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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.
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.