Lock-down, Force Majeure and the Indian Contracts

May 10, 2020

The lockdown enforced by the Governments to limit the outbreak of COVID-19 has already reached more than a month and half till now. As a result, the construction projects across the country came to an abrupt stoppage. This article is meant to the correlations of lockdown, “Force Majeure”, and the consequences on the project time and cost.

Understanding ‘Force Majeure’

The phrase ‘Force Majeure’ is French in origin, the English synonym is ‘superior or irresistible force’. The Cambridge dictionary provides the most easy-to-understand explanation - “an unexpected event such as a war, crime, or an earthquake which prevents someone from doing something that is written in a legal agreement”.

Further, the Black’s Law Dictionary describes it as “an event or effect that can be neither anticipated nor controlled. It is a contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event that the parties could not have anticipated or controlled.’

In the context of a contract, Force Majeure is a commonly used clause that essentially frees the parties bound by the contract on occurrence of any extraordinary event or circumstance which is completely beyond the control of the parties bound by the contract. As a practice, the parties involved in a contract identify and agree on an exhaustive list of events at the bidding stage of a contract before its execution which, in future would attract the applicability of the force majeure clause during execution of the contract. The consequences of invoking of the Force Majeure clause are generally mentioned specifically in such clauses.

Usually in a contract the ‘Force Majeure’ phrase is used to designate the events like natural catastrophes e.g. flood, tsunamis, epidemics or occurrence of war, riots, terrorist attacks or emergency.

Reference to the Indian Contract Act

In Indian Contract Act 1872 there is no direct reference or mention of ‘Force Majeure’. However, similar situation is referenced under section 32 of the said act.

The section 32 is Enforcement of contracts contingent on an event happeningwhich states that, “Contingent contracts to do or not to do anything if an uncertain future event happens cannot be enforced by law unless and until that event has happened.” It further states that “If the event becomes impossible, such contracts become void.”

Invoking of Force Majeure or the relevant clause of Contract Act

To enable either parties to invoke the Force Majeure clause the situation must be such as to restrain the parties to perform. Only financial unviability will not be enough to invoke Force Majeure clause of any contract or the section 32 of Indian Contract Act, unless performing the obligations becomes ‘impossible’.

Also, the contract should have been performed before happening of an event leading to invoking of the Force Majeure clause, that is, a contract which has become void otherwise or either of the parties has failed to discharge their contractual liabilities are not enabled to get any benefit out of this clause.

Mention of COVID-19 wouldn’t have been there in the contracts which were framed before January 2020. Yet, if ‘epidemic’ is agreed to be an event in the relevant contract clause to enable parties to invoke Force Majeure then the same may be applicable in this regard.

For contracts where no Force Majeure clause exists, the business or activities which are not excluded from lockdown imposed by the Government, construction being one of them, should come under the ambit of section 32 of the Indian Contract Act 1872, as performing the contractual obligations has become impossible during the lockdown being against the order of the Government.

As per news, in a recent plea of an oil field service provider to a renowned client in order to relieve them from their contractual obligations on the ground of lockdown imposed by Government to control the COVID-19 outbreak ‘Force Majeure’, the Delhi High Court has commented that the lockdown is prima facie in the nature of Force Majeure.

Impact on timeline

Lockdown was put in order by the Central Government and was implemented directly by the state Governments. Being it an order from the Governments immediately with its effect the construction projects were stalled abruptly which made the further execution of the same in the specified period an ‘impossible act’. Naturally, for the same period the parties are relieved from their deliverables as per the contract. If there is a clear clause in the contract specifically mentioning the ambit of a Force majeure, consequences in that particular contract will follow the same course. For other cases where a force majeure clause is missing in the contract, references can be made to the contract act clause mentioned above. In pursuance of the same, contractors are likely to receive an unconditional time extension.

Here is an important point to note. Time extension for the official lockdown period only wouldn’t serve the purpose of a contractor, as they will be facing a lot of hindrances post-lockdown in terms of re-mobilization of workmen, materials etc. The supply chain of the country is under a massive disruption since the lockdown started and one cannot expect immediate reinstatement to normalcy on withdrawal of lockdown. The workmen left project sites will take time to return after normalization of the fear psychosis of going outside from home. Additional safety precautions to be adopted in project sites against any probable contamination will also have an indirect effect on the timeline. Just as an example, maintaining sufficient quarantine period for all the incoming workmen will be part of the revised standards operation procedures in projects.

The contractors, hence should impress upon the clients, in order to modify the master construction schedules of projects by inclusion of new work-breakdown structures based on conditions which will record such delays in parcel post lockdown. The cascading effects of such delays in parcel, recorded in minute, will form the basis for calculation of the time extension actually required for the projects. Both the parties should come to a conclusion after jointly rationalizing the facts while preparing the modified schedule. There should be provision of further modifications also, along the length of the projects to incorporate the revised situations.

Impact on project cost

Certainly the contractors will incur some additional unproductive costs during the work-stoppage enforced by lockdown and further extension of timeline resulted from it. This includes but not limited to the under-utilization of resources engaged for such idle period, in terms of salaries, wages of workmen, hire or rental charges, electricity bills, insurance premiums and bank guarantee charges, facilities provided to the retained workers, additional health and safety measures, wastage of perishable materials e.g. cement, admixtures or waterproofing compounds etc., which would not be technically suitable for use after resumption due to storage beyond their individual shelf-life.

Claims for cost compensation may yield different results

For all the above the contractors are likely to place a claim for compensation to individual clients. While COVID-19 is a pandemic it is also to be noted that the work stoppage at projects were not resulted directly from the disease but due to enforcement of lockdown by the Governments. Hence in case of direct Central or State Government contracts there is a better chance for the contractors to claim for cost compensation.

For the projects where the client is a public or private limited company certainly the clients would put effort to negate any such claims raised by the contractors citing that the responsibility of either parties becomes void under such situation. The contractors’ arguments should be based on the fact that these unexpected costs were not considered during the estimation while bidding for the contract, and the client being the ultimate beneficiary of the project cannot negate compensation of these additional cost.

Support from the Government

As per news, the Force Majeure clause or the relevant sections of the Contract Act are being already invoked by some business houses in the COVID-19 scenario as a ground for not paying the license fees to the Government. Also, under this situation the Government should come forward themselves to support the construction projects with a slash on GST, loans through nationalized banks at easy terms and lower interest rates, waiving out license fees and bank guarantee charges to create some amount of financial comfort to fight the situation to normalcy.

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