Applicability of Force Majeure Clause in Commercial Leave and License Agreements

Shivani Kumbhojkar & Omprakash Jha

To contain the outbreak of novel corona virus disease, the Government of India and State Governments in exercise of powers under Epidemic Disease Act, 1897, have taken such measures that are required to curb the spread of the disease. Apart from the exercise of powers under the Disaster Management Act, 2005, the State Governments have also imposed Section 144 of the Code of Criminal Procedure, 1973, restricting congregation above 5 people.

The District Administrations and Municipal Corporations in exercise of powers vested in them, under the aforementioned laws, have issued directions calling for closure of all commercial establishments, unless the commercial establishment falls under the exempted category duly notified in the notification, till such time epidemic continues or till the notification is withdrawn. The violation of directions issued by the administration would attract criminal prosecution under Section 188 of IPC alongwith other provisions of the Code and other applicable laws.

Due to the notification calling for closure of all establishment till 14.04.2020 or till such other date that may be notified subsequently, the licensees who are operating their establishments from licensed premises are loosing out on income while the obligation to pay license fees still shoulders on them.

Given the above scenario, the question that arises is whether people who are operating commercial establishments from premises obtained under leave and license can invoke Force Majeure clause to claim exemption from payment of monthly license fees contemplated under the license agreement executed with the premises owner.

What is a Force Majeure Clause?

The French expression “Force Majeure” means superior force. The performance of a part of the contract is not possible due to causes which are outside the control of the parties and which could not be avoided by the exercise of due care, this provision protects the parties. It covers a wider class of events than vis major (i.e. an act of God).

Force Majeure in Leave and License Agreements

Leave and License Agreement only confers easement rights in the licensee. No right, title or interest is passed on to the licensee. Not even possession of the property is given to the licensee. That what is given to the licensee is only license to use the premises for the purpose agreed.

If the Leave and License Agreement contains an force majeure clause and the unforeseeable event fits within categories stipulated in the given clause. Subject to the reading of such clause in the Agreement, the Licensee may intimate the Licensor of the occurrence of event that constitutes force majeure and consequently suspend his obligation to pay license fees till such time the Force Majeure continues.

The doctrine of force majeure is reflected in Section 56 of the Indian Contract Act, 1872. The judicial precedents have referred to Section 56 as Doctrine of Frustration. Section 56 stipulates that an agreement to do an impossible act is in itself void. Accordingly, it provides that a contract to do an act which, after the contract is made, becomes impossible or unlawful by reason of some event, which the promisor could not prevent, becomes void when the act becomes impossible or unlawful.

However, it has to be borne in mind that for an event to quality as force majeure, the event should be such that upon occurrence of the event the performance of a party’s obligation under the contract has become impossible and leading to frustration of the contract. The event contemplated should have the force of frustration of the contract. Temporary events would not qualify as force majeure. Merely because of the occurrence of certain event the performance of contract has become onerous and difficult would not be good enough to qualify for abandonment of obligation of party under the contract.

When an unforeseen event occurs, a tenant can rely upon Section 56 above and contend that the outbreak of corona virus and the consequential lockdown ordered by the Government is a force majeure event that was beyond his/her control.

Our View

In conclusion, we are of the view that force majeure will not be available as a defense to avoid payment of agreed license fees for following reasons-

1. COVID – 19 lockdown is a very temporary event;

2. The lockdown does not effect the entire lease period or the right to use the premises during the license period;

3. The Licensee has the option of surrendering the license. The licensee cannot hold on to the license and then not pay the license fees citing force majeure.

4. There is no frustration of contract if license is retained by the licensee. Since the effect of frustration of contract is termination.