‘Force Majeure’ cannot be a fig leaf for corporates’ naked greed

The Economic Times of April 3, 2020 reported that several large retail chains in India, such as Reliance, Future Group, MacDonald’s, Domino Pizza and others are trying to use the omnipresent ‘force majeure’ clause in all agreements and contracts to back out of commercial obligations.

The legal term means ‘unforeseeable circumstances that prevent someone from fulfilling a contractual obligation’

Typically, these notices are served on the smaller associates deemed least able to challenge it. It would be interesting to know if the government has been told by Reliance or Airtel of their inability to pay telecom spectrum dues? Or would Prince Mohammed bin Salman take kindly to any attempt to diddle his country of payment for oil already processed?

It won’t be long before other companies follow this lead. Several automotive companies also operate their own showrooms, as do oil marketing companies and others. Some of our top business groups like Tata’s with Croma and Westside, Goenka with Spencers have a strong presence in retail. The More retail chain was recently sold by Birla's 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 and because of their perceived creditworthiness manage to get lower rents.

These companies are citing a letter dated 19.02.2020 issued by the Ministry of Finance 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 the Government of India for goods and services and is not applicable to such 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. However, the orders of the governments only cover educational institutions, theatres, function halls and cinema halls.

In any event, the COVID-19 virus cannot be invoked as a reason to escape all contractual obligations in general by universally invoking force majeure clauses. The spread of this coronavirus 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 governmental 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 COVID-19 related government notifications, no government notification has rendered it impossible for companies to pay for goods and services availed or being availed off. 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 the premises for storing commercial goods that are 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 current national lockdown, despite not being able to complete the delivery of sale, they still continue to accept and receive payments for products that are stored in their premises.

Nothing therefore 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 cannot be wriggled out of because of reduced business opportunities in light of measures around COVID-19 prevention.

With respect to a similar pandemic of SARS (Severe Acute Respiratory Syndrome) in 2003, the courts did not permit tenants to wriggle out of their obligation of payment in lease agreements even when the tenant was not permitted to enter the leased premises due to temporary isolation orders of the Government. In that context, courts held that a two-week period was insignificant in view of the long durations of the lease, and that whilst 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, 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 Limited has reported a post-tax profit of over ₹35000 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.2727 crores just in Q3 of 2019

It is sad that these big groups are attempting to wrongfully wriggle out of their contractual obligations in such difficult times. Such attempts to renege on performance obligations particularly oppresses smaller associates.

Views expressed in the article are the author’s own