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Centre citing Act of God unusual, could affect range of contracts: Experts

The invocation of force majeure can possibly be also done for payment of salaries but experts said statutory obligation to pay salaries remains sacrosanct.

Written by Aashish Aryan , Aanchal Magazine | New Delhi |
September 5, 2020 4:50:32 am
According to a ministry source, there was only temporary retention of the excess cess in the Consolidated Fund of India under Article 266 of the Constitution, pending reconciliation, which usually happens by the end of June in the subsequent financial year.

BY invoking the “Act of God” in shrugging away its Constitutional responsibility of assured payments to states under the Goods and Services Tax (GST) regime, the Centre has set a precedent that could have wider ramifications, legal experts and those who have worked with the Government said.

If contracts involving the Centre — a sovereign that has the power to decide policy— are deemed null and void on account of force majeure, this could have a bearing on a range of contracts that include payment obligations such as rents, interest payouts, utility bills and even salaries.

“Force majeure, in law, is used in the context of commercial contracts between two parties. The Supreme Court has numerous recent rulings on it in the context of issues such as electricity tariffs. We have had several natural calamities, drought, tsunami, which can all legitimately be called Acts of God. Not once did the Government resort to that (invoking Force Majeure). Nowhere in the world has anyone referred to the disease in this manner… and certainly not in the realm of taxes,” a former Union Government Secretary and an infrastructure sector regulator told The Indian Express.

Explained | What counts as ‘Act of God’?

The invocation of force majeure can possibly be also done for payment of salaries but experts said statutory obligation to pay salaries remains sacrosanct. “Can tomorrow the states say that I will not pay salaries of all civil servants because of force majeure? So what do you do? We cannot tell employees that you go and borrow money from the market. This (GST compensation to states) is a statutory obligation and you cannot get out of it. Say for example the airline, if they do not pay their loans, can they invoke the same clause?,” senior counsel and legal expert Arvind Datar told The Indian Express.

Datar said force majeure is not “normally available” in statutory obligations. “It is like a dearness allowance. If I take a base year and say that I will give you 10 per cent DA per year, then once you have a DA, it does not matter whether the wholesale prices have gone up, inflation is there or deflation is there. You have made the commitment of a DA and you have to give that,” he added.

The clause can also be cited to stall payments to contractors, who have performance-linked contracts such as in road construction. “Wherever there is a contract, particularly with a performance clause, if this particular position is upheld in court then it can be used. For contractors, money is paid based on achieving milestones but milestones have been affected, so force majeure can be invoked,” an expert with experience in Government affairs said.

Last week, Finance Minister Nirmala Sitharaman, after the 41st GST Council meeting, referred to the pandemic as an Act of God while detailing that states need to borrow — instead of the Centre – to meet the GST compensation deficit. “The Act did not foresee an Act of God, it just kept saying protected revenues should be taken care of,” she said. The Centre and Opposition-ruled states are in a slugfest over financing of the GST shortfall of Rs 2.35 lakh crore in the current fiscal, with Centre giving states two options to borrow to bridge the gap.

At least seven Chief Ministers have written to the Prime Minister rejecting the options and asking the Centre to borrow instead.

Experts said even what constitutes an ‘’Act of God’ is open to debate. While the pandemic may well be a trigger, the subsequent GST revenue loss, loss of livelihood and industrial production are all, it can be argued, a direct consequence of the national lockdown, which is not strictly an “Act of God,” but a policy decision.

India had, arguably, the strictest national lockdown in the world which froze economic activity to the point that the April-June GDP growth contracted 23.9 per cent, the worst amongst G20 countries.

Borrowers, too, could seek refuge in the force majeure argument, with the SC verdict Thursday effectively amounting to a suspension of a key banking principle — recognising loans gone bad.

That the sovereign, which can take recourse to borrowing and has the powers to direct the central bank to print notes to cover for all shortfalls, has decided to invoke “force majeure” could effectively open up this option to others.

Recently, L&T Metro contemplated invoking the force majeure clause to make up for losses due to stalled operations in Hyderabad. The country’s biggest gas importer Petronet LNG also invoked it on some of its cargo from Qatar. The Supreme Court has held that force majeure could be invoked only if two conditions were fulfilled: if non-performance was due to circumstances beyond control; and no steps could be legally taken to mitigate the event.

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