COVID-19 AND THE LEGAL WHIRLWIND

 

 

Amidst the COVID-19 crisis, when the Government has ordered a nationwide lockdown it is important to note and assess the nature of lockdown impact which will ideally vary from jurisdiction to jurisdiction, depending largely on the “socio economic lifestyle” of the jurisdiction of each state.

 

It is pertinent to note that the guidelines restricting freedom of trade/occupation/profession have been framed under the National Disaster Management Act, 2005, and interestingly these guidelines do not put a direct restriction on the freedom of movement. The movement of citizens is restricted through a collective series of executive orders passed under Section 144 of the Code of Criminal Procedure, 1973 coupled with the addendum issued by the Home Ministry and read with the colonial era Epidemic Diseases Act, though, till recent, there have been efforts to update this colonial and draconian law as it does not provide clear cut and ample guidelines to the states, to act, to prevent and to mitigate epidemics. 

 

In a country with huge socio-economic diversity and disparity across sects, blanket restrictions of a pervasive nature could produce highly inequitable effects upon enforcement and in view of the various notifications issued by the state governments , dictating the mid-level industry and factory owners to ensure timely and full payment of wages to the workers despite complete lockdown of their operations, the impact is a double whammy and the repercussions can be lethal and disastrous for a sizeable number of businesses, which could result in a complete stoppage of operations along with an added obligation to pay timely salaries to the employees.

 

Amongst the widely noticeable impacts of the Covid-19, are its imperative effects on contractual agreements with respect to the Force Majeure reasons and effect of the Government notifications issued in lieu of the COVID-19 pandemic. One such notification, dated February 19, 2020, issued by the Ministry of Finance, has clarified that Force Majeure under Manual of Procurement of Goods 2017, would be applicable in this pandemic due to disruption of numerous supply chains. It has also been stated that it should be considered as a natural calamity and the Force Majeure clause should be invoked, following the due procedure. The Ministry of New & Renewable Energy with respect to solar project developers, vide office memorandum dated March 20, 2020 has declared that the parties involved can invoke the Force Majeure clause to avoid financial penalties, if they miss the contractual obligations on account of COVID-19. 

 

It is pertinent to note that one complex element in application of the doctrine of force majeure is difficulty to prove such reason unless the type of event is specifically mentioned in a contract. The specific mention of force majeure events in a contract may relate to events other than the novel coronavirus virus. It is highly unlikely that contracts drawn before 2020 would mention the occurrence of COVID-19. However, the mention of the cessation of a contract due to an epidemic, pandemic or other such events being forces outside the control of the contracting parties could perhaps be relied upon to invoke force majeure.

 

It is important to point out that even if a contract makes no mention of a force majeure eventuality, parties to a contract may rely on section 56 of the Indian Contract Act, to plead frustration of a contract in the present lockdown situation. This section allows termination in the event that a contract is frustrated and cannot be performed. Such interpretation will depend on the length of the lockdown and on each individual case. Several large business houses have already invoked the provisions of force majeure to stall the payment of license fees and to restrain the invocation of penalties.

 

A major setback has also been felt by the construction sector and the interpretation of the Force Majeure in view of the provisions under the relevant act/s. In exercise of powers conferred under Section 10(2) (l) of the Disaster Management Act, 2005, the Ministry of Home Affairs, Government of India came up with guidelines under Order No 40-3/2020-DM-I(A) dated 24.03.2020 .  Under the guidelines all commercial and private establishments except for essential services listed were asked to remain closed for a period of 21 days with effect from 25.03.2020. The list of exceptions of essential services did not include construction services and hence all construction of real estate projects have come to a halt from the date. Hence contractually, if the Force Majeure clause of the Model Agreement to Sale, has been adopted by the promoter then Force Majeure can be triggered under Part (ii) of the clause. However, depending on the clause adopted, each agreement should be looked at in the spirit in which it was entered into, needless to emphasize that COVID-19 has been described as “threatening disaster situation” by National Disaster Management Authority and for all practical and logical interpretation the meaning of ‘disaster’ may be assigned to ‘calamity’ as mentioned under The Real Estate (Regulation and Development) Act, 2016, thus invoking the Force Majeure. However, strictly speaking, the invoking of the Section 6 is not automatic and the promoters shall have to make an application to the Authority.

 

The Maharashtra Real Estate Regulatory Authority in its Order 13/2020 dated 02.04.2020 has extended the completion dates of all projects, with completion dates on or after 15th March 2020 by 3 months. The Authority has cited lockdowns, disruptions in supply of construction material and migration of labor force for issuance of the Suo Moto Order. It is also prudent to point out that if the Force Majeure clause in an agreement is established to be triggered, the COVID-19 situation shall not frustrate the entire contract or absolve the promoter of delivery of units but merely give a time extension to perform the agreement. Hence, the promoter of a real estate project shall get extension of time to handover the possession of the constructed property and the allottee shall get the time extension in payment of money based on percentage of completion of the project.

 

In view of the above the impact on the Real Estate Sector has been multifold, from disrupted supply chains to delayed construction activity on account of reasons not limited to lack of man force on the sites due to the lockdown effects, all stakeholders from the builders to the lessees, are affected from the pandemic and the resultant lockdown. The Builder Agreements usually contain such Force Majeure clauses and the same can easily be invoked but the same is not the case with lease /leave and license (commercial) agreements. In case there is no Force Majeure clause, then Doctrine of Frustration under Section 56 of the Indian Contract Act, does not come to the aid of the parties. 

 

Keeping in mind the genuine crisis that the industry is facing, a statement was released by the Confederation of Real Estate Developers Association of India (CREDAI) wherein the following policy relief was immediately sought from the Ministry of Housing and Urban Affairs:

 

1.Inclusion of Covid-19 as a force majeure condition under Section 6 of the RERA.

2.Extension of registration period by at least One (1) year.

3.Requirement of additional funds on the same terms as existing loans without additional collateral from financial institutions to meet the increased costs.

4.Loans by real estate developers should not be classified as NPA in case of default on interest or principal repayment.

5.Interest and principal repayments falling due over the next three months in case of real estate projects be put off and recovered over the next nine months.

 

The CREDAI has brought forth the proposal of addition of Covid-19 as a force majeure condition in light of the country-wide lockdown which has led to nearly no economic activity and necessitated Work from Home arrangement in the private sector. For all registered projects where completion date, revised completion date or extended completion date expires on or after 15th March 2020, the period of validity for registration of such projects has been extended by three months and project registration certificates, with revised timelines for such projects would be issued, subsequently. Further, the time limits of all statutory compliances in accordance with RERA due in March, April and May have been extended to 30th June 2020.

 

It is worth noting that, in line with the relaxations offered by the Government, the Government of India has given a 4 Months’ Rental Waiver to the IT Companies Operating from Software Technology Parks of India (STPI) Centers, small IT units operating out of the Software Technology Parks of India (STPI).  Most of these units are either Tech MSMEs or startups.

 

The Ministry of Electronics and Information Technology (MeitY) has decided to provide rental waiver to these units housed in STPI premises in the country from 01.03.2020 till 30.06.2020 i.e. for 4 months period as of now.

Additionally, to help the industry come out of massive disruptions caused by the COVID-19 pandemic, the Maharashtra industries department (Maharashtra Industrial Development Corporation- MIDC), also, has allowed companies to delay lease rentals.

 

Concluding this , the Pandemic of Covid-19 and the Legal whirlwind surrounding it, is definitely a matter of individual agreement/contract interpretation and applicability of the relevant clauses, status of the contracts, stage of project , as the case may be. No statute ensures a blanket applicability and interpretation of the clause of Force Majeure.

 

Disclaimer: The Author has relied on information available on the public domain, legal articles, relevant acts and Notifications issued by the Government of India. The Author has relied on information available on the public domain, legal articles, relevant acts and Notifications issued by the Government of India.