India: Lockdown Constitutes A Force Majeure Event: Madras High Court Waives A State-owned Shop's License Fee For The Entire Lockdown Period

Brief Facts

In a recent decision of the High Court of Madras in R. Narayanan v. The Government of Tamil Nadu and Ors.¹, the Nagercoil Municipal Corporation (Municipal Corporation) had conducted a public tender cum auction sale of licenses to occupy (License) shops in 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 (License Fee). The Municipal Corporation issued the License to the petitioner for a tenure of three years commencing from 1 November 2019. The petitioner paid one-year's License Fee in advance payment to the Municipal Corporation.

On 24 March 2020, the National Disaster Management Authority (NDMA) exercising its powers under Section 6(2) of the Disaster Management Act, 2005 issued an order directing all authorities to take measures to counter the spread of the global pandemic Covid-19 across the country. In pursuance of the directions issued by NDMA, the Government of Tamil Nadu (Government) issued orders 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. After suffering from considerable economic losses, the petitioner decided not to renew his License even though there was a clause that permitted the same. In the meanwhile, the Municipal Corporation intended to adjust the License Fee paid in advance by the petitioner against the outstanding dues for the time that the shop remained closed. Therefore, the petitioner approached the Madras High Court (High Court) praying that the Municipal Corporation should entirely waive off the requirement to pay License Fee from 24 March 2020 till 6 September 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. However, given the licensees' hardship, the Government passed an order (Order) to waive off payment of license fee from 1 April 2020 to 31 May 2020. Thus, the Government contended that the petitioner could not seek relief that travelled beyond the terms of the License and the Order. Hence, the present matter.

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 relied upon the Davis Contractors Ltd v. Fareham Urban District Council's² decision wherein it was held that frustration occurs wherever the law recognizes that a contractual obligation has become incapable of being performed without the default of either party. The frustration of contract is identified by a radical change in circumstances from those in which the parties signed the contract.

The High Court then noted that force majeure is defined as an "event outside the control of the parties and which prevents one or both of the parties from performing their contractual obligations". Force majeure is a clause in a contract specifying certain conditions which would excuse the non-performance of a contractual obligation.³ The High Court referred to the language in Section 56 of the Indian Contract Act, 1872 (Indian Contract Act), which embodied the doctrine of frustration. The High Court then relied upon the judgment of the Hon'ble Supreme Court in South East Asia Marine Engg. & Constructions Ltd. (SEAMEC LTD.) v. Oil India Ltd.⁴ to hold that the effect of the doctrine of frustration is that it discharges all parties from their respective future obligations. However, it was held that the doctrine of frustration could not be attracted to the instant matter since the parties were proceeding on the premise that their contractual relations were very much holding good. The petitioner had been occupying the shop post the lockdown and continued to conduct his business. Therefore, the invocation of the doctrine of frustration was ruled out by the High Court.

In the present case, the moot question was whether the High Court would be justified in treating the lockdown as a force majeure event, notwithstanding the 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). Further, the High Court referred to Section 54 of the Indian Contract Act, which stated that the performance of contractual obligations could not be claimed unless the other party has performed its part. If the Municipal Corporation had directed the licensees to close down the shop, it could not reasonably demand the license fee.

The High Court held that there was a more significant reason to deem the lockdown as a force majeure event that would release the petitioner. 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 placed reliance upon the decision of the Hon'ble Supreme Court in the case of Jamshed Hormusji Wadia v. Board of Trustees, Port of Mumbai⁵ wherein it was held that the State and its authorities have to act just, fair and reasonable in all their activities including the ones falling within the domain of contracts. The State could not indulge in rack-renting, profiteering and whimsical or unreasonable evictions or bargains. Similarly, in Bharat Petroleum Corpn. Ltd. v. Maddula Ratnavalli,⁶ the Hon'ble Supreme Court held that the State while acting as a landlord or a tenant, must act in a bona fide and non-arbitrary manner, when the same is likely to affect the right of others prejudicially.

Applying the ratio of the cases mentioned above, the High Court held that the terms of License must be interpreted with regard to Article 14 of the Indian Constitution. The High Court further held that there was no merit in the contentions of the respondents as they themselves chose to treat the lockdown as a force majeure event by offering relaxations in the License Fee for the period from 1 April 2020 and 31 May 2020. The High Court reiterated that the reason for granting a waiver for April and May was economic hardship, which also held good for the entirety of the lockdown period. The respondents had directed the petitioner not to open the shop till 6 September 2020. Therefore, the High Court held that the petitioner was entitled to the benefit of complete waiver of License Fee from 1 June 2020 to 6 September 2020. Therefore, the petitioner was allowed to call upon the respondents to revisit the quantum of License Fee from the period after lifting the lockdown.

Comments

The judgment gives respite to many litigants situated in positions similar to that of the petitioner in the instant case. The global pandemic has brought tremendous hardships onto small business owners and enterprises whose income was reduced to negligible levels if not wholly cut-off. In such circumstances, it would be unreasonable if these business owners and enterprises were forced into paying rents or other monthly fees without any readjustment or waivers, particularly when the landlord is a State authority. The Madras High Court has rightly held that the Government's Order in the instant matter was only a baby step where giant strides were required. We firmly believe that this decision shall lead us in the right direction by further reinforcing the legal position that the State authorities cannot enforce unreasonable bargains.

Footnotes

1 R. Narayanan v. The Government of Tamil Nadu and Ors. W.P. (MD) No. 19596 of 2020 and W.M.P. (MD) Nos. 16318 and 16320 of 2020.

2 Davis Contractors Ltd v. Fareham Urban District Council's (1956) A.C. 696.

3 P. Ramanatha Aiyar's Advanced Law Lexicon (5th Edition).

4 South East Asia Marine Engg. & Constructions Ltd. (SEAMEC LTD.) v. Oil India Ltd (2020) 5 SCC 164.

5 Jamshed Hormusji Wadia v. Board of Trustees, Port of Mumbai (2004) 3 SCC 214.

6 Bharat Petroleum Corpn. Ltd. v. Maddula Ratnavalli (2007) 6 SCC 81.

"The authors wish to acknowledge the research assistance rendered by Harshvardhan Korada, a student of the Amity Law School, Delhi."

Originally Published by Phoenix Legal, February 2021

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