Force Majeure Clause - Your Safeguard from Rents in Covid-19/Corona

What can save you from heavy rentals – Force Majeure Clause

The Coronavirus or COVID-19 crisis is not yet over. As of now, there is no medicine or cure to fight this virus. Lots of experts are mentioning that it may take up to September 2020 to be able to say something on the real answers around COVID-19. I was speaking to a friend who has taken a banquet hall on a yearly lease where his monthly rentals are Rs 10 lacs (that’s $1 million) a month. With Corona now and bookings at zero level, he is finding it difficult to imagine how to pay his rentals as Incomes are zero while expenses are heavy. Same is the case of cinema halls, shops in malls, convention centres and the likes.

India’s largest restaurant chains, retailers and multiplexes including McDonald’s, Domino’s Pizza, chain of restaurants, Reliance Retail, Future Group, Spencer’s Retail and PVR have told their landlord’s that they are going to invoke the clause and not pay the rentals till May at least. In the letters (drafted mails), they have given a valid reason also that they have not been able to earn the incomes from the properties which they have contracted. Small businesses in malls have also made similar demands.

So, the Brahmastra (Lord Brahma Astra) for you as the tenant is going to be the – Force majeure clause which is generally put in under normal contracts. Force majeure refers to rare and unanticipated events, beyond the control of the concerned party that prevents him from fulfilling a contract. Typically, this clause can be invoked only if it is specified in the original contract.

Let us understand the Force majeure clause:

Force majeure is a word used in French implying a force which is not a normal power and is a supernatural or superior force (beyond normal situations). In finance or legal terms – the word “force majeure” covers any abnormal or events which are not in anyone’s hands or control, examples can be – war, unnatural famines, labour stoppages or extreme weather or any situation which is not common). There are some places where it is common to have floods or earthquakes and even labour strikes. In those scenarios, force majeure may not be applicable at all. These cover those areas which are extremely difficult or nearly impossible to do the activity for which the contract was made.

Generally, as a standard, in legal contracts especially in the case of Rental agreements, the clause is majorly present, and most companies insert these force majeure clauses to protect themselves from any liabilities or problems which they feel they may not be able to fulfil in terms of a contract (or if attempting to do so will result in loss or damage of goods) for reasons which are beyond its control. So far, COVID-19 was not mentioned under the examples given; however, it meets the definition and objectives also.

Why COVID-19 has not been mentioned was because it has happened for the first time in the history of mankind.

Who defines force majeure in India? Which law captures it and covers it?

Section 32 of the Indian Contracts Act:

The term ‘force majeure’ has been defined in the Legal dictionary as ‘any event or effect that can be neither predictable nor controlled. It is a contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event that the parties could not have anticipated or controlled.’ Indian Contract Act deals with such situations in a certain way since it defines the rights and duties of the parties to the contract.

If in any contract, the act of the parties is probably dependent on the happening or non-occurrence of an event, and the event itself becomes impossible, then the contract becomes void (void legally means not valid). So, if I am buying space for the purpose of a banquet hall and now this act is impossible since, in during the coronavirus pandemic, gatherings are not permitted, so technically by applying the clause, my rental agreement becomes questionable from the perspective of rent payments. From a contract perspective, a force majeure clause provides temporary relief to a party from undertaking its obligations under a contract upon the occurrence of a force majeure event. This is right also since practically how the person is expected to do so.

Here are the remedies for the tenant to escape the liabilities, especially when he/she is going to earn from the rented space (malls/restaurants/cinema, etc.) and now his rentals are not there:

Step1 – Check the existence of the clause

If you have a signed agreement (check the presence of Force majeure in the signed contract with the Landlord). A force majeure clause in a contract would typically include an exhaustive list of events such as:

  1. Acts of God
  2. War
  3. Terrorism
  4. Earthquakes
  5. Hurricanes
  6. Acts of government
  7. Explosions
  8. Fire
  9. Plagues
  10. Corona/COVID-19
  11. Epidemics 

It also includes a non-exhaustive list wherein the parties generally simply narrate what generally constitute force majeure events and thereafter add “and such other acts or events that are beyond the control of parties”.

As discussed above, it would also include conditions which would have to be fulfilled for such force majeure clause to apply to the contract and the consequences of the occurrence of such force majeure event.

The major consequences would include the deferment of the obligation of the parties upon happening of a force majeure event. The events generally are given in the example list. The list is just to mention some examples only and is not a complete list.

Step2 – Suppose the contract does not have the Force majeure clause

Use Section 56 of the Contract Act – There can be a possibility that the contract does not have the clause of force majeure.

If a contract does not include a force majeure clause, then what next for the tenant, will he have to pay? Not really. Now in this scenario, the parties (both landlord and tenant) would have to ascertain factors such as:

  • Nature of the contract
  • Nature of event and so forth

It needs to be checked as to whether Section 56 of the Contract Act (which deals with agreements between the parties to do an impossible act) and which has been briefly discussed below, can be applied to such contract so as to discharge the parties from their contractual obligations.

Section 56 of Contract Act – The Doctrine of frustration of Contract:

The new concept of the Doctrine of frustration, covered under section 56, shall be applicable in case section 32 is not usable or applicable. This covers – happening of an act which is outside of the contract and because of such act, it makes the completion of the purpose of the contract impossible. Section 56 states that any agreement to do an act impossible in itself is void (not valid). On a plain reading of Section 56 of the Contract Act, it is evident that the section covers the impossibility and because of the impossibility, the unlawfulness of the performance (payment of rent) of the act, which the parties had not imagined/worked out at the time when they entered into the contract. It leads to a valid question as to what are these impossible acts which can make the frustration of contract.

The term impossible – The courts in India have held that the word ‘impossibility’ used in Section 56 of the Contract Act must be understood in a Practical form and not in its literal sense. So, if I buy a space on a highway and because of the quality of food or service or brand name, I am not able to attract many customers, I cannot use this context as ‘Impossible’. However, if due to COVID, I am not able to operate my restaurant, mall or shop since the law is not allowing customers to enter in my place, then it is an impossible act. So, the law only understands the practical application only.

Very recently in 2016, in a case between Airports Authority Of India vs Hotel Leela Venture Ltd. wherein Hotel used the provision to not pay the lease rentals citing the above provision, the judgement was passed on 15 July 2016. The courts did not agree since as per courts the provisions were wrongly taken.

Section 56 and Section 65 of the Contract Act:

The concept of restitution (restoration of something lost or stolen to its proper owner) are covered in Section 65 of the Contract Act. It states that when an agreement is discovered to be void (post various situations like the cases as above including the occurrence of COVID), resulting in the case of a contract getting frustrated, the person (landlord) who might have received any benefit under such agreement is ‘bound’ to return or give it back, from whom (tenant) he received it. Hence, it can be mentioned that one of the solutions of the frustration of a contract is to restore back to ensure parties are to be put in the same position they were if the contract had never been executed.

Current situation:

The COVID-19 pandemic has affected almost everything. Inter-state trade, commercial business, property market, hospitality industry, Airlines, malls and shops, hotels and restaurants are some of the worst-hit sectors. It has also impacted their ability to meet their contractual obligations due to various reasons, such as:

  1. Restriction in movement
  2. Stopping manufacturing
  3. Increase in costs due to scarcity of raw materials components
  4. Labour shortages (labourers have gone back)
  5. Shortage of funds (economy cycle stopped)
  6. Disruption in the supply chains

In the current scenario, media reports have already mentioned various big names – Hero group, PVR, Inox, Reliance Retails, to name a few. With the widespread disruption in the economy and the business, NIL manufacturing and NIL transport due to the presence of COVID-19, the stage seems set for India to see a flood of ‘force majeure’ cases and its applications. If the situation does not improve (which is expected by June maybe) over a period of time more and more Indian companies may have to think of using ‘force majeure’ clauses in their contracts resulting perhaps in a high number of litigations should parties not come to a workable understanding. If tenants are at a loss so are landlords also. Quite possible, they might have invested huge money to buy these properties. So, usage of these clauses is definitely increasing the legal fights.

Of course in such situations, the courts and arbitrators will have to evaluate and decide each dispute on individual merits, which would be based on the terms of the contract, the intent of the parties, and steps taken to mitigate. It will also increase the demand for arbitrators.

Further, in cases where a contract does not have an explicit clause on force majeure, there could be situations or scenarios where parties may try to seek shelter under Section 56 of the Contract Act and seek frustration of a contract. The courts will then have to ascertain whether the contract has become impossible to perform and whether the Doctrine of the frustration of contract could be made applicable to such a contract.

Suggestions:

Kindly ensure to pick up the right clauses and invoke it at the right time so that you take the right benefit of the same. Rentals are very high, and the above two clauses shall be really helpful to save you during this time.

Related Links:

How COVID-19 is Changing Global Financial Market?

How to Keep Your Financial Operations Running During The Lockdown

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Force Majeure Clause - Your Safeguard from Rents During Covid-19
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Force Majeure Clause - Your Safeguard from Rents During Covid-19
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In Finance or legal terms, the word Force Majeure covers any abnormal or not in anyone’s hands/uncontrollable events. Read on to know who defines force majeure in India, which law captures it and covers it.
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