Applicability of Force Majeure Clause in Tenancy Agreement

As per Salmond “A contract is an agreement creating and defining obligation between two or more persons by which rights acquired by one or more to act or forbearance on the part of others”. [1]

Contract is an agreement that governs the rights and duties of the parties to the contract. A contract is legally enforceable as it has the requirements and approval of the law. It is an agreement which deals in the exchange of goods and services in respect of which the consideration is made. The contracts which takes place between the parties is followed as per the provisions of Indian Contract Act, which provides contractual rights to the parties of contract. The Act provides with the rights and duties and also the parties of the contract to successfully conclude business from everyday life transactions to evidencing the businesses of multinational companies.

The Indian Contract Act 1872 which was enacted on 25th April, 1872 and came force on the first day of September 1872, it clearly states how to enter into a contract, execute the same. [2] A contract takes place between two parties, where proposal is made by one party and acceptance by other party. An offer is made in starting which is proposal to another party to enter into an agreement on the basis of the terms decided, after that there is an acceptance of that offer is made by the other party in respect of the goods and service which will be provided. Consideration is one of the important part of the contract it basically means what parties will going to gain from the contract.

A contract is of many kinds and used in different ways even a tenancy agreement is called a contract between landlord and a tenant. It is also called as a rent agreement it is for a fixed period of time that contains the already discussed norms and conditions under which tenant gets the temporary possession of the property. This agreement gets renewed after the mentioned period and gets followed particularly. The terms conditions of the contract can be renewed, and amount is also paid which is called as consideration. This agreement gives both the renter and the property owner a mutual understanding of the terms of the occupancy.

The beginning of the nationwide lockdown has started from 24th March when the Prime Minister Narendra Modi declared it on our televisions and screens. To eliminate the spread of coronavirus, the Prime Minister have asked the entire population to stay indoors. Due to this, people were unable to go to work, there has been a reduction in the salary of the employees i.e. corporations has imposed salary cuts, man people lost their jobs and the self-employed people have suffered the most.

The lock down has worst effect on the economy. It has also reduced the ability of the people to spend money on things which they earlier used to do. It has also impacted the landlord-tenant relations. On one hand, it has adversely affected the tenant’s ability to pay rent while on the other, the economics of the labour has also been disturbed. Because of the tenant’s financial capacity/earning to pay the rent, tenants have asked for the waiver of the same as their incomes have been affected. The aim of the tenants was to invoke the doctrine of force majeure so that they can seek legal protections with regard to non-fulfilment of their contractual obligations.

What is Force-Majeure

The term “force majeure” has no reference in the Indian Contract Act, 1926 as such. The term is used to refer the foreseeable stipulated circumstance or a supervening superior force that prevents someone from fulfilling their part of the contract. The establishment of “force majeure” clause gives rise to the consequences that are contained in the contract. Normally, a force majeure clause will first specify the events that would constitute a force majeure and it is then followed by the consequence which will arise if such an event has taken place.

In order to determine the event which falls under the force majeure clause depends upon the phrasing of that clause and what consequences it must follow. The occurrence of the force majeure clause in a contract does not mean that all contractual obligation such as the payment of the rent is waived off. In other words, it is not a magic wand which will terminate all the contractual obligations of the contract. The first and golden rule of the contract law is the ‘sanctity of a contract.’ Contracts must be executed and performed, and there is no easy way to rescue from them. The Contract Act governs them which have a binding force on the parties to fulfil their contractual obligations.

Implied or Explicit

A force majeure clause is not necessarily an implied term of a contract as per the Indian Law. In ordinary circumstances, a court would not consider a force majeure clause into a contract.  In the words, to invoke such a clause, it should have been expressly stipulated in the contract. In a case, where a force majeure clause has not been contained, in such situation it has to be strictly and narrowly construed. In such circumstances, clause cannot be rewrite by the court or can be read by it or taken into account of what is not expressly mentioned.

The mere fact that a force majeure event has took place does not by itself escape from its performance. Even if the government has declared coronavirus as a force majeure event, it will only be used as an evidence that a force majeure event has occurred. It is difficult to not allow tenants from the rent due because of this lockdown on the nation. Although, only those situations which are stated under the contract in the force majeure clause will be applicable.

Therefore, it depends upon the language of the clause whether such an event is covered under the clause or not and whether a party can be excused from performing its obligations. If the clause has stated that the event is due to or occurred because of “failure of the lessee to perform due to natural epidemic” or it is of such a nature that the tenant claims it is failed from performing due some natural epidemic or other circumstances as they have stated in the clause, force majeure, then it will be applicable.

If in a case, the lessee desires to be excused from this clause with respect to discharging its liability it must not only shows that the force majeure was beyond its control but also prove that the event was of such a nature that it was impossible for the lessee to perform its responsibility. The fact that if the tenant is forced to perform its obligations arising from the contract would cause economic hardship or inconvenience is not sufficient to take defence under the force majeure clause. If there would have been some alternative to the situation, then the tenant would not have been excused to pay rent. If the financial capacity/earning of the tenant would not have any affect then the obligation to pay rent would not be terminated. 

Anticipation is also a key. Considering an ‘Act of God’ as a force majeure event, in the opinion of our Supreme Court “does not operate as an excuse from liability, if there is reasonable possibility of anticipating their happening”. The agreements of tenancy that are entered before the SARS and H1N1 pandemic may qualify as a force majeure event but in the case of COVID-19 as it was not anticipated event and the consequent lockdown does not fulfil that requirement. But it does not mean that on happening of the lockdown or pandemic the tenant’s liability to pay rent would be automatically terminated. The tenants will be entitled to seek that relief which has been stipulated in the agreement.

Some of the views that have been taken by the Delhi High Court in the case Ramanand & Ors. Vs. Dr. Girish Soni & Anr.[3] Considering various decisions of the Apex Court, the learned judge considered the following factors as to whether the Tenants are entitled to any relief of suspension of rent:

  1. Nature of Property
  2. Financial and social status of the parties
  3. Amount of rent
  4. Other Factors
  5. Any contractual condition
  6. Protection under any Executive order

In this case, the court has denied any suspension of rent due to COVID-19 and the resulting lockdown while considering the above-mentioned factors. A force majeure clause mostly provides for a notice period. It means that whenever a party wishes to invoke a force majeure clause on the happening of the event, they have to intimate the landlord for the same. If in case, a tenant omits to issue a timely notice but does it later on, then such clause for the termination of rent can be used by the party after issue of the notice.

As we have discussed above the court has stated that the contracts having force majeure clause, then there can be waiver of monthly rent and it would be governed by Section 32 of the Contract Act. The court referred the decision of the Supreme Court in Energy Watchdog v. CERC & Ors, [4]in this case it was held that “the contract itself contains an express or implied term relating to a force majeure condition, the same shall be governed by Section 32 of the ICA. Section 56 of the Indian Contract Act 1872, which deals with impossibility of performance, would apply in cases where a force majeure event occurs outside the contract”. The court also stated that if any clause is present which provides regarding some sort of waiver or suspension of rent, only then the tenant can claim the same.

Force Majeure and Frustration of contract

There is popular belief that in the absence of stipulating force majeure clause, in certain cases the unanticipated occurrence of COVID-19 can be cited as an event that has made performance of obligations under the lease agreement impossible or impracticable and in such a situation, the contract is termed as frustrated as per Section 56 of the Indian Contract Act 1872. Section 56 of the Contract Act cannot be applied in the case of lease.

The following are the essential ingredients of second part of Section 56:

  1. The contract should be valid and subsisting
  2. Some part of the contract is yet to be performed
  3. The contract becomes impossible to perform (after it has been entered into.

The mere fact that doctrine of frustration applies to contract is not in dispute. In the case of lease, it is becomes more than a contract as it creates interest in favour of the lessee. Where the possession of the premise is given in the hands of the lessee, there is nothing else that needs to be performed and thus condition (2) would not be fulfilled. In case of complete transfer, Section 56 i.e. doctrine of frustration is not applicable unless there is an express provision to the contrary in the contract itself.

The court also inspect the circumstances in which the contracts having no force majeure clause and the tenant seek to frustration of contract due to impossibility of performing it. In this regard the court in above case again referred the Supreme Court decision of Raja Dhruv Dev Chand v. Raja Harmohinder Singh & Anr [5]in which it was stated by the court that Section 56 applies to executory contract and this section cannot be used to waive, suspend or get exemption from payment of rent. On the basis of these judgements Delhi High Court in present case stated that Section 56 of the act does not apply to a lease agreement and other similarly situated contracts.

These principles were explained clearly in case of Energy Watchdog v. CERC [6]in which Justice P.C. Ghosh and R.F. Nariman stated that”

  1. If an express or implied ‘force majeure’ clause exists in a contract, the same will be exercised over and prior to the principle enshrined under Section 56;
  2. Application of Doctrine of Frustration must always be with narrow limits and implication;
  3. A mere rise in cost or expense does not come under the ambit of Doctrine of Frustration;
  4. Doctrine of Frustration will not apply so long as the fundamental basis of the contract remains the same.

The petition was also dismissed by the Delhi High Court in case of Gaurav Jain v. UOI [7]in which same relief was seeking which was of waive, suspension of rent payable by tenants during this country lockdown. The court in this case stated that “If the landlord is entitled to receive the rent/consideration in accordance with law as per the contractual agreement entered between the parties concerned, then, the Court cannot, by a general order of the nature sought by the petitioner, waive such amount.”

Conclusion

The suspension of Rent depends upon the tenancy agreement which took between the parties. Due to this outbreak of corona virus epidemic there is suspension of rent by application of the doctrines like force majeure, frustration of contract. So, in order to terminate the tenancy agreement the occurrence of these clause and the events specified is necessary.

References

  1. https://indiankanoon.org/doc/130579261/
  2. https://www.lawinsider.com/clause/force-majeure
  3. https://www.scconline.com/blog/post/2020/04/20/applicability-of-force-majeure-and-frustration-to-lease-deeds-a-critical-analysis-in-light-of-covid-19/
  4. https://www.thehindu.com/news/cities/Delhi/rent-waiver-only-if-contract-has-force-majeure-clause/article31654353.ece

[1] Sir John William Salmond

[2] Indian Contract Act 1872

[3] Decided on 21 May, 2020

[4] (2017) 14 SCC 80

[5] AIR 1968 SC 1024

[6] (2017) 14 SCC 80

[7] 2020 SCC Online Del 652

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