India: Covid-19, A Force Majeure Event: Madras High Court, Madurai Bench Opines In R. Narayanan v. The Government Of Tamil Nadu

INTRODUCTION

Force majeure clauses bear the risk attribution terms, which specifically deal with the attribution of risk arising out of a force majeure event. Force majeure events are often broadly defined as unforeseeable events, over which parties have no control, which have arisen not a result of default of the party, and which cannot be prevented by parties by exercising reasonable care and caution. In this context the occurrence of COVID-19 event has given the entire law of force majeure a fresh significance.

The earliest instance of recognising COVID-19 pandemic as 'Force Majeure' in the realm of contractual law in India, was through the Office Memorandum dated 19.02.2020 by the Government of India, Ministry of Finance. This office memorandum laid down a path-breaking instance, by modifying para 9.7.7 of the Manual for Procurement of Goods, 2017 (which earlier did not contain "epidemics" or "pandemics" as a force majeure event), and specifically adding COVID-19 under the bracket of force majeure event. Subsequently, in continuation to the Office Memorandum, further reliefs were announced on 13.05.2020 by the government for affording relaxation in the existing terms of contractual obligations, including relaxation in bank guarantee norms and extension of time and concession period with no additional cost to the contractors.

Proceeding forth, various courts in India have also considered and held COVID-19 as force majeure event. The celebrated judgment of M/s Halliburton Offshore Services Inc vs Vedanta Limited¹ was one of the earliest judgments wherein the High Court of Delhi specifically held COVID-19 to be a force majeure event. However, the court prescribed a caveat by observing that whether COVID-19 would justify non-performance or whether the non-performance is a breach of a contract, has to be examined on the facts and circumstances of each case, and only in genuine cases where the party was prevented or could justify its non-performance because of the epidemic/pandemic, the recognition of Covid-19 as 'Force Majeure' event would be justified.

The latest judgment in this regard was passed by the High Court of Madras in the case of R. Narayanan v. The Government of Tamil Nadu² whereby COVID-19 was justified to be treated as a Force Majeure Event.

FACTS

The Nagercoil Municipal Corporation had conducted a public tender cum auction sale of licenses to occupy shops at a bus stand. The petitioner herein was one of the successful bidders, who offered to pay a sum of INR 1,15,000 as a monthly fee for the license. The Municipal Corporation issued the license to the petitioner for a tenure of three years commencing from November 01, 2019. The petitioner paid to the Municipal Corporation a security deposit of Rs. 10 lakhs and a refundable deposit of Rs.13.80 lakhs which was equivalent to one-year's license fee in advance.

On March 24, 2020, the National Disaster Management Authority (NDMA) issued an order directing all authorities to take measures to counter the spread of the global pandemic Covid-19 across the country. In line with this the Government of Tamil Nadu issued orders dated 23.03.2020 which led to the closing of the bus stand and the petitioner's shop therein. Having been prevented from accessing the shop, the petitioner could not run his business when the restrictions were effective from 24.03.2020 to 06.09.2020. The Govt. of Tamil Nadu issued an order on 02.09.2020 waiving the payment of lease rentals from 01.04.2020 to 31.05.2020. In view of the considerable economic losses suffered, the petitioner decided not to renew his license. As a result, the Municipal Corporation intended to adjust the outstanding license fee from the advance deposited by the petitioner. Aggrieved by this, the petitioner approached the Madras High Court praying that the Municipal Corporation should entirely waive off the requirement to pay license fee from March 24, 2020 till September 06, 2020 and further grant a partial waiver for the subsequent period. The respondents, i.e., the Government and the Municipal Corporation contended that the petitioner was contractually obligated to pay the License Fee and that any supervening events did not excuse him.

FINDINGS OF THE COURT

The High Court observed that in usual circumstances, the rights of the contracting parties would be determined by its terms. However, where the performance of the contract is affected by post-contract events, the situation would be resolved either by the doctrine of frustration or principle of force majeure.

The High Court then noted that force majeure is defined as an "event outside the control of the parties, which prevents one or both of the parties from performing their contractual obligations".

In the present case, the question was whether treating the lockdown as a force majeure event would be justified, notwithstanding the contractual stipulation that cast a duty on the petitioner to ensure the absolute performance of the contract. The High Court answered in the affirmative. It was held that under Section 51 of the Indian Contract Act, when the parties were required to perform their reciprocal promises simultaneously, no promisor was required in law to perform a promise unless the promisee was ready and willing to perform its reciprocal promise(s).

The High Court held that there was a more significant reason to deem the lockdown as a force majeure event in view of involvement of the government as the contracting party. It was emphasized that the petitioner in the instant matter, had not contracted with a private party, but the Municipal Corporation which was a state instrumentality vested with constitutional status. Since one of the parties in the present dispute was the State, the High Court decided that it would be justified in applying the principles of reasonableness and fairness. The High Court noted that the government itself chose to treat the lockdown as a force majeure event by offering relaxations in the license fee for the period 01 April 2020 to 31 May 2020. The High Court further noted that the reason for granting waiver for the months of April and May was economic hardship, which also held good for the entirety of the lockdown period. Pertinently, the respondents had directed the petitioner not to open the shop till 06 September 2020. In the circumstances, the High Court held that the petitioner was entitled to the benefit of complete waiver of license fee from 01 June 2020 to 06 September 2020. As regards the prayer for partial waiver of license fee for subsequent period of partial lockdown, the court directed the Respondents to consider the request of Petitioner while taking note of the ground realities.

COMMENTS

Knowing that the pandemic has brought forth tremendous hardships and economic duress, this judgment provides a ray of hope to those facing difficulties in fulfilling their obligations. However, it is pertinent to note that relief in cases arising out of hardships due to COVID-19 will have to still be adjudged according to the factual matrix of each case.

Similar litigations are still pending across various courts in the country, and it will be interesting to see how this question of law takes its further course, particularly in cases, where government is not involved as a contracting party.

Footnotes

1 O.M.P.(I)(COMM.) No. 88/2020.

2 W.P. (MD) No. 19596 of 2020 and W.M.P. (MD) Nos. 16318 and 16320 of 2020.

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