Can Force Majeure be invoked by Builders?

As per the definition in the Merriam-Webster dictionary, Force majeure translates literally from French, as “superior force”. In English, it describes those uncontrollable events viz: war, labour stoppages, natural calamities or extreme weather that are not the fault of human being and that make it difficult or impossible to carry out normal business for reasons

Meaning of Force Majeure:

As per the definition in the Merriam-Webster dictionary, Force majeure translates literally from French, as “superior force”. In English, it describes those uncontrollable events viz: war, labour stoppages, natural calamities or extreme weather that are not the fault of human being and that make it difficult or impossible to carry out normal business for reasons beyond control. Force majeure clauses help allocate risk between the parties when an unanticipated event makes performance impossible or impracticable in the event some condition beyond human control occurs.

If an event or circumstance comes within the ambit of a force majeure event and fulfils the conditions for applicability of the clause then the consequence would be that parties would be relieved from performing their respective obligations to be undertaken by them under the contract during the period that such force majeure events continue. Considering the present scenario, apart from the devastating impact that COVID-19 continues to unleash on human beings and countries worldwide, its outreach has also reached commerce and business as was natural. COVID-19 has resulted in lockdowns or restricted movements within the country thereby hampering day to day business activities and in the long-term affecting the continued services of various businesses across the country.

Consequently, businesses have been impacted and so have operations and consequently contracts and obligations under contracts are being revisited to assess these impacts. The term that has assumed relevance in contractual context today for businesses today for businesses today and heard most often is “force majeure” and how will this term be construed in a contract in the background of COVID-19.

Builders in Lockdown- Overall Effect on Real estate:

In light of the recent pandemic, the country has been under a lockdown for quite some time which could possibly last for an unforeseeable period of time in the future. This nationwide lockdown, which has been imposed to curb the spread of coronavirus has invariably impacted the real estate sector quite severely since housing sales and projects have almost come to a standstill. The profits and cash flow of the Builders have also been deterred and severely affected and this in turn could lead to defaults in repayment of bank loans in the near future. Furthermore, there is a possibility that existing buyers may delay payments of their instalments to Builders in the event that projects might miss their stipulated dates of completion under the original contract. In this scenario the Builders have to cover up their losses while also avoid any legal action being taken against them for non-completion of work. Any force majeure clause language should apply since March 11, as the World Health Organization declared the COVID 19 Outbreak as a pandemic. The Builders are finding it difficult to market their existing projects and have hence started using digital platforms to market all their projects.

With the onset of the Coronavirus Pandemic, a lot of Real Estate Projects have suffered a major setback as a result of which the Builders have been unable to adhere to the terms and conditions under the various contracts with home buyers. As we are aware, most courts require the party claiming force majeure to indicate that the event was not foreseeable and directly caused the failure to meet contractual obligations leading to invoking the clause.

It is pertinent for some very critical conditions to be considered while understanding that Builders are justified in invoking the concept of Force Majeure. Normally, a force majeure event may exist when the event is unforeseeable and outside control. COVID-19 is something, which is unforeseen, but still there is no clarity if Courts agree with that general assessment for claim relief and resolution of disputes. Typically, a contract requires prompt notice of a claim of force majeure, which should have started during this pandemic situation. Many Courts reject the invoking of the clause if parties have failed to give due and adequate notice. Also if the Force Majeure clause in the contract does not cover the Pandemic or epidemic under the Contract, then it is up to the Court to consider the Pandemic as an unforeseen event or classify it as an Act of God. For Builders it is advisable that if there is no timing mentioned in the Contract, then they need to ensure that they communicate their incapability to complete their obligations under the Contract immediately instead of at a later period, along with caveats. This will help mitigate any miscommunications between the Builders and the property buyers.

It has been notified by various ministries of the Central Government that Covid-19 is a natural calamity or a force majeure event and hence there have been relaxations for all the delays caused on account of it. It has also come to public knowledge that RBI has announced three months of moratorium on payment of instalments in respect of certain loans. In the event that a contract does not include a force majeure clause, the parties would have to ascertain the nature of the contract in relation to the delay in the performance of the obligation. It is only then that Section 56 of the Contract Act which deals with agreements between the parties to do an impossible act can be invoked. This section is applied to the contract, so as to discharge the parties from their contractual obligations.
 
Conclusion

In view of Section 108 of the Transfer of Property Act which only covers a situation when the property is destroyed or is reduced substantially and permanently as out of condition, for the purposes for which it was let on. Generally, a force majeure event is limited to the definition of force majeure as indicated in the lease deeds. Hence, it is required to scrutinise each lease deed to ascertain, if there is a force majeure clause; and consequences on occurrence of a force majeure event in view that such force majeure clause predicts a termination or suspension of all rights and obligations under the Contract.