Overview

Introduction to the laws applied by Government during the present COVID-19 Crisis

In the wake of COVID-19, India for the first-time enforced Disaster Management Act, 2005 (Disaster Management Act) apart from the usual Epidemic Diseases Act, 1897 (Epidemic Diseases Act). The Disaster Management Act aims for providing effective management system to fight happening of a natural disaster. It provides for the establishment of National Disaster Management Authority (NDMA) with Prime Minister of India as its chairperson. NDMA has been conferred with powers to lay down various policies on disaster management, approve national plans, guidelines for state authorities to deal with disaster, etc.

Further, the Disaster Management Act mandates Central Government to constitute National Executive Committee (NEC) which assists NDMA and is responsible for implementing plans and policies of NDMA. Apart from this, NEC also acts as the monitoring and coordinating body for disaster management. It lays down guidelines and gives directions to state governments/state authorities with respect to the disaster management, etc.

As regards the Epidemic Diseases Act, it provides for the better prevention of the spread of Dangerous Epidemic Diseases. In the present epidemic- COVID-19, States and Union Territories have invoked the provisions of Section 2 of the Epidemic Diseases Act 1897, so as to make the advisories of the Central Government enforceable.

Both the Acts prescribe penalties and prosecution for disobeying any regulations or orders made under them. Any penal action and prosecution contemplated under these Acts would be in terms of Section 188 of the Indian Penal Code (IPC), which deals with Disobedience of an order duly promulgated by a public servant.

Order by the Ministry of Home Affairs

On 29th March 2020, Ministry of Home Affairs (MHA) issued an order using powers conferred under Section 10 (2)(I) of National Disaster Management Act, 2005 (Act). The order mandated all employers to pay salaries/wages of their worker for the period their establishments are under closure during the lockdown (Order). Vide this order the MHA had also directed State/Union Territory Governments and Authorities to take necessary action and to issue necessary orders to their District Magistrates / Deputy Commissioners and Senior Superintendents of Police/ Superintendent of Police/ Deputy Commissioner of Police, to take measures, such that the payment of wages are made to their workers by the industry or shops and establishments on the due dates without any deduction for the period these establishments are under closure during the lockdown. Accordingly various orders / advisories have been released by the respective State / UT functionaries.

Legal Issues pertaining to the Order

The legalities surrounding the present pandemic and the various Orders issued by both the Union and State governments hinge on the concept of Force Majeure and Doctrine of Frustration under the Indian Contract Act, 1872 (Contract Act). 

Force Majeure

Force Majeure is a French phrase that means a ‘superior force’. This is a classic exception to what would otherwise be construed as a breach of contract. Force majeure is commonly defined as an unforeseen irresistible force, such as an act of God or war. Performance of a contract by a party facing a force majeure situation may be impossible.

Force Majeure clause in contracts is incorporated so as to save the performing party from consequences of something over which it has no control or which are necessarily acts of god.  The term “Force Majeure” being a contractual provision agreed upon between the parties is available only when the contract contains such a provision. In the absence of any such provision in the contract, in India, parties to the contract cannot invoke provision of Force Majeure, as a defense for non-performance of it’s part of contract.

Doctrine of Frustration

Contract Act does not expressly refer to the term “Force Majeure”. In the absence of Force Majeure Clause in contracts, Section 56 of the Contract Act which embodies the English “Doctrine of Frustration” becomes important.  Section 56 of the Contract Act relates to performance of contracts and purports to deal with category of circumstances under which performance of a contract is excused or dispensed with. In terms of section 56 of the Contract Act, an agreement to do an act which is impossible in itself is void. Further a contract to do an act which, after the contract is executed, becomes impossible of performance or unlawful, also becomes void at that stage.

Supreme Court in the Satyabrata Ghose case has laid down certain principles in relation to Section 56.  It held that the word “impossible” in Section 56 does not mean physical or literal impossibility. That a contract can be held to be frustrated if its performance is “impracticable” and “useless” from the point of view of the object and purpose of the parties, though the performance is not literally impossible. If the untoward event totally upsets the very foundation upon which the parties entered their agreement, the contract can be held to be frustrated. The Court also held that the if the contract has an express or implied “Force Majeure” clause, then the situation will be analysed on the basis of that, and not through the application of principles under Section 56.

In the Energy Watchdog case the Supreme Court dealing with the Doctrine of Frustration under section 56 of the Contract Act held that if a contract has an express or implied ‘Force Majeure’ clause, it will apply as against Section 56. That application of the Doctrine of Frustration must always be within narrow limits. A mere rise in cost or expense will not frustrate a contract. That the Doctrine of Frustration will not apply so long as the fundamental basis of the contract remains the same. It also held that Force Majeure clause will not apply if alternative modes of performance are available.

Challenge of the Order before the Supreme Court

The Order was recently challenged in Supreme Court of India by various petitions. Many private enterprises  including Ficus Pax Private Limited and Nagreeka Exports challenged the said order on various grounds.

The petitions challenged the legal validity of the Order and termed it as a violation of Article 14, Article 19(1)(g), Article 265 and Article 300 of the Constitution of India. The petitioners pleaded before the Supreme Court that they should not be forced to pay the salary as-

“one-sided implementation of contract alone is not permitted since relationship between employer and employee consists of reciprocal promises wherein payment can be enforced only against consideration of performing work.”

Another legal issue pertaining to the Order is whether or not the Act can be used to force private institutions to pay wages/salaries to their employees and will this be covered under the ambit of “matters connected with or incidental” to the disaster?

Current Position

On 27th April 2020, the Supreme Court heard the plea of the petitioners through video conferencing in presence of the Solicitor General of India. The Supreme Court asked the petitioners to serve the copy of the petition to the Solicitor General via e-mail, further, it gave 2 weeks’ time to center to file its reply.

It is interesting to see how the Supreme Court will apply the principles of Force Majeure and the Doctrine of Frustration in respect of the employers obligations in the wake of the COVID-19 pandemic and how it will interpret the executive orders under the Disaster Management Act in these peculiar facts.

Contingency / mitigation measures

That the present COVID-19 Pandemic has been sudden and has caught all the stake holders including the employers, employees, regulators and the Governments unawares. Though Government of India as a labour/employee welfare measure has issued instructions / guidelines / circulars for protecting the employment and remuneration of the workers / employees during these difficult times, the industry as such and especially the SME and Service sectors are facing a humongous task in facing the sudden situation, dealing with cash flow crunch, lack of business and payments from the customers, complete lockdown and are experiencing hard times in business, as everything has come to a stand-still.

In this situation to mitigate any harsh measures by the regulators and the judiciary, the employers can broadly take the following steps :-

• Not to unilaterally terminate any employee;
• Not to unilaterally reduce salaries / wages;
• To treat the absence of employees due to the pandemic as attendance;
• Try to pay salaries / wages on time as per the contractual arrangements and/or the legal requirements;

Though the above is the ideal way of handling the situation, but the in view of ground reality and the cash flow crunch being faced by the employers, it is desirable that as a mitigation measure and in view of their moral/humanitarian obligations atleast they pay the work-force the subsistence allowance which will help them manage their rations. The employers should also start a process of consultation with the employees to build a consensus so that they voluntarily accept pay cuts / deferments / furlough. It is also advisable that the employers collate and retain appropriate evidence to prove the adverse working capital position during the pandemic, which has forced them to default their obligations towards the work-force.