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    View: Big companies should not wriggle out of contractual obligations by using the clause of force majeure

    Synopsis

    Typically, these notices are served on smaller associates deemed least able to challenge them. It would be interesting to know what GoI has been told by Reliance or Airtel of their inability to pay telecom spectrum dues

    Force Majeure
    All our big companies report significant profits. It is sad that some of them are attempting to wrongfully wriggle out of their contractual obligations in such difficult times, particularly oppressing smaller associates.
    By Mohan Guruswamy

    Last week, this paper reported several large retail chains such as Reliance Retail, Big Bazaar, McDonald’s and Domino’s Pizza trying to use the force majeure (literally ‘superior force’) clause -- which relieves both parties from liability or obligation when an extraordinary event beyond their control prevents one or both parties from fulfilling their contractual obligations -- to back out of commercial obligations.

    Typically, these notices are served on smaller associates deemed least able to challenge them. It would be interesting to know what GoI has been told by Reliance or Airtel of their inability to pay telecom spectrum dues. And whether Saudi prince Mohammed bin Salman would take kindly to any attempt to diddle his country of payment for oil already processed? It won’t be long before other companies follow suit. Several auto and oil marketing companies operate their own showrooms.

    Some of our top business groups like the Tatas’ Croma and Westside, and RP-Sanjiv Goenka’s Spencer’s have a strong presence in retail. Companies like Godrej, Samsung and LG have nationwide exclusive networks for their products. These company showrooms are often the anchor stores in a mall or market, with their perceived creditworthiness getting lower rents.

    Some of them are citing a February 19 letter issued by the finance ministry in relation to the definition of force majeure in the Manual for Procurement of Goods, 2017. This manual is in relation to procurement contracts of GoI for goods and services, and is not applicable to the interpretation of separate force majeure clauses in private contracts.

    Unlike with government procurement contracts, the performance of the obligation of contractual payments has not been prevented by any act, proclamation, regulation or ordinance of any government or governmental agency. The spread of Covid-19 is undoubtedly a public health crisis, with multiple measures placed by state and central governments.

    But these orders only cover educational institutions, theatres, function and cinema halls. In any event, Covid-19 cannot be invoked as a reason to escape all contractual obligations in general.

    Covid-19
    Covid-19

    The spread of the virus, or government regulations formed around its mitigation, has to directly make the performance of a contractual obligation impossible so as to invoke force majeure. The clause in agreements clearly specifies the requirement of prevention or delay ‘by causes beyond the reasonable control of such party, including, but not limited to, any act, proclamation, regulation or ordinance of any government or governmental agency, having jurisdiction over the parties, provided that the affected party takes all reasonable action to eliminate the cause of the delay’.

    Even if a company claims that it may have become onerous to pay the contracted amount as a result of Covid-19-related notifications, no notification has rendered it impossible for companies to pay for goods and services availed, or being availed of. The ability of a company to generate a monthly profit is not linked to the obligation, or ability, of a profitable public corporation to pay the contracted amount.

    Despite lockdown notifications, these companies continue using premises for storing goods for present or future sale. For instance, most retail verticals are continuing to take orders and payments online for all postal codes. Even during the national lockdown, unable to complete the delivery of sale, they continue to receive payments for products being stored in their premises.

    Nothing renders the payment of rent impossible. Any kind of temporary business interruption is covered in the risk insurance these companies are obliged to have. The burden of rent cannot be wriggled out of because of Covid-19-induced reduced business opportunities.

    With respect to the SARS epidemic in 2003, Hong Kong courts did not permit tenants to wriggle out of their obligations of payment in lease agreements, even when the tenant was not permitted to enter the leased premises due to temporary isolation orders (Li Ching Wing vs Xuan Yi Xiong, 2003).

    The court held that a 10-day isolation period was insignificant in relation to the two-year lease. And that while SARS was unforeseeable, it did not ‘significantly change the nature of the outstanding contractual rights or obligations’ of the parties in the case.

    The law states that ‘where the property leased is not destroyed or substantially and permanently unfit, the lessee cannot avoid the lease because he does not or is unable to use the land for purposes for which it is let to him’. Additionally, courts have held that even when the economic conditions are the product of a force majeure event, such financial hardship would not excuse performance if the party retained some level of control over its allocation of resources.

    All our big companies report significant profits. It is sad that some of them are attempting to wrongfully wriggle out of their contractual obligations in such difficult times, particularly oppressing smaller associates.

    (The writer is former advisor, ministry of finance, GoI)


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