The COVID 19 pandemic has changed the way we live and conduct business.
The Central Government and the State Governments have taken multiple steps to protect the citizens from the pandemic. India, in comparison to other countries, has so far been able to contain the spread of the virus relatively well. India took early steps to lockdown the entire country for an initial period of 21 days and then extended the same from time to time. Even while relaxing the lockdown conditions, the Governments imposed several restrictions, including maintaining social distancing, not allowing more than 33% of the workforce in workplaces, and sanitization of offices on a regular basis.
While these steps (Government Directions) did achieve the intended purpose to a large extent, and enabled the State Governments to build their medical infrastructure in order to deal with the pandemic, the Government Directions have substantially affected public and private contracts, especially construction contracts. For the projects given on license/ concessions, the bankability has been adversely affected and for many contracts the prices quoted by contractors are no longer viable.
In this scenario, claims under several construction contracts are inevitable. The claims are largely for extension of time and recovery, and parties would take recourse to clauses like force majeure, change in law, variation, insurance and suspension. While it might sound simple to identify which clause/s can be triggered and what can be claimed, practically there are various issues that arise when these claims are made before a Court or Arbitral Tribunal.
Some of the questions and issues that are likely to arise are:
- Do lockdown orders fall under the definition of force majeure?
- Do lockdown orders fall under the definition of change in law?
- Should a party to a contract trigger a force majeure clause, or a change in law clause, or both, pursuant to Government Directions?
- For how long can the effect of force majeure/ change in law be claimed?
- Whether multiple clauses in a contract can be triggered for the same cause?
- Should a contracting party choose to claim relief under Force Majeure, can it claim compensation (in addition to extension of time), even if the contract does not provide for it?
At the outset, it is important to mention the orders/ circulars issued by various agencies of the Government acknowledging the effect of COVID 19 as a force majeure event. These orders/ circulars are issued to provide clarity to the parties during these difficult times, and to obviate unnecessary disputes between the Government agencies and private players on the issue of determining whether it is a force majeure event or not.
The orders issued so far (Circulars) are listed below:
- The Procurement Policy division, Department of Expenditure at the Ministry of Finance issued an office memorandum dated February 19, 2020 recognizing that disruption of supply chains due to spread of coronavirus in China or any other country will be considered as a natural calamity, and force majeure clause may be invoked, where appropriate, by following due procedure.
- The Ministry of New & Renewable Energy (MNRE) issued an office memorandum dated March 20, 2020 directing all renewable energy implementing agencies of the MNRE (such as the SECI and NTPC) to treat delay on account of disruption of the supply chains due to spread of coronavirus in China or any other country, as force majeure.
- The Ministry of Shipping on March 24, 2020, ordered that the major port trusts may consider COVID 19 pandemic as a valid ground for invoking force majeure clause on port activities and port operations.
- The Ministry of Railways on March 27, 2020 decided that the period from March 22, 2020 to April 14, 2020 be treated as force majeure and during this period no demurrage, wharfage, stacking, stabling, detention and ground usage charge shall be leviable.
- The Finance Minister’s media briefing on Aatm Nirbhar Bharat Abhiyan provided an extension of 6 months to contractors engaged by agencies owned and controlled by the Central Government, such as Railways, National Highways etc. for completion of work and achieving intermediate milestones etc.
LEGAL AND CONTRACTUAL POSITION
The positions described below are based on clauses generally provided in construction contracts but would, of course, depend on the specific provisions in each contract, and the specific circumstances for each claim.
Force Majeure vs Change in Law
On occurrence of a force majeure event, the affected party is excused from performance under the contract and is provided extension of time commensurate with this period in accordance with the provisions of the force majeure clauses contained in the contract. In some cases, costs may also be payable to the affected party.
In contrast, the change in law provisions will usually not excuse performance, and the expectation from the affected party will be to incur the additional cost and get back on its feet to complete the work. Therefore, such provisions are likely to entitle the affected party to claim costs, and in some cases, where performance is affected, time extension may also be claimed.
Are COVID 19 and Government Directions a Force Majeure or Change in Law event
Various Government agencies have already declared the effect of COVID 19 and Government Directions as a force majeure event and are willing to provide extension of time. Therefore, it will not be difficult to prove force majeure under a contract with the Government if the conditions in the contract for invoking force majeure are satisfied. In this regard, the most prominent statement is the one issued by the Finance Minister under Aatm Nirbhar Bharat Abhiyan, where for Central Government projects, 6 months extension of time is granted for completion of work and achieving milestones.
However, none of these Circulars deal with compensation for the additional costs or losses that a contractor has suffered/ incurred or that will be suffered/ incurred due to COVID 19 or the Government Directions. The Circulars reflect that while Governments acknowledge the hardships of COVID 19 and are willing to extend the timelines, it is not vocal for total (cost) that it is willing to pay.
The Government Directions issued pursuant to the Disaster Management Act, 2005 (DM Act) and the Epidemic Diseases Act, 1897 have changed the legal framework within which the work was to be executed. The Government Directions have had a direct effect on the demand and supply chain, availability of raw material, availability of workforce etc., and thus has led businesses to re-look at the costs at which the work can be done. This could allow contractors to invoke provisions on change in law under their contracts and claim time and cost relief.
For how long can the effect of Force Majeure or a Change in Law be claimed?
Subject to the manner in which a force majeure or a change in law clause is worded in a contract, typically, as long as the affected party can show that the work is affected or the cost is being incurred, the affected party can claim relief for time and cost. For instance, if a contractor cannot engage workers with full capacity or has to pay higher for workers for a period of 6 months due to migrant workers moving to their hometown, the contractor can claim relief for 6 months.
Can Force Majeure and Change in Law be claimed simultaneously
Unless the contract contains a restriction, relief could be claimed under both clauses. That said, the claim to be made would be a strategic call which the affected party should choose based on the relief it is seeking. For example, when COVID 19 was declared a pandemic, it was only a force majeure event, but when the Government issued lockdown orders, it could be said to have changed the legal position in India, and take on the attributes of change in law. Therefore, where a party is affected by COVID 19 and the Government Directions, it might be entitled to not only extension of time under the force majeure clause, but also the right to recover additional costs under the change in law provision.
In our view, invoking change in law provision under the contract might be a better option in COVID 19 scenario – where the contract can still be performed even if there is delay but the costs might increase due to compliance with the Government Directions such as social distancing, raw material issues, increased labour cost due to short supply of labour, the MHA notification on payment of wages etc., On the contrary, if the force majeure clause is invoked, typically it would limit the relief to only an to complete performance.
Should a contracting party choose to claim relief under Force Majeure, can it claim compensation (in addition to extension of time), even if the contract does not provide for it?
There is no express law to deal with force majeure in India, unlike France where the French Civil Code provides for suspension of a contract in case the effect of force majeure is temporary, and termination if it is permanent. The Code also provides that the affected party will not be liable for damages for non-performance due to force majeure.
In the absence of a specific law in India, the principles laid down by Courts on compensation for delay events (other than force majeure) when the clause is silent about compensation can shed some light.
The Courts have largely held that even if the contract does not provide for compensation for delay or non-performance by the defaulting party because of circumstances beyond its control, the non-defaulting party may be entitled to claim compensation under Sections 55 and 73 of the Contract Act, 1872.
The Supreme Court in Asian Techs Ltd. v. Union of India and Ors. was hearing a matter where the arbitrator had awarded compensation even though the contract prohibited claims. The contract provided for extension of time for events, including for non-availability of Government stores, break-down of government tools. On cost, the contract provided “No claim in respect of compensation or otherwise, howsoever arising, as a result of extensions granted under Conditions ……above shall be admitted.” In spite of this provision, the arbitrator allowed the monetary claim in relation to extension of time events. The Supreme Court upheld the award because it found that, by a letter, the contractor (i.e., Asian Techs Ltd.) made it clear that it was not ready to carry out the work beyond the contracted period otherwise than on separate work orders. Further, the subsequent correspondence made it clear that it was on the specific assurance given by the principal to the contractor to continue the work and that the rates would be decided across the table that the contractor went ahead with the work. Although there is no mention of any legal provision in the judgement, the basis of the Court’s decision seems to arise from Section 55 of the Contract Act, 1872 which entitles the non-defaulting party to claim compensation if it has notified the defaulting party of its claims at the time of accepting delayed performance.
The Division Bench of the Delhi High Court in Navayuga Engineering Co. P. Ltd. v. Public Works Department and Ors., relying on Section 55 of the Contract Act, 1872, held that even if there is only extension of time provided (in case of delay event) and not compensation, even in such cases, if a party has given a notice while accepting extension of time and circumstances suggest that the employer did not object to it, the claimant is entitled to compensation.
The same analogy/ principles or the benefits of Section 55 may not be applicable for force majeure events as they do not arise due to breach/ non-performance of any party. Force majeure events arise due to extraneous reasons and neither does any party has control over such events nor does the resultant situation is beneficial to any party.
Further, considering that the Supreme Court in Energy Watchdog and Ors. Vs. Central Electricity Regulatory Commission and Ors. has observed that force majeure clauses are to be narrowly construed, it will be extremely difficult for an affected party to claim compensation if the clause provides that both parties will be absolved from their obligations.
This article cannot provide a detailed opinion on the issues above but has provided an overview on the manner these issues can be dealt with in the construction contracts.
This Article has been authored by Mr. Dinesh Pardasani, Partner, DSK Legal and Ms. Anuja Tiwari, Partner, DSK Legal. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views and opinions of DSK Legal.