COVID-19 has been a black swan event that has brought back the cruel memories of the Spanish Flu. This singular event has mercilessly impacted the social, economic, and political order of all the nation-states. Many contracts will or would have already felt the need of rewriting, renegotiations, and revisiting in the commercial world. This event has adversely impacted the existing contracts and the ones that have been executed, delivered, and sealed.
The bane of COVID-19 has made the execution, implementation and sustenance of certain contracts and commercial arrangements impossible, impractical or even commercially unviable. Such consequences are either covered under force majeure or frustration of contracts under the law of contracts. In case, a contract specifically provides for a force majeure clause, it shall be governed under Section 32 (Enforcement of contracts contingent on an event happening) of the Indian Contract Act, 1872 (hereinafter referred to as the “ICA”). However, in case a contract does not specifically provide for a force majeure condition and due to happening of an event, it becomes impossible for either or both the parties to carry out their duties/ obligations as enshrined in the contract, then such a case would attract Section 56 (Agreement to do impossible act) of the ICA. The said ratio was laid down by the Hon’ble Supreme Court in the matter of Satyabrata Ghose v. Mugneeram Bangur & Co. [1954 SCR 310] and reiterated by it in the matter of Energy Watchdog v. CERC and Others [(2017) 14 SCC 80].
Recently, Delhi and Madras High courts’ judgments have been in the limelight and have become a point of deliberation due to the verdicts passed therein. To an untrained mind or a layman, it would seem that the two verdicts are inconsistent with each other and unsettles the position of law of contracts determining relationship of lease and tenancy. One of the judgments in question was passed by the Hon’ble Delhi High Court in the matter of Ramanand and Ors v. Dr Girish Soni and Anr. [RC. Rev. 447/2017], while the other was passed by the Madurai Bench of the Hon’ble Madras High Court in the matter of R Narayanan v The Government of Tamil Nadu [WP(MD) 19596 of 2020].
In both the cases, the provisions of section 32 and 56 of the ICA have been called in for scrutiny and were discussed in great detail. In Ramanand (supra), the Hon’ble High Court concluded that no relief whatsoever can be granted concerning waiver or suspension of rent by the court in view of the COVID-19 situation, thereby dismissing the matter. However, in the second case the petitioner being the Licensee had approached the Hon’ble Madras High Court seeking waiver of the license fee for a certain period, and the court was pleased to grant such relief.
However, after examining each case’s details, it can be inferred that the two cases cannot be weighed on the same scale. It is pertinent to note that in the former case, the petitioner had filed a revision petition before the Hon’ble Delhi High Court for the waiver of rent on the ground that the government-imposed lockdown had disrupted their business activities. The Hon’ble Delhi High Court referred to the Hon’ble Supreme Court’s judgment in the matter of Raja Dhruv Dev Chand v. Raja Harmohinder Singh & Anr [AIR 1968 SC 1024], and as reiterated by it in T. Lakshmipathi and Ors. v. P. Nithyananda Reddy and Ors., [(2003) 5 SCC 150], and also in Energy Watchdog (supra), and held that the doctrine of frustration as enshrined in Section 56 of the ICA has no application in the lease and rental contracts. Further, the Hon’ble Court after having observed that there is no specific clause in the contract between the parties that deals with force majeure events, it referred to the doctrine of force majeure as recognised in Section 108(B) (e) of the Transfer of Property Act, 1882. However, the said section could have only come to the aid of the petitioner if the leased property would have been ‘substantially and permanently unfit’ to be used for the purpose it was let. The final nail to the coffin of the petitioner’s case was struck by the Hon’ble Court when it again referred to the judgment of Raja Dhruv Dev Chand (supra), and observed that temporary non-use by the tenant due to any other factor(s) would not entitle him to invoke this section, thereby dismissing the petition, with the only relief in the form of postponement of rental amount to a subsequent date.
Whereas, the matter before the Hon’ble Madras High Court was based on an entirely different foundation and set of facts. It was a writ petition under Article 226 filed by the petitioner against an instrumentality of state as recognized under Article 12. The said petition sought the waiver of license fee for running a shop in a bus stand during the entire period of the government imposed total lockdown, wherein all the shops were directed to be remain closed for the entire duration, and to reduce or revise the license fee in proportion to the hours the shop was permitted to be open. The Hon’ble Court opined that the doctrine of frustration cannot be applied to the facts of this case for the reason that it would put an end to the contract. Thereafter, the Hon’ble Court observed that even though the contract between the parties does not stipulate any force majeure clause, the Hon’ble Court would be justified in treating the government-imposed lockdown as a force majeure event which would relieve the licensee from performing his obligation to the corresponding extent. The Hon’ble Court observed that as per section 51 of the ICA when a contract consists of reciprocal promise to be simultaneously performed, the promisor needs not perform his part of the promise unless the promisee is willing and ready to perform his part of the reciprocal promise. In essence, if the government instrumentality is not willing to permit the shops to open, it would be unjust on their part to claim rent or license fee, as the case may be, from their tenants for the corresponding duration.
“If the local body had directed the licensee to close down the shop, it cannot demand fee from the licensee for the period when the shop remained closed. Of course, the licensee must be free of any wrong doing. If the licensee is made to suffer for no fault of his by direction to close down the shop, then, the question of payment of fee will not arise. This is clearly an implied term in the contract.”
While enunciating upon the application of Article 14 to the present case, the Hon’ble Court referred to the judgments of the Hon’ble Supreme Court delivered in the matters of Jamshed Hormusji Wadia vs Board Of Trustees, Port Of Mumbai [(2004) 3 SCC 214] and Bharat Petroleum Corpn. Ltd vs. Maddula Ratnavalli [(2007) 6 SCC 81], wherein it was held that the state and its authorities ought to act in a just, fair and a reasonable manner, even in the fields of contracts, or while playing the role of a landlord or a tenant, and they cannot in any manner cause any discomfort to Article 14. In Bharat Petroleum matter (supra), it was held that –
“..where an entity is a State within the meaning of Article 12 of the Constitution of India, it is enjoined with a duty to act fairly and reasonably. The State acting whether as a landlord or a tenant is required to act bonafide and not arbitrarily, when the same is likely to affect prejudicially the right of others. A statute must be construed justly. An unjust law is no law at all. A statutory order or discretion exercised by a statutory authority must be tested on the anvil of the constitutional scheme. The action on the part of the State must be reasonable even in contractual matters.”
The Hon’ble Madras High Court, in light of the facts presented before it, was pleased to grant relief to the petitioner by way of granting waiver of the license fee for the period of total lockdown, and for the duration of partial lockdown, it directed the petitioner to approach the concerned authority.
Therefore, it is apposite to apprise ourselves that no leeway can be sought for under Article 226 of the Constitution of India in the disputes arising between the private parties. Their respective contracts govern such contracts. The contracts that are executed with the state (authorities included within the purview of Article 12) are on a different footing than that of the contracts executed between the private individuals. The contracts between the private individuals will have to be construed according to the terms of the contract, and relief, if any, can be granted only if the contract and the clauses therein specifically provide for a corresponding relief redressal. In the Hon’ble Madras High Court matter, the relief was granted because there was a reciprocal promise incumbent on the part of the state. Therefore, only where there is a reciprocal promise incumbent upon a party, a relief may be granted.
The two judgments must not be read on the same lines. The main point of difference in the two cases in question is the relationship between the parties. What titled the case in favour of the petitioner in the Hon’ble Madras High Court judgment was that the Respondent was an instrumentality of the State, having a sacrosanct obligation to act within the periphery of rule of law and in a bona fide manner, without an iota of arbitrariness. Further, the Respondent was bound by its reciprocal promise, the non-performance of which was attributable to the lis. Whereas in the Hon’ble Delhi High Court matter, the private contract between the parties had to be construed as such, and no leeway could have been granted in the same.
The Hon’ble Madras High Court does not lay the ratio to the effect that the obligation to pay the rental amount under the lease deeds or similar contracts would be suspended in view of the COVID-19 or in similar contingencies, and that it is most apposite to bear in mind that each case is and has to be decided on the basis of its own merit and facts. The said judgment may have far reaching implications in the license, lease, concession or other similar agreements executed between the private parties, and especially in the contractual disputes where the Central or the State Government, or an instrumentality of the State is Lessor, Licensor or Concessionaire and positioned as a counterparty.
Through the prism of judicial pronouncements, it can be asserted that the law remains settled and undisturbed. Further, the provisions in relation to relief in cases of LessorLessee disputes would come to aid only if such a situation is contemplated in the agreement.
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