Mohan Guruswamy | Force majeure' can't be fig leaf for naked greed

The second wave of the Covid-19 pandemic is here, across most of the country. Our daily infection peak has crossed that of 2020. It will once again stress the entire system, including our creaking public health infrastructure, and such times of stress are when the “force majeure” clauses in commercial agreements are waved about to renege on the promised word.

Last year, early in the first lockdown in April 2020, a major financial daily had reported that several large retail chains in India, such as Reliance, the Future Group, McDonald’s, Domino’s Pizza and others were trying to use the omnipresent “force majeure” clause in all agreements and contracts to back out of commercial obligations. Typically, these notices are served on the smaller associates deemed least able to challenge it. Some succeeded.

It will be interesting to know if the government has been told by Reliance or Airtel of their inability to pay the telecom spectrum dues? Or would Prince Mohammed bin Salman take kindly to any attempt to diddle his desert kingdom of payment for oil already processed?

It won’t be long before the companies try these tactics again. Several automotive companies also operate their own showrooms, as do oil marketing companies and others. Some of our top business groups like the Tatas, with Croma and Westside, and the Goenkas, with Spencers, have a strong presence in the retail sector. The More retail chain was recently sold by the Birlas to a private investment group. 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 that because of their perceived creditworthiness manage to get much lower rents.

These companies are citing a letter dated 19.02.2020 issued by the ministry of finance and is in relation to the definition of “force majeure” in the Manual for Procurement of Goods 2017. This manual is in relation to the procurement contracts of the Government of India 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 government agency.  The spread of Covid-19 is undoubtedly a public health crisis with multiple measures placed by the state and Central governments. However, the orders of the governments only cover educational institutions, theatres, function halls and cinema halls.

In any event, the Covid-19 virus can’t be invoked as a reason to escape all contractual obligations in general by universally invoking “force majeure” clauses. The spread of the Covid-19 virus or the government regulations around it have to directly make the performance of the obligation in a contract impossible in order to invoke the force majeure clause. The force majeure clause in agreements clearly specify 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 government agency, having jurisdiction over the parties, provided that the affected party take(s) 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 the Covid-19 related government notifications, no government notification has rendered it impossible for the 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 the lockdown notifications, these companies continued using the premises for storing commercial goods that were for present or future sale. For instance, most retail verticals continued to take orders and payments online for all postal codes. During the nationwide lockdown too, in the absence of being able to complete the delivery of sale, they still continued to receive payments for products that were being stored in their premises.

Nothing renders the payment of rent impossible. Any kind of temporary business interruption is covered in the risk insurance that these companies are obliged to have. The burden of the rent can’t be wriggled out of because of reduced business opportunities in the light of measures taken around the prevention of Covid-19.

With respect to a similar pandemic, SARS (Severe Acute Respiratory Syndrome) in 2003, the 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 the temporary isolation orders of the government. In that context, the courts held that a two-week period was insignificant in view of the long duration of the lease, and that while SARS was arguably an unforeseeable event, it did not “significantly change the nature of the outstanding contractual rights or obligations” of the parties in the case.

The law of the land with respect to lease agreements is 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, the 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. Reliance Industries Ltd has reported a post-tax profit of over Rs 35,000 crores for the year ended March 2019. Its annual report also highlighted that Reliance Retail became the first retailer in India to cross the Rs 100,000 crore turnover milestone. Reliance Retail posted a profit of Rs 2,727 crores just in Q3 of 2019. Incidentally, Mukesh Ambani’s personal wealth went up by 60 per cent in the pandemic year.

It would be a travesty if these big groups should attempt to wrongfully wriggle out of their contractual obligations in such difficult times. Such attempts to renege on performance obligations particularly oppresses their smaller associates.