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Force Majeure comes to the limelight due to COVID-19

Force-Majeure

Force Majeure is a creature of Contract. It was a term and was a clause that always existed in Construction Contracts. But few stakeholders in the industry thought or imagined that this clause would assume so much importance ever as it has assumed during COVID – 19.

Let’s first understand What is Force Majeure?

Force majeure a contractual clause or terminology gives protection to a party to be excused from performing part of the contractual obligations due to reasons beyond its control.

A ‘Force Majeure’ event is a common law principle where the performance the obligations under a contract may be deferred when an extraordinary circumstance arises which makes performance beyond the control of the party. 

Though it is not defined under the Indian Contract Act 1872, the principle of the doctrine of Force Majeure is stated in Section 56, of the Indian Contract Act, 1872 which inter-alia, provides for effect of an unforeseen event that may prevent a party from performing its obligations under an agreement. The intent is to save the parties in a contract from the consequences where it has no control or is beyond its control, on the performance.

As the Indian Contract Act,1872 does not provide for any particular form or condition for a force majeure clause, parties are free to define the events and conditions that may be covered by the force majeure clause. In the COVID-19 situation it is important that each force majeure clause or in the absence of the same, the entire contract is understood independently to define the application or limitations of force majeure under each agreement and to test if the conditions of Covid-19 would be permitted or not.

Effect on performance in case of Force Majeure

  1. In the civil engineering industry during the occurrence of a ‘Force Majeure’ event, subject to giving notice, the contractors have to incur the liability for delayed performance of contractual obligations, cost overruns, disruption in revenues, and therefore sometimes unmanageable and unplanned repayment obligations in case of any borrowings. If a ‘Force Majeure’ event has interstate or global implications, movement of goods is restricted, shortage of labour takes place, production units come to a standstill, or operate with limited production. Therefore, there could also arise an increase in costs of products due to sourcing of material from alternate locations along with sourcing skilled labour from other states.
  2. Since the occurrence of force majeure may have unplanned consequences, both contractors and employers need to be aware of the existence of contractual rights for extension of time to complete the work and for the payment of additional costs with respect to their projects.  
  3. In, many construction and engineering contracts, parties generally specify the time for completion and/or expressly state that time is the essence of the contract. A contractor should be careful about such clauses, as any breach would make the contract voidable at the cost and consequence of the defaulting contractor.
  4. The general principle is that the parties are supposed to take reasonable efforts to minimize any delay in the performance of the Contract as a result of Force Majeure.
  5. No two contracts are the same and may have significant differences in the way of approach in such matters, it is thus not possible to provide any standard contractual clause for parties in the construction sector.

What is important for the parties in a Force Majeure event

  1. Documentation: Notices are the most important aspect of Force Majeure. Site, manpower, equipment records. To take up a claim for Force Majeure the service of a Notice specifying the event of Force Majeure and the obligations whose performance is or will be prevented is necessary. That Notice is likely to be a condition precedent to the right to claim a Force Majeure event, so must be dealt with correctly.
  2. To evaluate the contract clause(s)to ascertain the extent of liabilities upon breach of the contract.
  3. The parties should protect themselves against such FM situations by adopting corrective measures in time.
  4. The most important way would be to adopt measures to mitigate the liability by timely adopting the correct legal principles through a contract.

In the COVID -19 situation, it is important to note that in India, one of the earliest examples of COVID-19 getting recognized in the field of contractual law was by the Government of India, Ministry of Finance, and through the Office Memorandum. This office memorandum is considered path-breaking where it interprets para 9.7.7 of the Manual for Procurement of Goods, 2017 (which did not contain “epidemics” or “pandemics” as a force majeure event), added COVID-19 under the bracket of force majeure, terming it as a “natural calamity”. Subsequently, on 13.05.2020, in continuation of the Office Memorandum further reliefs were announced, including relaxation in bank guarantee norms and extension of time and concession period with no cost to the contractors. On 12.11.2020, even further measures regarding bank guarantees were announced, including a decrease in the value of Performance Security were announced.

In the earlier judgments in Halliburton Offshore vs Vedanta case, the court has stated that whether COVID-19 would justify non-performance or breach of a contract has to be examined on the facts and circumstances of each case and only in genuine cases where the party was prevented or could justify its non-performance because of the epidemic/pandemic. The judgment also holds that a force majeure clause has to be interpreted narrowly and if there is a breach from before the COVID-19 period, then the party will not be entitled to take the benefit of the Force Majeure clause.

For project owners, it will be essential to evaluate contractual provisions, including project termination, force majeure clauses, notice requirements, change order requests, entitlement for time extension, cost escalation, availability of resources, as well as health and safety measures. As the situation continues to evolve almost on a daily basis, it is important for owners to steer through those changes in order to prepare for the future of their projects and manage them successfully.

Contractors will also evaluate their contractual obligations and the impact of nonperformance on agreed milestones and scope. The recovery roadmap after the repercussions of COVID-19, project stakeholders will have to take a specific approach in order to evaluate the overall progress of their projects and create a win-win situation for all.

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M U SHAH
M U SHAH
October 1, 2021 3:24 pm

Nice article. It gives basic principles and rights and obligations of both parties.

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