Changing World -Commercial Contracts and the COVID-19 – Part I

Zubin Behramkamdin, Counsel, Bombay High Court

Vyom Shah, Counsel, Bombay High Court

Effects on Wages Payable to Employees

On account of the COVID-19 pandemic, the Government of India imposed a national lockdown on 24th March 2020, which was extended and partially relaxed from time to time. The Government of Maharashtra had imposed its own lockdown from 22nd March 2020, which continues till date. Uncertainties abound and employees/workmen of businesses are amongst the most vulnerable, on account of their minimum financial means and their inability to work and earn wages.

The Ministry of Home Affairs issued an Order dated 29th March 2020 which was followed by an Order dated 31st March 2020 by the State of Maharashtra effectively directing that employers shall be liable to pay employees full wages for the duration of the lockdown, despite the employees not being available for work. There has been considerable debate about the legitimacy of these Orders and the Supreme Court is also looking at this issue. While the Ministry of Home Affairs appears to have revoked its Order dated 29th March 2020 by an Order dated 17th May 2020, the Maharashtra Government’s Order apparently remains unaffected. This paper looks at some of the issues involved.

Advisories and Orders issued by the Government

The Ministry of Labour and Employment issued an ‘advisory’ dated 20th March 2020 to Chief Secretaries of States and Union Territories that all employers of public/private establishments be advised to not terminate their employees from their job or reduce their wages. It appears that the intention of the Government at that point of time was to persuade the employers and that the advisory was not binding on employers.

As a result of the nationwide lockdown, a lot of migrant workers were left stranded in the States where they work but the businesses/establishments were shut. A movement of large number of migrants to their homes did in fact take place in some parts of the country. It was due to these changed circumstances that the Ministry of Home Affairs of the Government of India, again in its capacity as National Executive Authority, issued Order No. 40-3/2020-DM-I(A) dated 29th March 2020 under Sec 10(2)(l) of the DMA (“29-3-20 Order to pay wages”). The 29-3-20 Order to pay wages directed employers, whether in industry or in shops and commercial establishments, to make payment of wages of workers without any deduction for the period during which establishments are closed.

The 29-3-20 Order to pay wages went beyond the 20th March 2020 ‘advisory’. These two directions appear to have been given on the basis that the lockdown was time bound and it was not expected that the lockdown would continue for this long. The MHA has revoked the 29-3-20 Order to pay wages by its Order dated 17th May 2020. Several corporations have also commenced laying off their employees due to the pandemic and/or lockdown.[1] In the meantime the Government of Maharashtra, in its capacity as the Maharashtra State Disaster Management Authority, passed an Order dated 31st March 2020 under Section 24 of the DMA directing that all workers working in private organisations, industries, companies, shops (except essential services organisations) and who have to stay at home shall be assumed to be on work.

The litigation spawned by the Orders

There are litigations filed and pending in the Supreme Court where the Orders by the Centre and the State of Maharashtra have been challenged. In a petition filed by Indian Jute Mills Association challenging the constitutional validity of the 29-3-20 Order to pay wages pending lockdown, the Supreme Court has, by its Order dated 15th May 2020, adjourned the petition for a later date and directed that no coercive action is to be taken in the meanwhile.[2] There was a further adjournment too. Since the Supreme Court is looking at the legitimacy of the Orders, the Bombay High Court refused to consider this issue in Align Components Pvt Ltd and Anr v Union of India and Ors[3]. The High Court did however hold that if workers do not report for work when employed by establishments whose business is permitted to continue, wages may be withheld. It appears, therefore, that the pandemic cannot be used as a reason to not go to work.[4] That being said, the Orders continue to impose considerable pressure on businesses, which themselves are floundering.[5]

The Disaster Management Act, 2005 (DMA) was enacted to deal with a disaster defined in Sec 2(d) thereof and contains various provisions to help deal with a. disaster[6]. The Epidemic Diseases Act is an old statute which has been amended in 2020 to deal with the recent pandemic and for protection of healthcare personnel and to expand the powers of the government to prevent the spread. Section 2 of the Act specifically permits the State Government to inter alia prescribe such regulations to be observed by the public or by any person or class of persons as it deems necessary and determine in what manner and by whom any expenses incurred (including compensation if any) shall be defrayed. (Emphasis supplied). It is arguable that by virtue of Section 2, the State Government may be entitled to direct employers to pay wages on the ground that these wages are essentially compensation or expenses to be incurred for the mitigation of the damage caused by the disaster.

The Ministry of Corporate Affairs has recently stated that payment of salary/wages to employees and workers during lockdown is a ‘moral obligation’[7] thus indicative of the MCA’s understanding that despite the Orders, the payment of wages to employees and workers during lockdown is not mandatory. The FAQs also call it a ‘moral/ humanitarian/ contractual’ obligation.

Employers argue that this understanding of the MCA waters down the mandate of the Orders for payment of full wages to employees and workers for the duration of the lockdown. However it should be noted that the MCA is not the governmental authority for issuing the Orders and its understanding of the Orders cannot said to be sacrosanct. The Orders have been issued by Centre and State authorities under the DMA and have to be considered by that yardstick. The FAQs in relation to CSR obligations by the Ministry of Corporate Affairs under the Companies Act cannot aid in interpretation of the orders of the Ministry of Home Affairs under the DMA.

The Contract Act is of relevance when interpreting terms of contracts between employers and employees who are not “workmen”. An employer seeking to suspend contractual payment of salaries/wages to employees citing an event of ‘force majeure’ would have to justify the same in the context of the provisions of the force majeure clause in the contract.[8] In the absence of such a clause, Sections 32 and 56 of the Contract Act are relevant. For invoking the principles of force majeure, it remains to be seen whether there is in fact a temporary impossibility to pay salaries/wages on account of the lockdown or pandemic and whether as per the contract between parties, the employer’s obligation to pay salaries was not an absolute obligation but only a best endeavor. It is arguable that the prevalence of the pandemic and imposition of the lockdown does not render the actual payment of wages to employers as ‘impossible’. Besides this, if there is no force majeure clause, it is arguable that the employer’s obligation to pay wages is an absolute obligation. The employer could however say that the contract is ‘frustrated’ under Section 56[9] and if he can prove the event of frustration the contract of employment stands terminated.

The Industrial Disputes Act, 1947 (IDA) is relevant insofar as the Act considers laying-off of workmen and the consequences thereof. As with most labour legislations, the IDA is applicable only in respect of ‘workmen’ as more particularly defined therein and other employees would not be covered under this Act. The terms of service of such other employees would be governed by their independent contractual terms of service and the terms of the Indian Contract Act.

The IDA permits temporary unemployment of workers through the concept of ‘lay-off’, which has been defined to mean the failure, refusal or inability of an employer, on account of inter alia natural calamity or any other connected reason, to give employment to a workman who has not been retrenched[10]. The IDA also clearly provides that no workman can be laid off by an employer unless the permission of the appropriate authorities is taken and such lay-off is due to shortage of power or natural calamity, and in the case of a mine, such lay-off is due also to fire, flood, excess of inflammable gas or explosion.[11] The COVID-19 pandemic and resultant lockdown is arguably a natural calamity. Laying off a workman would however warrant compensation under the IDA which mandates that every workman laid off is to be paid compensation of 50% of the basic wages and DA payable[12].

The IDA provides that employers may not continue with the full force of their workmen and pay them wages in certain circumstances, This also however is subject of course to payment of compensation. The mandate of the Orders is thus contrary to the IDA.

Arguments based on contractual terms of service proceed on the basis that the workers are ready to work but are prohibited from working because the establishments are shut. It may be argued that in such circumstances, the contract continues and employers are expected to pay and abide by the terms of the contract. Reference however should be had to the Standing Orders (if applicable) as Standing Orders are of great relevance. [13]

The Industrial Employment (Standing Orders) Act, 1946 requires employers to define and publish uniform conditions of employment and this Act has been made applicable to industrial establishments in the State of Maharashtra. The Supreme Court has held in Agra Electric Supply Co. Ltd v Alladdin[14] that the Act is a beneficial piece of legislation to define with sufficient precision the conditions of employment of workmen. It is also settled law that Standing Orders would prevail over terms in the contract of service[15].

The Bombay Industrial Employment (Standing Orders) Rules, 1959 provide Model Standing Orders which also provide for an epidemic, and state:

“18. (1) In the event of a fire, catastrophe, breakdown of machinery, stoppage of power supply, an epidemic, civil, commotion or other cause beyond the control of the Manager, the Manager may, at any time without notice or compensation in lieu of notice stop any machine or department wholly or partially or the whole or part of the establishment for a reasonable period…

 (2) ….. If the period of detention in the establishment exceeds one hour, workmen so detained shall be entitled to receive wages (including all allowances) for the whole of the time during which they are detained in the establishment as a result of the stoppage.” [16]

 

The Model Standing Orders further provide that when workmen have to be laid off for an indefinite period exceeding two months, their services may be terminated after giving them due notice or pay in lieu thereof[17]. These Rules are subject to the provisions pertaining to lay-off in the IDA and the rights of workmen under the Minimum Wages Act, 1948[18].

The directions in the Orders, and the argument that workers should be paid as long as they are unable to work because of the prevailing circumstances, therefore run contrary to the Standing Orders. However, can that be reason alone for challenging the Orders? And to take it one step further, can it be stated that the employers have no obligation to the employees/workmen during the period of the force majeure/pandemic/natural calamity?

The Supreme Court in Rashtriya Mill Mazdoor Sangh, Parel, Bombay & Another v Apollo Mills Ltd and Ors[19] was adjudicating a matter dealing with closure of textile mills on certain days, due to reduction in supply of electricity. It was argued by the mills that the partial closure of the mills was due to force majeure and was covered by the Standing Orders and hence, they were not liable to make payment of compensation claimed by workers. The Supreme Court considered the matter having regard to the provisions of Section 40 of the Bombay Industrial Relations Act, 1946 and the Standing Orders governing the mills. It was held that payment of ‘wages‘ was separate from payment of ‘compensation’ and that compensation was still payable. This would be in line with the provisions of Section 25C of the IDA and reiterates that employers cannot disclaim all onus to make payments to employers merely because of the occurrence of an event of force majeure.

While the Orders at hand call for payment of wages and not compensation, it remains to be seen whether an ex gratia amount or some lesser amount can be paid to the workers as ‘compensation’, which would also help them tide over the bad times more equitably.


The Authors are Practicing Advocates / Counsels at the Bombay High Court and can be reached at zubin.behramkamdin@gmail.com and vyomdshah@gmail.com respectively.

Views are personal.


Photo Credits: Justin Sullivan/China Photos

Notes:

[1] See https://scroll.in/latest/962452/coronavirus-lockdown-ola-to-layoff-1400-employees-says-ceo

[2] See https://images.assettype.com/barandbench/2020-05/cd6c6f7b-3821-4a90-9f24-04ddc01a1fc0/Order_dated_15_05_2020.pdf

[3] Align Components Pvt Ltd and Anr v Union of India and Ors, Judgment dated 30th April 2020 in WP Stamp No. 10569 of 2020 and Ors of Bombay High Court (Aurangabad Bench)

[4] A petition has also been filed in the Supreme Court by Teknomin Construction Ltd namely SLP (D) 11094/2020 seeking clarification that the MHA Orders should not apply to establishments which are operational and where workers are not voluntarily reporting to work. This petition is pending and has been tagged with the petitions challenging validity of the MHA Orders.

[5] The Delhi High Court has been moved in Nirmal Bhagat & Ors v Ministry of Home Affairs and Ors WP (C) 3145/2020 and CM Appl. 10941-42/2020 seeking registration of FIR against directors of a company for not paying wages as per the 29th March 2020 Order. The Court has issued notice by its Order of 15th May 2020 and made the matter returnable on 29th May 2020.

[6] Section 24 of the DMA. Section 24 is of particular importance because the 31st March Order is issued under that section.

[7] See the General Circular No. 15/2020 dated 10th April 2020 issued by the Ministry of Corporate Affairs of the Government of India addressing COVID-19 related Frequently Asked Questions (FAQs) on Corporate Social Responsibility (CSR)

[8] Courts have interpreted force majeure clauses having regard to the terms and intention of the parties and held that they are to be narrowly construed, see Energy Watchdog vs. CERC & Ors. 2017 14 SCC 80 and NTPC Vidyut Vyapar Nigam Ltd. vs. Precision Technique Pvt. Ltd., 2018 SCC Online Del 13102

[9] The Supreme Court has recently considered the concept of impossibility and resultant frustration of contract in South East Asia Marine Engineering and Constructions Ltd v Oil India Ltd Civil Appeal No. 673 of 2012 Judgment dated 11th May 2020.

[10] Section 2(kkk) of the IDA.

[11] Section 25M of the IDA

[12] Section 25C of the IDA.

[13] The Supreme Court has also held in Workmen of Firestone Tyre & Rubber Co. of India Pvt Ltd v Firestone Tyre & Rubber Co 1976 3 SCC 819 that workmen may be laid-off only as per terms of the contract or Standing Orders.

[14] Agra Electric Supply Co. Ltd v Alladdin 1969 2 SCC 598

[15] Western India Match Company Ltd v Workmen 1974 4 SCC 330

[16] The Bombay High Court in Association of Engineering Workers Trade Union v Sewree Iron & Steel 1992 SCC Online Bom 568 had the occasion to interpret Rule 18 of the Bombay Model Standing Orders and held that the contingencies referred to therein cannot be foreseen and warrant immediate action by the employer.

[17] Rule 19 of the Bombay Model Standing Orders

[18] Rule 21 of the Bombay Model Standing Orders

[19] Rashtriya Mill Mazdoor Sangh, Parel, Bombay & Another v Apollo Mills Ltd and Ors 1960 3 SCR 231

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