Once the force majeure event occurs, the clause requires the parties to mitigate the effects of the occasion and then prescribe time and cost implications arising out of the occurrence. As a general trend, force majeure events, not being attributable to either party in a contract mandate that the parties have to bear their own costs, with the affected party being given an extension of time to fulfil the obligations affected by force majeure. However, in certain situations, costs are prescribed to be paid, or the contract mandates that the parties have to re-negotiate the terms to the extent the force majeure event might affect the performance.
Most present-day construction contracts have force majeure clauses. However, before the occurrence of COVID-19, these clauses used to occupy a somewhat obscure part of the contract and were rarely the focus of attention. The occurrence of COVID-19 has given the entire jurisprudence of force majeure a fresh relevance. The initial days of the virus spreading from China to different parts of the world, COVID-19, and the consequent lockdowns were truly unprecedented and unforeseeable. Further, these events resulted in a complete shutdown in businesses all across the world. Almost immediately, there was a scrambling of legal minds, in a rush to understand how these force majeure clauses could be invoked, what the degree of protection they would afford to the affected parties, and how the losses arising out of COVID-19 would be dealt with.
It is pertinent to note that in India, the one of the earliest instances of COVID-19 getting recognised in the realm of contractual law was by the Government of India, Ministry of Finance, and through the Office Memorandum dated 19.02.2020. This office memorandum is 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), and specifically adds 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, to 3%, down from existing 5-10%, further no provisions for additional security deposit to be kept in cases of abnormally low bids, and no provisions regarding bid security should be kept in Bid Documents. The CPWD and MoRT&H also announced similar measures.
Regarding road projects, both the MoRT&H and NHAI have issued various circulars, most important being MoRT&H circulars dated 18.05.2020, and 03.06.2020, wherein several reliefs were granted for all national highway works, including expeditious release of payments, extension of time, expeditions approval of change of scope, relaxation of PBG rules, extension of concession agreement, relaxation in remittance of toll money for tolling contractors, etc. The National Highways Authority of India has also relied on the MoRT&H circulars, to come out with its own circulars which entitle the contractors the above reliefs.
Regulators such as the Reserve
and Securities Exchange Board of India had also introduced several relief measures such as imposing a moratorium/deferment of 3 months on payment of loan installments and interest on working capital facilities, and exemptions from several compliance and disclosure requirements. Further, considering the severity of the situation, the moratorium was further extended. At present the same is still continuing, pending the decision of the Supreme Court. Similarly, amendments were also brought to the Insolvency and Bankruptcy Code, through the Insolvency and Bankruptcy Code (Second Amendment) Act, 2020 wherein immunity was granted from initiation if IBC proceedings if the default arise after 25.03.2020 for a period of six months and such further period not exceeding one year from such date as may be notified.
Various courts in India have also recognized COVID-19 as force majeure. The celebrated judgment of M/s Halliburton Offshore Services Inc vs O.M.P.(I)(COMM.) No. 88/2020 was one of the earliest judgments wherein the High Court of Delhi specifically held COVID-19 to be a force majeure event. However, 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.
In another judgment of the Delhi High Court, South Delhi Municipal Corporation vs. MEP Infrastructure Developers Ltd. LPA 165/2020, the Court specially relied on the MoRT&H circular dated 18.05.2020 in order to grant relief in remittance in toll collection from the contractor to SDMC from 26.03.2020 till 90% traffic, compared to the traffic before lockdown period of weekly basis, stands resumed.
Law relating to force majeure is quite settled and one requirement of law that when the contract itself provides for the force majeure and reliefs therefrom, the aggrieved party is bound to follow the process of notification. The courts also, while providing reliefs under the force majeure, are required to be within the four corners of the contractual provisions. However, Covid-19 is such an unprecedented event which nobody has ever contemplated while entering the contract and also the sufferings because of the various steps taken by the Government to contain the spread of Covid-19 has affected almost all the industries, however the degree of impact varies from industry to industry.
Therefore, obviously the Governments with respect to certain sectors are voluntarily providing certain reliefs, however, the question remains whether or not the said reliefs are enough. The courts have also been inclined to enforce the specific benefits that are available either under the various government notifications, or under the contractual terms, provided that there is no breach by the contractor and the aggrieved party has validly invoked the force majeure clause.
(Co-authored by Nilava Bandyopadhyay, Senior Partner and Adhip Kumar Ray, Principal Associate, Singh & Associates)