By: Abhinav Gupta
This post is the second of a two-part series on the topic. Part 1 may be found here.
Approach of Civil Law Countries
The concept of frustration and force majeure in the civil law jurisdiction is enumerated across the various statutes of the respective countries. For this blog-post, two concepts, namely – hardship and good faith – under the civil law jurisdiction, are important and pertinent. The same are discussed below.
A. Hardship – The change in circumstances
As discussed in the previous part, the mere change in circumstances surrounding the basis of the contract does not attract the frustration, force majeure doctrine in tenancy contracts in India. The permanent destruction of the property is required. However, this approach is substantially different from the model in Germany and France. Article 1195 of the French Civil Code, 1804, envisages the hardship principle which is applicable for tenancy contracts. The said provisions enable parties to modify the terms of the contract due to the change in the circumstances that makes the performance of the contract extremely onerous on the party that did not assume the concerned risk. The application of this provision is not dependant on any clause in the contract between the parties. However, if the parties cannot arrive at a consensus, either party can refer the situation to the court, which can instead amend the agreed contract or refer the party to renegotiations, as per Article 1195.
Similarly, §313 of the German Civil Code, 1900, also permits such alterations due to hardship. The said provision states that if the circumstances surrounding the ‘basis of the contract’ have changed significantly that would have resulted in the parties entering a different contract, the contract may be altered with an equal distribution of risk. Further, it stipulates that one of the parties should not have been reasonably expected to perform the contract in such changed circumstances.
The implementation of the aforementioned provision can be witnessed in a recent judgment by the Regional Court of Munich. The case dealt with the payment of rent during the lockdown caused by the pandemic. The court held that the lockdown due to the pandemic has resulted in a significant change in the basic of the tenancy contract between the parties. The court, therefore, distributed the risk of the rent at a 50-50 rate. This reasoning was based on the fact that the fall of the economy during the lockdown affects both the landlord and the tenant. Herein, the tenant is unable to generate any form of profit, and the landlord is also unable to lease the said property to any third party on a comparable rent.
However, the court clarified that this rule should not apply to each situation. It opined that while assessing the unreasonableness of the rent, the standard of the distribution of risk should be based on the decline in the total turnover due to the State mandated lockdown. For instance, if the lessee’s income is unaffected by the lockdown, such as in cases of work-from-home jobs, the basis on which the tenancy contract was entered into remains unchanged. Further, the court observed that 22% of the rent shall be generated from the average rate of business of the landlord during the remaining year. It also granted a 5% adjustment rate on the activities of the tenant. Therefore, it concluded that the risk distribution of 50-50 between the lessee and the lessor should be done on 73% of the rent that was due.
B. Good Faith in contractual performance
The concept of performance of a contract in good faith is absent in many common law jurisdictions, including India. On the other hand, this principle is widely implemented in many civil law jurisdictions. The German Civil Code, 1900, through §242, provides for the performance of the obligator’s duty in good faith in consideration of the customary practices. In practice, the German judiciary attaches an overwhelming significance to the requirement of §242 of the 1900 Code. The said provision has been envisaged as a means to derive numerous principles of equity and fairness in the performance of contractual obligations. It has also been used in implementing the doctrine of frustration with respect to tenancy contracts. Thus, the contracting parties have to consider the ‘protection-worthy’ interests of their counterparts and conduct their actions in good faith.
Such principles and concepts are also present in other civil law countries such as France and Sweden. Article 2 of the Swiss Civil Code, 1907, and Articles 1134 and 1135 of the French Civil Code, 1804, govern the good faith principle in contractual performance under the respective jurisdictions. The Dutch Civil Code, 1992, also incorporates this principle under Article 6.2 of the said Code. It further provides that the conditions under a contract shall not be applicable in case their effects are unreasonable or unfair. Even under the Italian Constitution, the court has the power to alter the contract in consonance with the standard of fairness. The courts can even terminate contracts when the performance becomes contrary to good faith as stipulated under Article 1374 of the Italian Civil Code, 1942.
Observations and Conclusion
From the above discussion, we can observe the wide ambit of the doctrine of frustration and force majeure for tenancy contracts in civil law jurisdictions. It is argued that the said ambit is more flexible and robust for dealing with the precarious situations caused by emergencies such as the COVID-19 pandemic. It allows for an equitable distribution of risk amongst the tenant and the landlord and therefore achieves a harmonious balance. The incorporation of such principles in the statutes rather than a mere discretionary power of the judiciary reinforces the ideas of equity and justness in such tenancy events.
Crucially, in times of such hardship and unpredictability, there is a need for a pragmatic and robust basis for dealing with such issues and gaining confidence in the legal system. The present structure surrounding tenancy contracts with no force majeure clauses is governed by §108(B)(e) of the TPA. It mandatorily provides for permanent destruction of the property to absolve or reduce the liability of the tenant. Arguably, in situations such as the current pandemic, one party to the tenancy contract wins, and the other party loses. There is a need for a more flexible, creative, and equitable solution to the said problem. This can be achieved through the incorporation of a model similar to the civil law countries. The said laws, through their equitable principles of hardship and good faith, strikes an appropriate balance between the interests of a tenant and the landlord and also provides for a more just distribution of risks.
The current Indian regime does not include the ‘ability to pay the rent’ on behalf of a tenant as a ‘risk’ under the concept of frustration and force majeure. It only incorporates the ‘usage of property’ as a risk under such doctrines. This approach is argued to be archaic and not suitable for dealing with situations such as the current COVID-19 pandemic. Such an approach is also not ideal for natural disasters, pandemics, and other emergencies that may take place in the future, which render hardship of similar nature on the tenants. On the other hand, the civil law approach enables the readjustment of a tenancy contract without an inadvertent enrichment of one party at the cost of the other.
(Abhinav is currently a law undergraduate at the West Bengal National University of Juridical Sciences, Kolkata. He may be contacted via mail at email@example.com)
Cite as: Abhinav Gupta, ‘Reconceptualising Frustration and Force Majeure under tenancy in India post COVID-19: Lessons from Civil Law Jurisdictions’ (The RMLNLU Law Review Blog, 15 April 2021) <https://rmlnlulawreview.wordpress.com/2021/04/15/reconceptualising-frustration-and-force-majeure-under-tenancy-in-india-post-covid-19-lessons-from-civil-law-jurisdictions-part-2/> date of access.