Disruption due to COVID-19; How forceful is the Force Majeure Clause (FM) in a contract?

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 By Sudhir Dash 

What ensures a much needed reprieve and address the immediate vulnerabilities of millions of migrant labour, the Central Government has issued a recent directives (No. 40-3/2020-DM-I(A) dated 29th March 2020) directing that no landlords should collect rent from migrant labours, students for one month and also empowering states to take the errant landlord to task in defiance of such orders.

 What considers as a major contributing cause of defiance of the recent lock down declared by Centre and State administration is lack of work and the provision for daily sustenance that lots of migrant labours and student strangled in various stated have the increased tendency to look at option of returning their hometowns. The Centre taking cognizance of the facts has directed that food, shelter and other facilities must be made available to the poor and needy people, including migrant labourers. States have been asked to use funds from the State Disaster Response Fund for this purpose.

The direction was issued in view of reports concerning the movement of migrant labourers in the country. The 21-day national lockdown announced by Prime Minister Narendra Modi last Tuesday had prompted a mass exodus by migrant labourers in various places, who left their places of work in hopes to go back to their hometowns amidst the lockdown.

This step by the Ministry of Home affairs Government of India is a welcome step and praiseworthy to protect the interest of these marginalise migrant labour and students. At this point it is so obvious to think what is going to be the fate of the Corporate Tenants (Lessee) who too are vulnerable in the hands of their respective Landlords (Lessee) with this unprecedented Lock down and Zero Business occurring with Lockdown. It is worth to mention here that the Government of India, Ministry of Finance, Department of Expenditure, Procurement Policy Division in their Office Memorandum (File No. F.18/4/2020-PPD) dated 19th February 2020 have clarified that the disruption due to spread of corona virus in China or any other country is to be considered as a case of natural calamity and will be covered under the Force Majeure Clause (FM) of Para 9.7.7 of the “Manual for Public Procurement”

The above clarification is of wider importance and may not be confined to only public contracts but indeed sets the tone for any contract of Supply or Service even by Private Parties. At this point it is important to understand what the meaning and significance of a Force Majeure Clause in a contract more particularly the contract of Lease.

A Force Majeure (FM) means extraordinary event or circumstance beyond human control such as an event described as an act of God (like a natural calamity or event such as a war, strike, riots, crimes (but not including negligence or wrong doing, predictable seasonal rain and any other events specifically excluded in the clause)

The effect of an FM clause in a contract frees the both the parties from contractual liability or obligation when prevented by such events from fulfilling their obligation under the contract.  An FM clause does not excuse a party’s non-performance entirely but suspends it for the duration of the FM

 The above discussion brings us onto a question in a Tenancy Contract what if the lessee fails to pay the Leasehold charges during the Lockdown period, Can the Landlord (Lessor) takes the legal course of recovery from the Lessee more particularly when the Tenancy / Lease Agreement is protected by an FM Clause?

The above situation must be analysed with focus onto the Legal Precedence invoking a lockdown. The Central Government has invoked the Provisions for the Disaster Management Act to enforce lock down that has been followed by many of the States too along with the Provisions of the Epidemic Diseases Act, 1897. Whereas Section 73 of the Disaster Management Act provides that there cannot be any proceedings against the Government or against any person acting in good faith in pursuance of regulations framed under the Act, that Section 3 of the Epidemic Disease Act, 1897 goes further to provide that a person disobeying any regulation made under this Act shall be punishable under Section 188 of the Indian Penal Code, 1860. Further, Section 4 of the Epidemic Diseases Act provides that no suit or legal proceedings shall lie against any person for anything done by him under this Act. Therefore, the lease rent for the lockdown period will be akin to a time barred debt although payable, but proceedings cannot be initiated for its recovery.

Our Comments

Although lock down is not in anyone’s interest or spirit, the leasehold charges is an exorbitant burden on small and medium businesses. Whereas the developers of Industrial Parks, Landlords may have been protected by Insurance coverage for disruption of business, small and medium enterprises are not aware about their legal rights and otherwise face hardships to enforce their rights. The FM Clause is a contract offers a remedial waiver of liability to pay during the Lockdown period. The Ministry and/or Nodal agencies (MSME) need to come up with some ordinance to clear this dilemma which will give some financial boost to the Small and Medium Section and not to forget the healing impact to start-ups.

(The writer is a Chartered Accountant and is the CEO of PAMS Professional Group and can be reached on [email protected] )

 

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