Home » Between The Lines » High Court of Delhi : Doctrine of frustration under Section 56 of the Indian Contract Act,1872 is not applicable to lease agreements

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The High Court of Delhi (“DHC”) has, by its judgement dated May 21, 2020 (“Judgement”), held thatthe doctrine of frustration under Section 56 of the Indian Contract Act, 1872 (“ICA”) is inapplicable to lease agreements as it can be applied to only “executory contracts” and not “executed contracts”.

Brief facts of the case are that Ramanand and others (“Appellants”) ran a shoe store called ‘Baluja’ in Khan Market, Delhi, in the tenanted premises leased to them by the landlord, Dr. Girish Soni, through a lease deed executed on February 1, 1975 for a monthly rent ofINR300. In the year 2008, Dr. Girish Soni and another (“Respondents”) filed an eviction petition against the Appellants under Section 14(1)(e) of the Delhi Rent Control Act, 1958 (“DRC Act”). Initially, leave to defend was granted to the Appellants by the Senior Civil Judge-cum-Rent Controller (“RC”) on March 31, 2012. However, by the impugned order dated March 18, 2017, a decree for eviction was passed. The Appellants filed an appeal against the impugned order which was dismissed by the Rent Control Tribunal (“RCT”) by an order dated September 18, 2017 on the ground that the same is not maintainable. Hence, the present petition, challenging the eviction order dated March 18,2017, was filed before the DHC.

The petition was first listed before the DHC on September 25, 2017, on which date the single judge had stayed the order of eviction subject to the Appellants paying the Respondents a sum of INR3.5 lakhs per month in advance for each month by the 10th day of the English calendar, with effect from the month of October, 2017.

Following the outbreak of COVID-19, an application for suspension of rent was moved by the Appellants before the DHC, during the lockdown period. The Appellants stand was that due to the lockdown, there has been complete disruption of all business activities, including the business of the Appellants. It was pleaded that the circumstances were force majeure and beyond the control of the Appellants. Thus, it was claimed that the Appellants were entitled to waiver of the monthly payment directed by DHC’s order dated September 25, 2017, or at least some partial relief in terms of suspension, postponement or part-payment of the said amount.

(i) Whether Section 32 of the Indian Contract Act, 1872(“ICA”) is applicable to the matter.
(ii) Whether Section 56 of ICA is applicable only to “executory contracts” and not to “executed contracts”.
(iii) Whether temporary non-use of the premises would render the lease void.

Contentions raised by the Appellants:
The Appellants, inter alia, contended that the present application was made by way of abundant caution as the DHC had by its interim order dated September 25, 2017, directed that any default in payment would lead to execution of the eviction decree passed by the RC. The Appellants were however willing to make part payment of the monthly rent. Alternatively, it was the Appellants prayer that the rent be suspended for at least one month.

The Appellants further submitted that since there had been no business during the lockdown period, they should be entitled to some form of remission. They emphasised that some rebate should be given only for the period of the lockdown and that otherwise the Appellants were willing to regularly make the monthly payments.

Contentions raised by the Respondents:
The Respondents contended that the Appellants had been enjoying the tenanted premises since 1975 for a paltry sum of INR 300 per month. The Appellants were well off business people who had also purchased a neighbouring shop in Khan Market, Delhi. It was also contended that the amount of INR 3.5 lakhs per month fixed by the DHC was a very meagre amount compared to the prevalent market rate and that the tenanted premises would earn much more than the amount fixed by the DHC.

It was further submitted that force majeure does not apply in the present instance as the case falls under the DRC Act. Also, the Respondent needed the place for his own bona fide use as he was a dentist. The Respondents contended further that mere disruption of the business could not exempt the Appellants from making the monthly payments as the Respondents also depended on the income from the tenanted premises.

Observations of the Delhi High Court
The DHC observed that, the relationship between a landlord and tenant can be in multifarious forms. These relations are primarily governed either by contracts or by law. Where there is a contract, whether there is a force majeure clause or any other condition that could permit waiver or suspension of the agreed monthly payment, would be governed by the contractual terms. If, however, there is no contract at all or if there is no specific force majeure clause, then the issues would have to be determined on the basis of the applicable law. In circumstances such as the occurrence of a pandemic, like the current COVID-19 outbreak, the grounds on which the tenants/ lessees or other similarly situated parties could seek waiver or non-payment of the monthly amounts, under contracts which have a force majeure clause would be governed by Section 32 of the ICA.

In passing its judgement, the DHC relied on the judgement of the Supreme Court in the matter of Energy Watchdog v. CERC and Others [(2017) 14 SCC 80], where it was clearly held that in case the contract itself contains an express or implied term relating to a force majeure condition, the same shall be governed by Section 32 of the ICA. Section 56 of the ICA, which deals with impossibility of performance, would apply in cases where a force majeure event occurs outside the contract. The fundamental principle would be that if the contract contains a clause providing for some sort of waiver or suspension of rent, only then the tenant could claim the same. The force majeure clause in the contract could also be a contingency under Section 32 which may allow the tenant to claim that the contract has become void and surrender the premises. However, if the tenant wishes to retain the premises and there is no clause giving any respite to the tenant, then the rent or the monthly charges would be payable.

The DHC observed that in the absence of a contract or a contractual term which is a force majeure clause or a remission clause, the tenant may attempt to invoke the Doctrine of Frustration of contract or ‘impossibility of performance’, which however, would not be applicable in the present case in view of the settled legal position provided by the Supreme Court in the case of Raja Dhruv Dev Chand v. Raja Harmohinder Singh and Another [AIR 1968 SC 1024], where it was held that Section 56 of the ICA does not apply to lease agreements. The Supreme Court drew a distinction between a‘completed conveyance’ and an ‘executory contract’ and observed that “There is a clear distinction between a completed conveyance and an executory contract, and events which discharge a contract do not invalidate a concluded transfer. By its express terms Section 56 of the ICA does not apply to cases in which there is a completed transfer.” The aforesaid judgement laid down unequivocally that a lease is a completed conveyance though it involves monthly payment and hence, Section 56 of the ICA cannot be invoked to claim waiver, suspension or exemption from payment of rent.

The DHC further observed that in the absence of contracts or contractual stipulations, the provisions of the Transfer of Property Act, 1882 (“TPA”) would govern tenancies and leases. The doctrine of force majeure is recognised in Section 108(B)(e) of the TPA. The same would be applicable only in absence of contractual stipulations and on occurrence of specific circumstances like fire, flood and other similar incidents which would render the property ‘substantially and permanently unfit’ for the purpose for which it was leased and at the option of the lessee the lease would be then void.

In the judgement of Raja Dhruv Dev Chand v. Raja Harmohinder Singh and Another [AIR 1968 SC 1024], the Supreme Court observed 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.” Thus, for a lessee to seek protection under sub-section 108(B)(e) of TPA, there has to be complete destruction of the property, which is permanent in nature due to the force majeure event. Until and unless there is a complete destruction of the property, Section 108(B)(e) of the TPA cannot be invoked. In view of the above settled legal position, temporary non-use of premises due to the lockdown which was announced due to the COVID-19 outbreak cannot be construed as rendering the lease void under Section 108(B)(e) of the TPA. The tenant cannot also avoid payment of rent in view of Section 108(B)(l) of the TPA.

The DHC also observed that in the absence of a contract or a contractual stipulation, as in the present case, the Appellants may generally seek suspension of rent by invoking the equitable jurisdiction of the court due to temporary non-use of the premises. The question as to whether the suspension of rent ought to be granted or notwould depend upon the facts and circumstances of each case. In relation to some contracts which are not classic tenancy or lease agreements, where the premises is occupied and a monthly pre-determined amount is paid purely as ‘Rent’ or ‘Lease amount’, the manner in which pandemics, such as COVID–19, can play out would depend upon the nature of the contract. In contracts where there is a profit-sharing arrangement or an arrangement for monthly payment on the basis of sales turnover, the tenant/lessee may be entitled to seek waiver/suspension, strictly in terms of the clause. Such cases would purely be governed by the terms of the contract itself, and the tenant’s claim could be that there were no sales and no profits and thus the monthly payment is not liable to be made. Therefore, the entitlement of the client in such a situation is not governed by any overriding force majeure event but by the consequence of the said event, being that there were no sales or profits.

The DHC further observed that the Ministry of Home Affairs, Government of India may have from time to time given protection to some classes of tenants such as migrants, labourers, students, etc. however, without going into the legality and validity of such executive orders, the DHC stated that the present case is not covered by any of such executive orders.

Decision of the Delhi High Court
In disposing off the appeal, the DHC held the view that there is no rent agreement or lease deed between the parties and hence Section 32 of the ICA has no applicability. The case is governed by the provisions of the DRC. Further, Section 56 of the ICA does not apply to tenancies. The Appellants do not urge that the tenancy is void under Section 180(B)(e) of the TPA. The Appellants are also not ‘Lessees’ as an eviction decree has already been passed against them. Therefore, the Appellants’ application for suspension of rent is thus liable to be rejected inasmuch as while invoking the doctrine of suspension of rent on the basis of a force majeure event, it being clear from the submissions made that the Appellants do not intend to surrender the tenanted premises. While holding that suspension of rent is not permissible in these facts, some postponement or relaxation in the schedule of payment can be granted owing to the lockdown.

It was accordingly directed that the Appellants would pay the use and occupation charges for the month of March, 2020 on or before May 30, 2020 and for the months of April, 2020 and May, 2020 by June 25, 2020. From June 2020 onwards, the payment shall be strictly as per the interim order dated September 25, 2017. Subject to these payments being made, the interim order already granted shall continue. If there is any default in payment, the interim order dated September 25, 2017 would be operational. The said interim order was very clear that if there is any non-payment, the decree would be liable to be executed.

Vaish Associates Advocates View
The DHC’s judgement has come at a time when there has been a fair amount of ongoing debate as to what constitutes or would be deemed to be a force majeure event under contracts. In this regard, the DHC has adopted the principles laid down by the Supreme Court in the cases of Energy Watchdog v. CERC and Others and Raja Dhruv Dev Chand v. Raja Harmohinder Singh and Another and expressly reiterated that Section 56 of the ICA would not apply to cases in which there has been a completed transfer, thereby excluding lease deeds from its purview. Further, the DHC has also confirmed that lease deeds/ contracts would need to contain a clause providing for some sort of waiver or suspension of rent in cases of certain force majeure events and only then would the tenant be entitled to claim the same.

Although there have been protective orders passed by the Ministry of Home Affairs, Government of India with respect to suspension of rent during the ongoing COVID-19 situation, these were intended specifically for the benefit of migrants, students and other stranded persons occupying rented premises and not as a blanket protection available to all tenants. The present situation should be treated as a wake-up call by stakeholders to ensure that going forward, lease deeds are negotiated so as to include specific provisions dealing with waiver or suspension of rent in force majeure situations, inter alia, including a pandemic.

For more information please write to Mr. Bomi Daruwala at [email protected]