COVID-19 Lockdown as 'Act of God' Justifies Contract Payment Waiver Under Force Majeure/S. 56 ICA: Rajasthan High Court - 2024-04-15

Rajasthan High Court Rules COVID-19 Lockdown Warrants Contract Payment Waiver Under Force Majeure

Jodhpur: In a significant ruling concerning contractual obligations impacted by the COVID-19 pandemic, the Rajasthan High Court has held that the nationwide lockdown constitutes an 'act of God' and falls under the doctrine of Force Majeure and Section 56 of the Indian Contract Act, thereby justifying the waiver of contractual payments for the period when performance was rendered impossible.

Justice Rekha Borana delivered the judgment in a writ petition filed by contractors challenging a recovery notice issued by the Gram Panchayat, Pasund, Rajsamand.

Background of the Case

The case arose from a contract awarded by the Gram Panchayat, Pasund, to the petitioners for the removal and dumping of marble slurry. The agreement, dated January 30, 2019, stipulated monthly payments by the petitioners to the Gram Panchayat. While the petitioners initially performed their obligations, they faced difficulties and a previous termination order was stayed by the High Court, allowing them to continue work.

However, the core dispute revolved around the period from March 2020 to June 2021. The petitioners contended that during this time, due to the unprecedented outbreak of the COVID-19 pandemic and subsequent lockdowns, industrial activities ceased, making it impossible for them to undertake the contractual work of lifting and dumping marble slurry. Consequently, they were unable to deposit the agreed monthly payments. The Gram Panchayat subsequently issued a recovery notice demanding Rs. 19,26,680 for this period.

Arguments Presented

The petitioners argued that their inability to perform was due to circumstances beyond their control, constituting a 'Force Majeure' event. They highlighted the severe disruption caused by the lockdown and submitted that holding them liable for payments when no work could be done was arbitrary and illegal. They also pointed to similar waivers granted by the State Government to contractors involved in river sand royalty collection as a precedent.

Conversely, the counsel for the Gram Panchayat opposed the plea, asserting that the petitioners were contractually obligated to make payments regardless of their ability to perform. They contended that the agreement lacked any specific clause providing for relaxation or waiver of payments in situations like a pandemic or events beyond the contractor's control.

Court's Reasoning and Application of Law

Justice Borana considered the submissions and the record, acknowledging that the petitioners' inability to perform from March 2020 to June 2021 was directly attributable to the COVID-19 lockdown. The Court recognized the pandemic's outbreak as an "act of God" beyond human control.

The judgment emphasized that even if a contract does not explicitly mention such contingencies, situations arising from an 'act of God' that disable a party from performing their obligations must be considered to balance equity and arrive at a just decision.

The Court applied the doctrine of "Force Majeure" and, more specifically, the principles underlying Section 56 of the Indian Contract Act, 1872, which deals with agreements to do an act afterwards becoming impossible or unlawful. The judgment cited the Supreme Court's ruling in Satyabrata Ghose Vs. Mugneeram Bangur and Company (AIR 1954 SC 44) , which clarified that the term "impossible" in Section 56 is not limited to literal or physical impossibility but includes situations where an "untoward event or change of circumstances totally upsets the very foundation upon which the parties rested their bargain."

The High Court held that the petitioners were prevented by sufficient reasons beyond their control from performing their part of the contract. Burdening them with the liability for the period when performance was impossible due to the lockdown would cause undue hardship. The Court also found merit in the petitioners' comparison to the waiver granted to river sand contractors, noting that a similar principle of relief should apply. The Gram Panchayat's own admission that the work was suspended for the stated period further supported the petitioners' claim.

Decision and Implications

Based on these findings, the Rajasthan High Court partly allowed the writ petition. The recovery order dated September 25, 2021, was quashed to the extent it demanded recovery for the period from March 2020 to June 2021.

The Gram Panchayat, Pasund, has been directed to recalculate the amount due from the petitioners, waiving the recovery amount for the specified lockdown period. The petitioners are then required to deposit the recalculated amount in appropriate installments to be determined by the Gram Panchayat.

This ruling underscores the judiciary's approach to interpreting contractual obligations in light of unforeseen and extraordinary events like a pandemic, reaffirming the principles of Force Majeure and frustration of contract under Indian law to prevent undue hardship caused by circumstances beyond a party's control.