The Indian economy has suffered a lot due to restrictions imposed by Central and State Governments due to COVID-19. This blog will identify the liability of private parties in terms of paying license fee or rent to the Government accrued under the contract specifically for the lockdown period (inclusive of lockdown taken during COVID-19 wave 1 and wave 2 by Central as well as State Governments.)
Madras High Court in R Narayan V State of Tamil Nadu (W.P.(MD)No.19596 of 2020 and W.M.P.(MD) Nos.16318 & 16320 of 2020) dated 01.02.2021, clarified the liability of private parties vis-à-vis Government contracts, wherein giving the relief to the private parties (license holder) affected from the Lock down in paying the license fees.
Petitioners were license holder of shops (got through public tenders) situated at Nagercoil Municipal Corporation within the premises of Vadaseri Christopher Bus Stand. Their shops were shut down due to Lockdown restrictions arouse due to COVID-19. Petitioners due to such restrictions were unable to do its business thus unable to pay the license fees under the terms of the License Agreement.
Madras High Court in the instant case took into consideration the provisions of Section 6(2) of the Disaster Management Act, 2005 used by the National Disaster Management Authority following the outbreak of COVID-19, wherein Authority issued order dated 24.03.2020 directing all the authorities to take effective measures to prevent the spread of the pandemic in the country. In pursuance to which Nationwide lockdown was imposed by the Government.
Relevance of Force majeure Clause and Doctrine of Frustration
“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.
On the other hand, Frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract.
Madras High Court in the instant case observed that; “The relationship between the parties is contractual in nature. The rights of the parties will normally have to be determined in terms of the contract. But when the performance of a contract is affected by post-contract events, the situation will have to be resolved either by invoking the doctrine of frustration or the principle of force majeure.”
Thus it is clear that the Madras High court took into consideration Force majeure Clause and Doctrine of Frustration while deciding the said dispute and observed that situation where there is post contract event such as COVID-19, then Force majeure Clause and Doctrine of Frustration needs to be invoked for its effective solution.
Decision of the Court
The court concluded that:
“Section 51 of the Indian Contract Act, 1872 states that when a contract consists of reciprocal promise to be simultaneously performed, no promisor need perform his promise unless the promisee is ready and willing to perform his reciprocal promise. As per Section 54, performance cannot be claimed till the other has been performed. The local body must keep the bus stand open and in good repair. The licensee must be permitted to keep the licensed shop open. If the local body had directed the licensee to close down the shop, it cannot demand fee from the licensee for the period when the shop remained closed. Of course, the licensee must be free of any wrong doing. If the licensee is made to suffer for no fault of his by direction to close down the shop, then, the question of payment of fee will not arise. This is clearly an implied term in the contract.”
After observing the above legal proposition Hon’ble Madras High court finally gave relief to the petitioners and held that for the period when there was total lockdown that is from 24.03.2020 to 06.09.2020, the licensee/petitioner is totally relieved from the obligation to pay the license fee. He is entitled to complete waiver.
Responsibility of Government
Moreover, the Hon’ble Supreme Court in the case of Jamshed Hormusji Wadia vs Board of Trustees, Port Of Mumbai in (2004) 3 SCC 214, held that the Government and Government departments have to be just, fair and reasonable in all their activities including those in the field of contracts. A State cannot be seen to be indulging in rack-renting, profiteering and indulging in whimsical or unreasonable evictions or bargains.
Moreover Court expects from the authorities to take note of the ground realities and respond appropriately. Thus government should be fair, just and reasonable while dealing with the contractual obligations of the private parties vis-à-vis government contracts during the period of lockdown. It should not indulge in collecting license fees for the period when government itself put restrictions on their operations.
Force Majeure and Doctrine of Frustration are very useful concepts which needs to be taken into consideration while settling the dispute aroused out of contract due to restrictions imposed due to COVID-19.
The Government has extra responsibility to be more fair towards the citizen in its contractual capacity as well and should take into consideration the difficulties/ plight faced by the businesses and various license holders. Thus it is clear from the judgment of Hon’ble Madras High Court and Hon’ble Apex Court that the Government should wave off license fees from the private parties in pursuant of the contracts entered with the Government.
Moreover government itself in many circulars and notifications has chosen to treat the lock down restrictions as a force majeure event and gave various relaxations but still there are many contracts where private parties haven’t received such benefits. Thus in continuation to that Government should provide relief to all the private parties affected from the lockdown either imposed by Central Government or State Governments, whether during First wave or Second Wave by completely waiving off the license fees or rent from the private parties. Government has failed to perform its part under Section 51 and Section 54 of the Contract Act, by imposing restrictions on their operation, thus they cannot claim consideration from the private parties under contract. If the Government had directed the licensee to close down the shop, it cannot demand a fee from the licensee for the period when the shop remained closed. If the licensee is made to suffer for no fault of his by direction to close down the shop, then, the question of payment of fee will not arise.