The Viewpoint: Pandemic Legal Route - This way or that?
Karanjawala & Co

The Viewpoint: Pandemic Legal Route - This way or that?

COVID-19 pandemic is raging on and is quite unstoppable from the looks of it! COVID-19 has presented a lot of challenges for all industries, including the legal sector. While the concepts of force majeure, doctrine of frustration etc. have been discussed in other scenarios/situations, how the courts will look at the present pandemic and the economic, humanitarian, social etc fallouts thereof is still a grey area.

With the national lockdown being extended, currently till 31.05.2020, and exports/imports of raw materials, goods etc. taking a setback due to global transnational restrictions, clearly many contractual obligations have been adversely impacted. Consequently, many corporates and individuals are likely to plead the defence of force majeure or doctrine of frustration.

One interesting case which touches upon these issues is LI CHING WING v XUAN YI XIONG [2004] 1 HKC ; [2004] 1 HKLRD 754 ; [2004] HKC 353 [SARS Case]. This case is famously known as the SARS case, decided by the district court of Hong Kong in 2004 during the outbreak of the SARS epidemic.

The plaintiff was the registered owner of a flat in Block E, Amoy Garden, Ngau Tau Kok, Kowloon and he let out the premises to the defendant for domestic purpose for a fixed term of two years beginning 1 August 2002. In March 2003, many residents in Amoy Gardens were infected with Severe Acute Respiratory Syndrome (SARS) and fearing getting infected, the defendant moved out of the premises on 29 March 2003 and stayed in Guangzhou until 10 April 2003. On 31 March 2003, the Department of Health ordered that Block E be isolated for 10 days and the residents of Block E were evacuated to various places of safety. They were allowed to return to their flats afterwards. Thereafter the Defendant proceeded to terminate the lease agreement between the parties. The Plaintiff, challenging the alleged wrongful termination of the agreement, approached the courts.

The court, while examining the concept of frustration of contract, rejected the claim of the Defendant and held that the SARS epidemic and the consequent isolation order of 10 days would, at best, be an interruption in the tenure of the lease and would not frustrate the lease, unless the interruption was expected to last for the unexpired term of the lease, or, at least, for the unexpired term. The court famously held that “On the facts, the isolation order lasted for 10 days and was quite insignificant a period in terms of the overall use of the premises for a term of two years. While the outbreak of SARS was an unforeseen event, such a supervening event did not significantly change the nature of the outstanding contractual rights or obligations from what the parties could reasonably have contemplated at the time of the execution of the tenancy agreement”.

The court further denied the averment of the Defendant that due to the outbreak of SARS and consequent isolation orders, the demised premises had become unfit for habitation thereby warranting the Plaintiff to repair the demised premises failing which the lease was bound to be terminated. The court held that “It may be arguable that Block E was, at one stage during the term of the tenancy, not fit for human habitation. However, if the defendant were to succeed, he must be able to show that there was an implied term as to habitability throughout the term of the tenancy, the breach of which entitled him to terminate the tenancy agreement. But why should the court imply such a term? This certainly does not fulfill the necessity test as laid down in the case of Liverpool City Council v Irwin [1977] AC 239. Indeed, the outbreak of SARS was beyond the control of any individuals, and so one should not expect the plaintiff to give an absolute warranty that the premises would be safe from such virus. In England, this is in fact a trend, both by way of legislative intervention and judicial decisions, to impose harsher duty on the part of the landlord to repair a leased property, but at least, the physical condition of the property is something which is within the control of the landlord. This is very different from an absolute warranty that the premises are suitable for habitation and free of virus at all times, which are something beyond the control of the landlord

To reach its verdict the court relied on the landmark judgment of the house of lords, United Kingdom, namely National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675 dealing with the doctrine of frustration of contract. In the Panalpina case the lease in issue was a 10-year lease of a warehouse. Through a temporary order the City Council closed the street which gave the only access to the warehouse. The lessee relied on the doctrine of frustration of contract and refused to pay rent, thereby encouraging the landlord to institute legal proceedings for recovery of rent. The House of Lords held that the lease was not frustrated since the closure was expected to last only for a year or a little longer, which would still allow the lease to run for three more years after the street re-opened. The decision of the lower court in granting summary judgment in favour of the landlord was hence affirmed.

Indian courts have so far kept the threshold quite high while applying the concept of frustration of a contract. While it remains to be seen how Indian Courts will interpret the provisions in the COVID-19 situation, an interim order dated 20.04.2020 has been passed by the Hon’ble High Court of Delhi in the matter of “M/s HALLIBURTON OFFSHORE SERVICES INC vs VEDANTA LIMITED & ANR”. Though this is only an interim order passed by the Hon’ble High Court of Delhi in a pending proceeding, the Hon’ble High Court has formed a prima facie observation stating that “the countrywide lockdown, which came into place on 24th March, 2020 was, in my opinion, prima facie in the nature of force majeure. Such a lockdown is unprecedented, and was incapable of having been predicted either by the respondent or by the petitioner”.

In the above matter the High Court has been pleased to grant the interim relief to the petitioner based on the finding that the lockdown is, prima facie, in the nature of a force majeure.

As the matter is still sub-judice and at the interim stage, it is unwise to place complete reliance on the observation of the Hon’ble Court. However, it does reflect a possible direction the courts may head towards while interpreting the present pandemic and its effects.

Each contract will have to be seen on its merits and a blanket formula cannot be applied. Courts may or may not view COVID-19 pandemic as a force majeure event. Whether a contract stands frustrated will depend on the nature of the contract viz. the complete break down or inability to perform the contractual obligations thereby frustrating the contract.

It would be interesting to see how the Courts will view each case and whether the Courts will follow the principle/rationale laid down in Li Ching Wing v Xuan Yi Xiong [supra] wherein it was held that the current pandemic though being a force majeure event, doesn’t defeat the entire contract or the Courts are likely to follow a different route thereby holding that the lockdown and the Covid-19 pandemic would lead to frustration of contracts. The judgments which will be pronounced on these issues will have to balance equities and law and may well be path breaking landmark judgments which may be followed for years to come.

Meghna Mishra, Ankit Rajgarhia, Tarun Sharma
Meghna Mishra, Ankit Rajgarhia, Tarun Sharma

Authors are lawyers at Karanjawala & Co.

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