This article has been written by Indrasish Majumdar an intern at LawSikho. This article has been edited by Ruchika Mohapatra (Associate, Lawsikho).
Table of Contents
Introduction
A contract is an agreement between two or more parties that creates obligations that are legally enforceable or recognized by law. Unforeseen or supervening events, i.e., occurrences that are unexpected or cannot be predicted in advance by either of the parties or eventually release the parties from their contractual duties, may have an impact on the execution of these obligations. The principle of frustration is a doctrine enumerating a particular instance of contract discharge due to an inability to fulfill it. The word frustration is not defined under the Indian Contract Act of 1872. The frustration of purpose, as defined by Black’s Law Dictionary, is “the doctrine that if a party’s principal purpose is substantially frustrated by unanticipated changed circumstances, that party’s duties are discharged and the contract is considered terminated.” Courts in India argued that the term contract frustration is an elliptical expression. The frustration of the adventure or the business or practical aim of contract” is a more complete and precise statement.
This concept is a tool for reconciling the norm of absolute contracts with a specific exception that is required in certain situations in the interest of justice. The concept falls within the scope of Section 56 of the Contract Act since it dissolves the contract due to the supervening inability or illegality of the agreed-upon Act. A contract is also considered frustrated under Section 32 when the condition on which the contract is based is not met or cannot be met due to impossibility. Nonetheless, the concept is linked with Section 56 in Indian law. Section 32 only applies when contracts are fulfilled and parties are relieved of their duties per the provisions of the relevant contract. Section 56 applies when contracts are discharged and parties are relieved of their duties as a consequence of subsequent impossibility caused by external forces and causes. When addressing the doctrine’s legal implications, the courts have used the words ‘frustration’ and ‘impossibility to perform’ interchangeably.
Doctrine of frustration and force majeure in India
To establish whether the intervening event rendered the performance impossible under Section 56, it is necessary to set out several criteria used by the courts, including the newly created multi-factorial approach. Courts in India and England have recognized a variety of circumstances that may or may not invalidate a contract. The issue of whether the supervening event is a frustrating event is one of degree, that is, how much the supervening event has impacted performance.
While much is being said around the world about the ramifications of COVID-19 (the World Health Organization’s declared pandemic) in terms of global economic collapse, reduced productivity, economic downturn, lay-offs, and so on, businesses are also concerned about their operating costs, the consequences of terminating existing service, lease, and rent agreements, and so on. Rent reduction is one such element that all renters are looking forward to keeping their businesses afloat during the current global financial crisis. As a result, the invocation of the force majeure provision in the lease deeds is a source of concern for both landlords and renters. The purpose of this article is to restate the present legal situation of the concept of frustration in India in light of the COVID-19 crisis.
Force majeure clause and the doctrine of frustration: a legislative insight
The doctrine of frustration was originally founded in English law on the concept of implied contract, which meant that the parties to a contract had impliedly agreed that if the execution of the contract became impossible or unlawful, the parties would be released from the contract. The concept was founded on the idea that, in contracts in which the performance is conditional on the continued existence of a given person or thing, a condition is implied that the impossibility of performance arising from the person or thing’s perishing shall excuse the performance.
When an agreement is entered and is capable of being executed, but then becomes impossible to perform due to an event that a party could not help stop or the act for which the agreement was entered becomes illegal, the contract itself becomes void, or to put it another way, the contract becomes frustrated. The contract’s parties are dismissed. The notion of contract frustration is mostly founded on the contract’s inability to be performed.
Contractual provisions for doctrine of frustration and force majeure
In India, the debate is somewhat limited since Section 56 of the Contract Act itself incorporates the concept of frustration. As a result, the issue of contract discharge must be examined within the framework of Section 56 of the Contract Act. However, it cannot be completely ruled out that the concept of frustration, as understood in English law, falls beyond the scope of Section 56 of the Contract Act. The concept of frustration under Section 56 of the Contract Act was extensively addressed by the Supreme Court of India in the case of Satyabrata Ghose vs. Mugneeram Bangur & Co and has subsequently been adopted throughout India. In Satyabrata Ghose’s case (supra), the Supreme Court stated that the doctrine of frustration of contract is really an aspect or part of the law of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done and therefore comes within the scope of Section 56 of the Indian Contract Act.
While discussing contract frustration, it’s worth noting the distinction between Section 32 and Section 56 of the Contract Act. The following is a reproduction of Section 32 of the Contract Act: “Contracts to do or not do anything if an uncertain future event does not happen, cannot be enforced by law until and until that event happens. Such contracts become void and unenforceable if the occurrence becomes impossible.”
Section 32 assumes two things. (i) The contingent contract is only binding if an uncertain event occurs; and (ii) if the event on which the agreement is conditional, which the parties anticipated at the time of forming the contract, becomes impossible, the contract is rendered void.
In this paper, we are concerned with the second half of Section 32 of the Contract Act in this article. The second part states that if the event becomes impossible, the contract is rendered null and void. Therefore, under Section 32 of the Contract Act, if the specified event on which the contract is dependent becomes impossible, the contract becomes invalid, whereas under Section 56 the parties did not contemplate any such occurrence while entering into the contract, which may revoke the agreement.
Judicial interpretation
On a simple reading of Section 56 of the Contract Act, it is clear that the section contemplates some impediment or illegality of the execution of the act that the parties had not anticipated. It begs the question, what is such an inconceivable act that would result in contract frustration? Courts in both India and England have ruled that the term impossibility in Section 56 of the Contract Act must be construed realistically rather than literally. Thus, even if it is not an absolute impossibility, a contract would fall within the scope of Section 56 of the Contract Act if the contract has fundamentally altered, which the parties had not anticipated at the time of the agreement. This principle was affirmed in Satyabrata Ghose’s case (above), Inder Persad v. Campbell, and other English Court decisions.
Section 56 of the Contract Act, on the other hand, may not be applied in cases of (i) self-induced frustration and (ii) when parties have explicitly stated in a contract that the contract would remain notwithstanding such intervening events.
The following criteria must be met in order to show that a contract has been frustrated:
- There must be a valid and ongoing contractual relationship;
- There must be some part of the contract that is yet to be executed;
- The part of the contract that has yet to be executed should become unattainable or illegal; and that the impossibility should be due to an incident that the promisor could not help deter.
In Alopi Parshad & Sons Ltd v Union of India, the court analyzed a circumstance to have rendered the performance of the contract impossible. The facts of the case were limited to Section 56 but the reasoning is very much relevant to the application of Section 32 on contract cases as well. The court ruled that the defense of frustration cannot be taken unless the performance becomes impossible or unlawful on account of an event. Nothing under Indian law enables a court to absolve a party from the contract’s specific terms due to changes in circumstances wholly outside the contemplation of the parties since the time the contract was drafted. Merely because the contract became difficult to perform can’t be included in the doctrine of frustration.
Force majeure in commercial leases
Due to the economic slowdown, people across the nation have been unable to bear the financial losses which have resulted in the default in payments. Amid the crisis, one more area that faces the same difficulties is the lessors and lessees. The shutdown of numerous businesses since the initial lockdown in March 2020, as well as the ensuing economic slump, has heightened tensions between commercial property lessors and lessees. On the one hand, lessees are unable to meet the payment obligations on time or at all due to financial lockdown and shutting down of business premises completely. Lessors, on the other hand, are finding it difficult to waive or postpone rent owed to them, whether due to lease rental lowering or landlords experiencing a revenue loss.
In the light of such recent developments, what we aim to analyze in this section is the impact of the COVID-19, an event beyond the control of the parties causing loss to both. We will try to understand the specific provisions of the Transfer of Property Act (TPA) and establish how they interact with the provisions of the contract act to reach a conclusion in the situation. Meaning, the final objective of this section is to find whether the obligations, payment or otherwise, can be avoided in the case of a force majeure event such as the COVID one.
How does TPA interact with contract law provisions on force majeure?
The closest any provision in the TPA comes to the force majeure is Section 108 B(e). The section in whole discusses the rights and liabilities of lessor and lessee, and this provision specifically lays down a situation when the lessee upon their discretion renders the lease agreement void and can thus get out of following the obligations under the agreement. It lists down occurrences of some events for this right to be utilized by the lessee. When an unforeseen event destroys either the entire or material part of the property; or an unforeseen event that makes the property substantially and permanently unfit for the purpose for which it was let, the lease can at the option of the lessee become void.
By unfolding the provision we realize that the section has two crucial requirements, first that the property subject to the lease shall be left unfit for the purpose it was leased, and second the lessee reserves the right to terminate the lease agreement and the same does not automatically terminate by the act of law. Therefore, the lease may continue by itself until the lessee determines otherwise, but the option to continue the deed still remains reserved with the lessee. Unlike Section 56, which dissolves the contract immediately and inexorably when a frustrating event happens, discharge under Section 108(e) occurs only when the lessee chooses to terminate the lease. The lessee bears the burden of proof in either case, proving that a major component of the property has been destroyed or that the property has been rendered ‘substantially and permanently unsuitable for use’ by the lessee.
If a lessee can demonstrate that the criteria in Section 108 B (e) are satisfied, simply refusing to pay rent will not excuse the lessee from their responsibilities. The lessee must notify the lessor of their intention to exercise his discretion under Section 108 B (e) to terminate the lease. It’s crucial to remember that relief under Section 108 B(e) nullifies the whole agreement, so a lessee can’t keep using the property and must immediately return back vacant possession to the lessor. In a case where the lessee fails to hand over the property their liability to pay the rent shall be reinstated.
Interplay of force majeure and lease agreements
One of the very first discussions on doctrine of force majeure and lease agreements was done by the Supreme Court in Raja Dhruv Dev Chand v Harmohinder Singh. In this case, the appellant who before the partition of India leased a land which later became a part of Pakistan, and the appellant migrated to India. Thus, appellant applied for a decree for refunding of the rent paid towards the lease agreement contending that the covenants of the agreement became impossible to fulfill due to the partition and therefore the contract shall be terminated.
The court ruled that Section 56 of the Contract Act has only a limited application in the cases of complete transfer under the lease agreements. A lease covenant to do an act that becomes impossible or unlawful after the contract is formed due to an occurrence that the promisor could not prevent becomes invalid when the conduct becomes impossible or unlawful. However, on the account of this impossibility the entire transfer between the lessor and the lessee does not become void. Further, the court suggested that to terminate the entire contract the requisites of Section 108 B(e) shall be fulfilled as it is the only limited application of force majeure on transfer of cases.
The reason being that in leases of immovable property, the possession of property is transferred to the lessor in return for rent that the lessor in commercial leases may earn from the use of the leased premises itself. In a lease, where the possession of the property has been obtained by the lessee, is an executed contract. Therefore, any argument with respect to inability to pay rent hardly matters because doctrine of frustration applies only where the contract is executory and not executed. Let us understand it with the aid of an illustration. Where A promises B under the lease agreement to transfer the possession of her property, but before the property could be transferred it was acquired by the state for construction of a highway. In this case, the doctrine of frustration under the contract law may apply as the performance of the contract is rendered impossible by an act of law. However, where the possession has been obtained, the contract has been executed now the lessee has an absolute liability to pay the rent unless the property is rendered unfit for use under Section 108 B(e).
In T. T. Lakshmipathi v. P. Nithyananda Reddy, the Supreme Court clarified the issue of whether section 56 of the Contract Act applies to lease agreements, holding unequivocally that only section 108(B)(e) of the TPA does. The notion of force majeure is recognized in Section 108(B)(e). For this provision to be used, three conditions must be met:
(a) irresistible force must exist,
(b) the property must be rendered substantially and permanently unsuitable for the purpose, and (c) the lessee must notify the lessor that the lease deed has become void.
The Supreme Court further decided that a tenant’s temporary non-use of the property owing to whatever reason does not enable the tenant to use this section. This section places the onus on the lessee to establish the irresistible force due to lockdown, and that this lockdown has rendered the property permanently unfit for the purpose for which it was leased out. Therefore, it is crucial to see whether the lockdown imposed by the COVID-19 pandemic can be qualified as such an irresistible force that the court discusses in the above judgment.
Impact of COVID on lease agreements
From the above judgment, we understand that onus is on the lessee to prove that lockdown was an irresistible force that rendered the property unfit for use. The primary contentions have been that the property leased by the lessees was rendered inaccessible due to the lockdown, and thus they were unable to use it and carry out the business for which it was let. In the above judgment that we discussed, the court held that Section 108 B(e) cannot be utilized until and unless there is total damage of property that is permanent in character. As a result, we conclude renters’ temporary non-use of property owing to government-enforced lockdowns cannot be used as a basis for refusing to pay rentals.
Now even if the property is rendered inaccessible for a period of time during the lockdown, it does not become unfit for the purpose of carrying out any business. The matter regarding the impact of COVID on lease agreements has been categorically decided by the Delhi High Court in Ramanand v Dr Girish Soni. In this case, the court considered an application regarding the non-payment of rents by the tenants across the country, owing to the financial losses due to the COVID lockdown imposed by the government. The court acknowledged that in hundreds of cases throughout the country, the question of whether the lockdown entitles renters to a waiver or exemption from rent payment or rent suspension is sure to emerge.
First of all, the court considered the application of Section 32 on the lease agreements. The basic concept is that if the contract has a clause allowing the tenant to request a rent waiver or suspension, the tenant is entitled to it. The contract’s force majeure provision may potentially constitute a Section 32 contingency, allowing the renter to argue that the contract is void and relinquish the premises. If the renter intends to keep the premises and there is no condition providing for a grace period, the rent or monthly charges must be paid.
Further, it was observed that in absence of such a specific clause in the agreement, the tenants may try to invoke frustration due to an event rendering the performance of the contract impossible. Section 4 of the TPA allows that the provisions which relate to contracts are to be taken as part of the Indian Contract Act, 1872. However, it would be farfetched to construe that all the provisions of the contract act shall be read into the guidelines of TPA. There exists an evident distinction between an executory lease agreement governed under Section 56 of the Indian Contract Act and completed conveyance that can be frustrated only under Section 108 B(e).
Therefore, express terms of Section 56 do not apply to completed agreements. The court unequivocally laid down that Section 56 cannot be used to claim the waiver, suspension, or exemption from rent payment since a lease is a completed transfer despite the fact that the lessee is still required to pay monthly rent. Thus, for the frustration of the lease agreement only Section 108 B(e) can come to rescue and financial difficulty as to the payment of rent does not account for a reason to frustrate the contract by the tenant or get out of the liability to pay for the leased property.
Even where the lessee is able to prove that provision of TPA is applicable to their situation, the rent cannot be waived relying on such a section. The lease agreement terminates only when the lessee chooses to. As long as the lessee does not give notice to the lessor to terminate the contract, the lease agreement continues and the obligation to pay stays.
Further, let us discuss a situation where Section 56 has a direct application on the lease agreement, say the possession has not been handed over or where hypothetically section applies instead of provisions of TPA. Now due to the COVID, the premises have become inaccessible and due to lockdown the markets have been nose-diving and causing severe loss to the lessees of the premises. This has been contended to be the impossibility that makes the lessees unable to meet the obligations to pay rent under the lease agreement.
However, all the listed issues will merely qualify as commercial difficulties, which is not a practical impossibility towards meeting the obligations under the agreement. Such difficulties cannot be reliance for allowing any relief for the frustration of the contract or application of force majeure. The force majeure clauses in the agreement or even the impossibility of the execution of the contract is construed in very narrow terms, so only where the performance of the contract itself is impossible due to practical difficulties can a contract be frustrated or obligations be avoided.
Similarly, commercial difficulties in terms of financial constraints due to the plummeting economy and loss in the market is not a practical difficulty that can allow a lessee to not meet the payment obligations under the contract. Before, even if the lease agreements were not bound to be governed under Section 108 B(e), even then the lessees could not be allowed to avoid obligations to pay the rent under the lease agreements.
A comparison from the foreign jurisdiction
In a recent judgment in the US by the Illinois court, it was held that the payment obligations under the lease agreement can be excused, if the force majeure clause within the agreement does not expressly preclude it. It held that “Landlord and Tenant shall be absolved from performing their obligations under this Lease if and only if the performance of any of their obligations is prevented or delayed, retarded or hindered by an act of God, laws, governmental action or inaction, orders of government or civil or military or naval authorities, or any other cause, similar or dissimilar to the foregoing, not within the reasonable control of the party. Force Majeure shall not be used due to a lack of funds.”
In another judgment, the court dismissed the petition made for exemption in the payment of rent under the lease agreement. The reasoning however is that non-monetary obligations only can be excused if force majeure applies and that the COVID does not provide enough protection to absolve a part of their payment obligations under the agreement. English law, on the other hand, follows the same procedure as India does, i.e. in presence of a force majeure clause the same can be invoked, and in its absence rent obligations cannot be excused to the party.
An analysis of the legal position makes us realise that it is very similar across all the jurisdictions. Only when an act under the lease is rendered impossible to perform due to the occurrence of the force majeure, the obligations of the parties can be excused. English law has the same stance as India, there is no comparison to draw. While we look into the discussed rulings in the US we see that lack of funds or any form of commercial difficulty even in the US does not excuse the payment of rent. Therefore, Indian law follows the popular stand where a party does not escape their liabilities even if the property leased is yet perfect for the usage, and there is nothing that constrains the use of the property.
Conclusion
The project work was an attempt to understand the impact of the Coronavirus pandemic on the commercial lease agreement because in courts across the country several matters had come up and even been dismissed, which expected the courts to give them relief from payment of rent in the wake of COVID. COVID has plummeted the economy of the entire planet and India especially struggled a lot due to the heavy caseload due to its humongous population.
Hence, in the light of these issues, it was material to research the effects the COVID may have on meeting obligations under the lease agreements. To accomplish the desirable task, the project has first scrutinised the provisions related to both doctrine of frustration and force majeure and traced the history and interpretation of the provisions for their due application on the commercial lease agreements.
For a contractual duty to be avoided or the agreement is frustrated due to the happening of an event it is mandatory, that the happening of the event has rendered the performance of the contractual obligation impossible and the same cannot be performed in any other reasonable way. Further such impossibility shall be a practical barrier and not mere difficulty and financial constraints. Further, we understood the frustration doctrine that has evolved under the Transfer of Property Act in the form of Section 108B(e). However, further research suggested for the invocation of the said section, there shall be permanent damage to the leased premises that renders it unfit for the purpose it was leased out for.
Due to the direct application of only said TPA provision, the application of the contract law provisions related to both the doctrines have been subsided. Therefore, the proposition shall be analyzed in the light of only law around the transfer of property. It is unlikely that any property could have suffered any damage, much less of the permanent kind, for the lessee to invoke Section 108B(e). Further, even where the provisions of contract law could apply, a mere defense of financial hardship cannot be argued as to the cause of impossibility in payment of the rent, which is the contractual obligation.
Therefore, it shall be concluded from the above research that either in the light of provisions of the Contract Act or the provisions of the Transfer of Property Act, force majeure or frustration cannot be invoked to escape the contractual liabilities to pay the rent under a lease agreement and the lease agreement cannot be terminated unless the leased premises has sustained any permanent damage which renders the premises unfit for the expected use.
References
- Applicability of Force Majeure in Commercial Lease Agreements Amid Covid-19’ (IndiaCorpLaw, 02 June 2020) <https://indiacorplaw.in/2020/06/applicability-of-force-majeure-in-commercial-lease-agreements-amid-covid-19.html> as accessed on 17 October 2021.
- Andrew C. Smith, Anne C. Lefever & ors, ‘Tour de Force: What Constitutes an Act of God, and Other Developments in Force Majeure Law’ (Pitsbury, 15 June 2020) <https://www.pillsburylaw.com/en/news-and-insights/tour-de-force-what-constitutes-act-of-god-force-majeure-law.html> as accessed on 19 October 2021.
- Malcom Macfarlane, ‘COVID-19 – leases and the law of frustration and force MAJEURE’ (Wedlake Bell, 31 March 2020) <https://wedlakebell.com/covid-19-leases-and-the-law-of-frustration-and-force-majeure/> as accessed on 19 October 2021.
Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.
LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:https://t.me/joinchat/J_0YrBa4IBSHdpuTfQO_sA
Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.
