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October 20, 2020

Lease Deeds – The Frustrating Issue Of Enforceability Of Force Majeure Clauses On Account Of The COVID-19 Pandemic

Author: Andri Shukla

The year 2020 has perhaps elevated the status of force majeure clauses among the most important boiler plate clauses that ought to feature in an agreement or a contract. The COVID-19 pandemic has impacted businesses to evaluate the impact of force majeure clauses on obligations of parties. Doubt has also been cast on whether or not force majeure clauses can be invoked/enforced to frustrate contracts. This article explores the position of these issues in India in respect of lease agreements/lease deeds.

Force majeure has been defined as “an event or effect that can be neither anticipated nor controlled” and the term includes both acts of nature (viz. floods, hurricanes, etc) as well as human acts (viz. riots, strikes, war, etc.) [1]. Force majeure clauses feature in most types of contracts, including lease deeds/agreements, and are usually incorporated to excuse one or all of the parties from performance of the contract during events beyond their control (usually in case of an act of nature/act of persons/act of god).

Force Majeure can be understood as part of the Doctrine of Frustration embedded in Section 56 of the Contract Act, 1872 (hereafter the “Contract Act”) which states, “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”.

The Supreme Court of India interpreted Section 56 in Satyabrata Ghose v. Mugneeram Bangur & Co. and Anr. AIR 1954 SC 44, and observed that, “this much is clear that the word “impossible” has not been used here in the sense of physical or literal impossibility. The performance of an act may not be literally impossible but it may be impracticable and useless from the point of view of the object and purpose which the parties had in view and if an untoward event or change of circumstances totally upset the very foundation upon which the parties rested their bargain, it can very well be said that the promisor found it impossible to do the act which he promised to do.” Therefore, it can be arguably said that the Contract Act provides statutory cover for the COVID-19 pandemic which has created a restricted commercial climate globally and as such, the pandemic is a ‘frustrating’ force majeure event.

The Supreme Court in Raja Dhruv Dev Chand v. Raja Harmohinder Singh and Anr. AIR 1968 SC 1024, settled the position of law in respect of leases. The Apex Court observed that, “the chapters and sections of the Transfer of Property Act which relate to contracts are to be taken as part of the Indian Contract Act, 1872…and cannot be read as enacting that the provisions of the Contract Act are to be read into the Transfer of Property Act…By its express terms s. 56 of the Contract Act does not apply to cases in which there is a completed transfer…” and held that Section 108 of the Transfer of Property would apply to lease of land and thereby, to lease deeds. Furthermore, in Sushila Devi and Anr. v. Hari Singh and Ors. 1971 AIR 1756, the Supreme Court held that “Section 56 applies only to a contract. Once a valid lease comes into existence the agreement to lease disappears and its place is taken by the lease. It becomes a completed conveyance under which the lessee gets an interest in the property. There is a clear distinction between a completed conveyance and an executory contract.”. Therefore, it is an established principle of law in India that Section 56 would not apply to a lease deed, because execution of a lease deed completes a transfer and therefore executes a contract. Section 56 by its express terms is only applicable to contracts which are yet to be performed/executory contracts.

The provision to most closely import the Doctrine of Force Majeure in the Transfer of Property Act, 1882 (hereinafter the “TPA”) is Section 108 which renders a lease void only when the property is destroyed or is rendered substantially and permanently unfit for the purposes for which it was let on account of “…fire, tempest or flood, or violence of an army or of a mob, or other irresistible force”. In such an event, the lease is terminable at the option of the lessee. The language in Section 108 can be said to cover acts of nature and acts of persons, however, it does not explicitly lend clarity to whether it would cover a situation like the COVID-19 pandemic. It continues to be a matter of endless debate as to whether the pandemic can be pegged as a man-made event or a force majeure event.

 Nevertheless, in essence, all lease deeds are agreements and therefore parties to a lease deed (yet to be executed) have the option to mutually agree and decide parameters by which an event would be regarded as a force majeure event and the consequences thereof, such as suspension of certain/all obligations. In lease deeds where the force majeure clause features language such as “including, but not limited to” or “any cause/ event outside the reasonable control of the parties” or any other phrase that would throw a wider net on the type of events which would invoke the force majeure clause, it can be argued that the clause subsumes an event such as the COVID-19 pandemic. In lease deeds where such language is absent or which contain provision contrary to Section 108, the parties may either continue to be bound to perform their obligations or may need to seek recourse and rely on the perspicacity of the courts to adjudicate the matter.

[1] Ramanand and Ors. v Girish Soni and Ors., 2020 (1) RCR (Rent) 468 [Delhi High Court, Prathiba M. Singh, J.]

Disclaimer: Views, opinions, interpretations are solely those of the author, not of the firm (ALG India Law Offices LLP) nor reflective thereof. Author submissions are not checked for plagiarism or any other aspect before being posted.

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