries in India.
Where the contract does not contain any specific provision dealing with the eventuality of a force majeure event, in the event of occurrence of such an event the parties would be bound solely by the law relating to Force Majeure is embodied under Section 56 of the Indian Contract Act, 1872 (hereinafter referred to as “Contract Act”). The said section is reproduced hereunder for ease of reference:
“A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.” Section 56 of the Indian Contract Act, 1872 thus embodies special unforeseen circumstances as mentioned hereinabove. However, as per the Indian Contract Act, 1872, it follows the concept of Reciprocal Promises as embodied in Section 51 of Indian Contract Act, 1872 which is stated as under:
“Promisor not bound to perform, unless reciprocal promisee ready and willing to perform”. A conjoint reading of both the Sections mentioned above can be analyzed to give rise to a situation when either of the party is not able to perform unless other party is ready and willing to perform together with special circumstances arising when one of the parties while entering into the contract with another party was completely unaware of unforeseen circumstances which would make the act of the party promising of certain performance completely impossible and which is beyond the control of the party involved in the contract.
Sec 63 of Indian Contract Act, 1872 is narrated as under:
“Promisee may dispense with or remit performance of promise- It has been held in Jagat Bandhu –v/s- Smt. Nilima Rani (1971) 1 SC 38 that Sec 63 embodies principles of waiver of contractual obligation. To constitute waiver neither agreement nor “consideration” is necessary. It is nothing more than intention not to insist on the right of pre-emption.
“Obligation of person who has received advantage under void agreement, or contract that becomes void”-Sec 65 of the Indian Contract Act, 1872 enunciates the principle of restitution and should be liberally construed in order to do equity and justice between the parties. Sec 65 of the Indian Contract Act, 1872 applies where the parties enter into the contract with bonafide intention, however later the contract is “discovered to be void.” The words “discovered to be void” refer to the contract which was void ab initio but was not known at the time of its creation.
“Obligation of person enjoying benefit of non-gratuitous act” Section 70 of the Indian Contract Act contemplates an equitable principle of restitution which is intended to prevent unjust enrichment. The juristic basis of the obligation is embodied in Section 70 is not founded on any contract or tort but upon a third category of law, namely, quasi contract or restitution.
The parties entering into a contract are firstly bound by reciprocal promises. In the event of Force Majeure situation which is beyond contemplation of the parties while entering into a contract, the recourse can be “Waiver of Contract” or “Restitution of Contract” or “by Amicable Settlement by incorporating additional terms to the contract by way of Additional or Supplemental Agreement”.
A similar view has also been taken by the Supreme Court of India, regarding the treatment of inability of a party to perform strictly according to terms of a contract owing to supervening impossibility in the judgment delivered in matter of Madhya Pradesh Power Management Corporation Limited vs. Renew Clean Energy Private Limited and Anr., where the Hon’ble Supreme Court has inter alia held that, since delay in the said case was due to unavoidable circumstances, and said circumstances though not a force majeure event, have to be kept in view while counting the delay. Further the court held that termination of the contract due such unavoidable delays should not be permitted.
In light of the bar imposed by way of the GOI Order issued as per the provisions of the Disaster Management Act, 2005 (hereinafter referred to as the “Disaster Management Act”), the regular business operations of various entities are bound to be affected and restricted. Carrying on of said business activities would for the period specified under the GOI Order be unlawful and punishable as per provisions section 51 of the Disaster Management Act, and thus performance of contractual obligations which would fall within the above-mentioned barred activities would be impossible as per the provisions of section 56 of the Contract Act and accordingly the parties can take recourse of Waiver or Restitution or Amicable Settlement on case to case basis.
In a contract if a force majeure clause is provided for, the said clause would need to be examined closely on a number of aspects including inter alia the below mentioned aspects:
If the clause is an inclusive clause, where language suggests that any event contributing towards impossibility towards normal business functions on account of unforeseeable circumstances beyond control of the parties would be treated to be force majeure condition, it is reasonable to assume said party would be protected under the umbrella of such a force majeure clause.
Generally, force majeure clauses contain within itself requirement that the party seeking protection under the said clause should issue notice regarding the occurrence of the said force majeure at the earliest instance. A failure to provide such notice would generally disentitle a party from protection under the said clause for the intervening period between the onset of the said force majeure and the date of the notice.
Generally, force majeure clauses also impose requirement on the party seeking protection under the said clause to take all necessary steps to mitigate the said force majeure. A failure to take such steps would disentitle a party from protection. However, this aspect being factual would have to be examined on a case-to-case basis.
It is important to note the effect of the relevant provisions under the Transfer of Property Act which deal with conditions where under Lessee is entitled to treat the Lease Agreement as if Terminated, and thereby be protected from claim arising from non-performance of its obligations there under.
Section 108(B)(e) of the Transfer of Property Act deals with justifiable grounds to treat lease agreement as terminated at the option of the Lessee. The said section is reproduced hereunder for ease of reference.
“if by fire, tempest or flood, or violence of an army or of a mob, or other irresistible force, any material part of the property be wholly destroyed or rendered substantially and permanently unfit for the purposes for which it was let, the lease shall, at the option of the lessee, be void: Provided that, if the injury be occasioned by the wrongful act or default of the lessee, he shall not be entitled to avail himself of the benefit of this provision;”
In the present situation arising out of the restrictions imposed in light of the COVID-19 disease, a situation may arise where a lessee would contend that the said COVID- 19 conditions amount to “other irresistible force” within the meaning of the said section, or that it has led to the leased property having been rendered substantially and permanently unfit for the purposes for which it was let.
Accordingly, it is our opinion that a lessee may plead supervening impossibility of performance owing to the restrictions as imposed by the GOI, and accordingly may either address notice to the Lessor for termination of the lease agreement as aforesaid, or may undertake to plead for temporary suspension of Contract and re-negotiate the terms of the lease agreement with the Lessor, failing which the same may be terminated by the Lessee as aforesaid.
Now let’s examine the different scenarios vis-a-vis the Lease Deed/ Document and its clauses entered between the parties. Our opinion in this regard shall be dependent on two facts;
It is a well settled principal of law that in case a deed of Lease is registered the governing law shall be Transfer of Property Act and the Contract Act shall not be applicable. The Supreme Court of India in its landmark judgment of Raja Dhruv Dev Chand Vs. Raja Harmohinder Singh has held that the provisions of the Transfer of Property Act, 1857 govern all such transactions as covered there under, and that as per section 4 of the said TP Act, the provisions of the TP Act shall be read into the Contract Act and not vice versa, meaning that the general provisions of the Contract Act will not necessarily be attracted to Lease Agreements.
In case of an unregistered deed of lease the document cannot be relied upon as it is not registered therefore in effect there shall be no existence of any lease. The relation between the parties shall be of contractual in nature where one party is giving the delivery of possession and the other party is paying for such delivery of possession. The contractual nature of transaction in case of an unregistered deed of lease shall then follow concepts of reciprocal promises, supervening impossibility, concept of waiver and doctrine of restitution which can be examined on a case-to-case basis.
Therefore, a Registered Deed of Lease shall be governed by Transfer of Property Act and an unregistered Deed of Lease shall be governed by the Contract Act.
And secondly the presence and construction of Force Majeure clause of the Lease Deed. Keeping in mind the above facts the outcome under different scenarios are discussed hereinbelow.
In a scenario, when the said Lease Agreement is a registered document having the Force Majeure Clause, the said document is an independent document, not being attracted by the provisions of the Contract Act and thus the said Force Majeure Clause can be invoked by the Queriest, provided the said clause contains/ covers of the scope of pandemic. The scope of the Force Majeure clause would also need to be closely examined on a case-to-case basis. Such clauses may either be inclusive or exhaustive. In case the clause is framed in an exhaustive manner it would need to be verified whether the facts and circumstances surrounding the “Epidemic/Pandemic Condition” and restrictions imposed therefore have been specified in the said clause. However, the Querist can seek recourse of this clause and act in the manner as prescribed therein for suspension/termination of the contract.
In a scenario, when the said Lease Agreement is a registered document having the Force Majeure Clause, the said document is an independent document, not being attracted by the provisions of the Contract Act, however the Force Majeure clause does not specify the “Epidemic / Pandemic Condition” then the Querist cannot seek protection under the umbrella of the Force Majeure clause. In such a scenario the Querist has to seek recourse borrowing the principle of Suspension of Contract due to supervening Impossibility (the same is discussed before in details). However, If the clause of Force Majeure is an inclusive clause, where language suggests that any event contributing towards impossibility towards normal business functions on account of unforeseeable circumstances beyond control of the parties would be treated to be force majeure condition, it is reasonable to assume that the counter party would be protected under the umbrella of such a Force Majeure clause.
We rarely come across any document of lease where the Force Majeure clause is absent. Nevertheless, its still a possibility. In such a scenario the Querist has to seek recourse borrowing the principle of Suspension of Contract due to supervening Impossibility (the same is discussed before in details).
As stated herein above in a case the Lease Agreement is not a registered document the provisions of the Contract Act will attract and provisions of Transfer and Property Act won’t come in affect.
As the provisions of contract act applies in case of an unregistered lease therefore the Doctrine of Supervening impossibility shall be invoked in this scenario as has been discussed above.
The concept of Supervening Impossibility is to be considered with the concepts of reciprocal promises, concept of waiver, doctrine of restitution and amicable settlement, if possible.
In the said circumstances as mentioned hereinabove, it is advisable to deal with every contract on case-to-case basis to reach to any conclusion based on construction /interpretation of the contract and based on the performance of the contract in the wake of COVID-19 situation.
Section 6 of the Real Estate (Regulation and Development) Act, 2016 (“RERA Act”), provides for extension of registration of a project, owing to force majeure events beyond the control of the promoters, to a maximum period of One year from the Original Date of completion as per the project details as disclosed at time of registration of the Project with the respective RERA Authorities for the state where the project is located.
The Respective State Governments have at the time of promulgating the Rules and Regulations subordinate to the RERA Act have also made various provisions for the extension of the registration of Projects in order to accommodate delays arising out of Force Majeure.
Pursuant to the COVID-19 and restrictions introduced by the GOI in response thereto the Real Estate Regulatory Authorities for various states have suo moto provided for extension of the registration of Projects registered with the said authorities.
Further as per Section 18 of the RERA Act, the promoter is required to compensate the Allotees, in respect of delay that is failure to complete the Project as per the terms of the Agreement for sale entered into with said Allottee, however the said Order does not clarify with regard the requirement of promoters to pay interest to the Allotees for the said period of delay on account of the said Force Majeure conditions.
In view of the above mentioned, and depending upon the existence of force majeure clause in the said Agreement for sale as between the Promoters and the Allotees, the promoter may rely on the same in order to claim relief from payment of said compensation, and where such interpretation of the force majeure clause is permissible the same would ultimately lead to extension of date of completion as per the terms of the said agreement itself, and hence the same would not require the promoter to pay the said compensation.
However, where no such force majeure clause is contained in the said Agreement for sale, it is doubtful whether the Promoters would be able to place reliance on section 56 of the Contract Act, for pleading of frustration of contract, in light of Section 89 of the RERA Act, which provides that the RERA act shall have overriding effect over all other laws in place with respect to the subject matter dealt therewith. Hence in such case the promoter may be constrained to make payment of compensation to the Allotees in terms of the section 18 of the RERA Act.
In the above-mentioned scenario, it is advisable to deal with every contract on case-to-case basis to reach to any conclusion based on construction / interpretation of the contract and based on the performance of the contract in the wake of COVID- 19 situation.
Restructuring as per the terms of the RBI Notification No. DOR. No. BP.BC. 47/21.04.048/2019-20: RBI Notification No. DOR.No.BP. BC.47/21.04.048/2019-20 (hereinafter referred to as “said Notification”), does not deal with restructuring of financial facilities extended by banks. The said notification only specifically provides for permission to the SCBs/NBFC’s to allow a moratorium period of three months on repayment obligations of their borrowers subject to the terms of the said Notification. Importantly the said moratorium, is only in respect of repayment, and does not affect the accrual of interest, that is to say interest on all loans/working capital facilities shall continue to accrue even during the moratorium period, and shall be payable thereafter.
In light of the above mentioned considerations, it is our opinion that the said Notification does not entitle to a Borrower to any sort of restructuring of its financial obligations, and rather permits only a three month moratorium on repayment obligation, which may be granted to the Borrower (if the same is desired by the Borrower) at the discretion of the respective lender, such that said moratorium would not amount to restructuring/resolution as per the terms of the RBI Restructuring Directions.
The construction contracts are generally of two types; Works contract and supply contract. The manual for procurement is followed in both types for government contracts. The Office Memorandum specifically applies to contractual arrangements for procurement of goods and or related services by various arms of the State or by Central Public Sector Enterprises (i.e. a body incorporated under the Companies Act or established under any other Act and in which the Central Government or a Central enterprise owns more than 50 per cent of the issued share capital). The Office Memorandum has declared the COVID-19 to be a Force Majeure event and hence the same would apply to all contracts as entered into between state instrumentality as stated above and private contractors.
Accordingly, it is reasonable to assume that the same shall also apply to infrastructure contracts where the State has commissioned public works to be completed by the Private Contractors. Accordingly in respect of such public works or Infrastructure Projects, the said contractors would be able to take benefit of the said Force Majeure clause together with concepts of reciprocal promises, waiver and Doctrine of Restitution, (as has been discussed in detail above) and be entitled to relief as suitably required by the said contractors under the given circumstances. These reliefs inter alia could be required in the following forms:
This proposition has been laid down by the Hon’ble Supreme Court of India in Tarapore And Co. Vs. Cochin Shipyard Limited (984) 2 SCC 680. It was held that if the agreed fact and situation on the basis of which agreement was entered into, ceases to exist, the agreement to that extent shall become otiose and if rates initially quoted by the contractor becomes irrelevant due to subsequent price escalation, then the contractors claim for compensation of excess expenditure incurred due to price rise can’t be turned down on ground of absence of price escalation clause in the contract. It is however imperative to issue a notice in this case claiming the invocation of Force Majeure and thereby entitlement for price escalation.
As per the Advisory issued by the Press Information Bureau, contractors have been imposed with onus of making continuous payment to all labourers engaged by the said contractor irrespective of the stoppage of work. Hence the said cost incurred by the contractor would also be required to be factored into the project cost and be reimbursed by the principal employer in due course. In the event such reimbursement is not allowed, the contractor may be able to take recourse of rescinding the contract on ground of frustration/supervening impossibility and/or seek recourse under arbitration/ court. Where such costs are not covered within the Cost Escalation Mechanism as provided under the Contract, the Contractor would have to take recourse under the Force Majeure clause read with the Office Memorandum as well as the Advisory to bolster the claim for the said expense. Where such claim is not allowed the contract, itself may be rescinded by the contractor by taking recourse under section 56 of the Contract act by virtue of the existence of the said supervening impossibility of performance and/or seek recourse under arbitration/court. It is however imperative to issue a notice in this case claiming the invocation of Force Majeure and thereby entitlement for reimbursement of expenses made to labours.
In general, the construction contracts contain a time extension clause as by nature time is not essence of these contracts. In light of the stoppage or work due to the restrictions imposed by the GOI/State Governments, delay in completion of project is bound to occur. In view of the Office Memorandum having declared the COVID-19 to be a Force Majeure, we are of considered opinion that the delays caused towards completion of the said Project being caused by Force Majeure cannot be attributed to any fault of the Contractor. Accordingly, the delay in completion would have to be waived as having arisen out of circumstances which were not foreseeable, anticipated or within control of the Contractor. In a case where time is essence of the contract and there is no time extension clause even then the recourse under force majeure clause can be sought which has been levied by the office memorandum. It is however imperative to issue a notice in this case claiming the invocation of Force Majeure and thereby seeking extension of time.
Owing to the GOI and State Government restrictions as aforesaid, equipment taken on lease/hire for usage in respect of specific projects, contributes a large part of the project cost. Due to the said restrictions imposed by the GOI/State Governments it may be the case that the equipment which has been hired and deployed at the project site now remains idle during the period of the restrictions and the hiring/leasing charges is to be borne by the Contractor. The ballooning price of the said hiring of equipment due to the extended period where the same are not in a position to be appropriately used would also be reckoned and recoverable as part of the cost escalation of the project. As presently the office memorandum is in place declaring the Force Majeure therefore recourse can be sought and claim to be made for such hiring charges.
Where the mechanism for calculation of the cost escalation does not provide for escalation in the above stated manner, the same may be claimed on account of the Force Majeure clause read with the Office Memorandum. It is however imperative to issue notices to all the parties concerned in this case claiming the invocation of Force Majeure and thereby claiming entitlement for reimbursement of hiring charges of equipment as the purpose of hiring otherwise gets defeated in this scenario for the moratorium period of declared 3 months or until provisions of Disaster Management Act are withdrawn.
It is advisable to deal with every contract on case-to-case basis to reach to any conclusion based on construction / interpretation of the contract and based on the performance of the contract in the wake of COVID- 19 situation.
It has been an attempt made to carve out various scenarios arising out of various nature and stages of contract and an effort being made to contemplate the real issues which might be faced by the contracting parties which has to be dealt on a case-to-case basis. In the forthcoming months the most pertinent question which will loom over the entire economic and legal ecosystem would be how to deal with the contracts and set the entire system into motion again and restore the Status quo Ante. Our present laws were adequate but unforeseen event creates necessity and therefore the laws may undergo changes to achieve the purpose. Let us all Hope for the Best.
Tags: S. Jalan & Co.
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