Contractors need to consider the strategic consequences of a Force Majeure claim and the need to give Notice, establish causation, maintain careful records and evidence and provide updates where required...
The impact of Covid-19 on the infrastructure and construction sector in India has been extensive and damaging. The restrictions imposed by the Government of India, State Governments and the Union Territories to control the spread and impact of the virus have prevented work on projects, adversely impacted supply chains, plant, equipment, materials and manpower. Delays and disruptions to completion of projects are inevitable with concomitant losses, cost and expenses. Those involved in the construction industry need to be alert to the contractual and other provisions which govern entitlements to the potential recovery of these exposures. All of such entitlements are likely to be subject to time critical notice requirements and whilst some may be familiar with the concepts of "force majeure" which is enshrined in many contracts, the assertion of the occurrence of force majeure may have unintended consequences. Contractors and Employers alike therefore need to be aware of the existence of particular contractual entitlements to extensions of time to complete and for the payment of additional costs in relation to their projects. Such clauses are likely to be subject to certain conditions governing their operation. Generally speaking, no two contracts are identical and may have material differences in the way in which they approach such matters and it is therefore not possible to provide any generic contractual panacea for those involved in the construction sector. However many EPC and other contracts in India take as their base the FIDIC forms of contract, in particular the "Silver Book" and this Note therefore focusses upon the rights and obligations prescribed by that Form in the context of the Covid problems. There will inevitably be contracts with unique changes to the FIDIC Form and this Note can only serve as a preliminary guide but one which hopefully will catalyse thinking of the steps to be taken to moderate the impact of Covid-19 and preserve and implement rights and protections under contract.
COVID-19 and Force Majeure
Under Force Majeure clauses, if either party is prevented from performance of its obligations by reason of certain defined exceptional or extraordinary circumstances beyond its control, then, subject to giving notice, it may be excused performance of those obligations. Force Majeure clauses differ from contract to contract but generally provide entitlement to extensions of time and in some cases, costs. Clause 19 of FIDIC defines force majeure as (i) an "exceptional event or circumstance" (ii)"which is beyond a Party's control", (iii) "which such Party could not reasonably have provided against before entering the contract (iv) "which, having arisen, such Party could not reasonably have avoided or overcome" and (v) "which is not substantially attributable to the other Party" For the definition to be satisfied the event must be exceptional and meet the five criteria above. FIDIC then goes further by listing in sub-clauses (i) to (v) of Clause19.1 some examples of circumstances which may amount to Force Majeure so long as they satisfy the above five criteria. The list is not exhaustive and does not include pandemic but it is generally considered that Covid-19 does satisfy the five criteria.
To pursue a claim for Force Majeure requires the service of a Notice specifying the event of Force Majeure and the particular obligations whose performance is or will be, prevented. That Notice is likely to be a condition precedent to the right to claim so must be dealt with correctly. Employers who are prevented from giving access or possession to Site or supplying Employer supplied material may give Notice. Contractors suffering delayed material, plant or workforce supplies or other interruptions may also give Notice. Since at this stage in the pandemic many of such Notices may have been given, it is important now to consider the effects of such Notice, the further steps which need to be taken and alternative approaches open to the Contractors for recovering costs.
The first point to be made for Contractors is the need to prove causation – that is to say that Covid and the restrictions caused the problems complained of. The pandemic may be seen by the Contract Administrator as a useful smokescreen to conceal an inherent problem which is the responsibility of the Contractor, such as a pre-pandemic failure to mobilise adequately. Contractors need to be aware of the need to prove cause and effect. Evidence in the form of Site photographs, Site Meeting minutes, communications and recollections of Site staff etc. need to be assembled to support causation and to combat any suggestion of alternatives causation which is a Contractor risk.
Secondly Contractors need to be aware that although Covid is likely (but not guaranteed) to be an event of Force Majeure, the FIDIC contract, whilst providing an entitlement to an extension of time, does not provide an entitlement to recovery of costs. This is simply because the, cost recovery is permitted only if the event falls under the very specific events identified in sub-clauses (i) to (iv), of 19.1 which do not include the pandemic. If at all, the pandemic falls under the broader wording of sub-clause (v). So Contractors must look elsewhere in the Contract for rights to recover costs.
Thirdly the FIDIC contract requires regular updates of the impact of Force Majeure as events develop. In many contracts these updates, as well as the giving of the original Notice, will be a condition precedent to the right of recovery. No notice – no right to claim!
Fourthly Employers and Contractors alike must be aware that whist the giving of a Force Majeure Notice to prevent its non-performance being a breach of contract, it will amount to an admission that it is prevented from performing its obligations and should only be given if it is satisfied that it can discharge the burden of proof of causation referred to above. This is especially important in the context of the right of either party to terminate the contract if the progress of the Works is delayed for more than a particular period (84 Days in FIDIC). This could allow contracts which have become financially unsound for either party to be terminated under the guise of Covid 19! Strategically the Party giving the Notice needs to be aware of that threat of that potential.
Fifthly it must be remembered that each party to a FIDIC style contract will be under a contractual duty to "use all reasonable endeavours to minimise any delay in the performance of the Contract as a result of Force Majeure." This is a continuing obligation.
So what other options are open the Contractor to recover the costs and losses incurred as a result of the problems of Covid-19?
Change in Law
Subject to the giving of Notice, the Contractor may be entitled to an extension of time and additional cost if delay and cost are incurred as a result of a Change in Law or changes to the interpretation of such laws. Under FIDIC, "Change in Law" is broadly defined and actions of the State Governments and Union Territories to invoke Epidemic Diseases Act 1897, and other such Acts to issue Regulations/Ordinances and orders thereunder may well qualify as a 'Change in Law'.
Delays caused by Authorities
Again, subject to giving a Notice, the Contractor may be entitled to an extension of time (but no cost) if it has "diligently followed" procedures laid down by public authorities but those authorities delay or disrupt the Contractor's work. This is likely to apply to the measures enacted to control the spread of Covid-19 by lockdown and stoppage of works etc.
Delays by Employer
If, as is likely, the pandemic has prevented the Employer from giving access or possession to all or part of the Site at any time, or has delayed approvals, release of design information or the provision of Employer supplied materials, these would amount to breaches of contract by the Employer entitling the Contractor to recover costs and extensions of time. To prevent such matters being breaches of contract, the Employer would be advised to claim Force Majeure on the basis that the pandemic and its consequences are preventing him from performing his contractual obligations. If the Employer has not done so, or has done so defectively or not in accordance with the procedures of the Contract, the Contractor may wish to claim breach of contract and thereby recover its costs. It the Employer has properly claimed Force Majeure, the Contractor must be aware of its rights to seek a termination of the Contract after the elapse of the appropriate period of time.
Variations and Changes to the Works
There are a number of provisions in FIDIC style contracts which may be of relevance to matters which have been impacted by Covid-19 and can give rise to additional cost and time.
A Variation to the Works necessary to accommodate changes required as a result of taking account of the effect of the pandemic upon the Permanent Works or their means of delivery.
A change to the relevant applicable technical standards, environmental laws, product standards and so on specified by the Employer caused or required as a result of the pandemic may entitle the Contractor to a Variation, with consequent time and Cost recovery.
Potentially, changes required by the Employer to the Contractor's Health and Safety Procedures under Clause 6.7 could be argued to require a Variation with the concomitant entitlements.
Considerations Going Forward
Contractors need to be alert to ensuring that their rights under the Contract to protect themselves from the dire impacts of Covid-19 and its consequences are maintained and implemented. They need to consider the strategic consequences of a Force Majeure claim and the need to give Notice, establish causation, maintain careful records and evidence and provide updates where required. They need to consider carefully whether the events and the Employer's reaction to such events provide an opportunity to claim breach of contract or to seek a Variation. Doing nothing is not an option.
Finally, it should be noted that in relation to contracts entered into following the declaration by the WHO of a pandemic (and possibly earlier) the protection of a claim of Force Majeure is unlikely to be available since the requirement of unforseeability will be absent and parties could and should have made provision accordingly in their contracts. Contractors will be advised to ensure that all current and future contracts contain express provisions dealing with the risk of Covid-19 and its consequences. Employers may want Covid-19 expressly carved out from Force Majeure, Suspension and Termination provisions whilst Contractors will be best advised, as a minimum, to require express extension of time provisions. In current negotiations Contractors should also be seeking additional costs provisions. Whilst a generic entitlement is unlikely to be acceptable to Employers, Contractors should seek for very specific events of relief for costs in relation to material availability and supply chain issues generally. As the construction sector opens up more, there are likely to be problems of reduced supply chain capacity due to insolvencies and general financial uncertainties; the risk of these need to be evaluated and allocated with clarity and fairness. Consideration should also be given to cash flow improvements such as shorter payment periods, greater advance payments, improved price indexation and reduced retentions. There is much that all sides of the industry need to be doing to ensure that the economic engine of construction continues to drive India's growth.
Disclaimer: The contents of this article are for general information and discussion only and is not intended for any solicitation of work. This note / article should not be relied upon as a legal advice or opinion.
Mr. Atul Sharma
Managing Partner, Link Legal India Law Services
Has over 40 years of experience in his practice areas of project advisory, corporate litigations, mediations, arbitrations including international commercial arbitrations. Mr. Sharma represents clients in infrastructure and transport sector on their entire project life cycle. He has advised both developers and contractors on various projects including airports, ports, roads, metro rail projects, airlines, smart cities, energy, automotive and other social infrastructure projects in India. He has also served as board of directors of numerous companies in India. He is very well regarded for his strategic abilities and is recognized widely as a leading infrastructure, aviation and corporate disputes lawyer in India. He represents clients before various courts, tribunals, arbitral tribunals (including international commercial arbitrations), other judicial and quasi-judicial authorities. Clients appreciate his solution-oriented approach, sound technical knowledge of the subject matter and sound business acumen. Mr. Sharma is considered as a "deep thinker" for his strategic abilities and his experience in various practice areas. Being one of the industry leaders with deep knowledge, he has been invited to speak on many complex legal issues at national and international fora. Mr. Sharma is highly ranked and recommended by various directories such as RSG, Chambers and Partners, Legal 500, India Business Law Journal in the practice areas of Aviation, Arbitration, Litigation and Projects, Infrastructure & Energy. Also, he features in the A List Lawyers of India Business Law Journal and recognized as a Litigation Star by Benchmark Litigation Asia Pacific 2020 and one of India's Top 15 Disputes Lawyers 2019 by Asian Legal Business.
CBE, Chair International Business, Link Legal India Law Services
Mr. Harman is a former Senior Partner and Chairman of Pinsent Masons LLP, generally recognized as the world's leading international law firm specializing in global infrastructure and construction. Mr. Harman has spent more than 44 years with Pinsent Masons LLP with specialized knowledge in the procurement and management of a wide range of major, complex international infrastructure projects including airports, metro systems, roads, sports stadia and related infrastructure, ports and high-rise buildings, advising construction companies, developers and Governmental bodies. Mr. Harman lectures widely on procurement strategies, risk management and dispute resolution. He has extensive experience of providing clients with overarching strategic advice on complex projects where the proper management of the contractual and legal interfaces are central to successful implementation and the realization of profit. He has worked as an international legal counsel on some of the leading infrastructure projects in the Asia Pacific region, Africa and Middle East in addition to the projects in Europe. Mr. Harman has consistently been ranked by the Global Legal Directories as a leader in the field of procurement strategies, construction risk management and dispute resolution. Mr. Harman is also a qualified Arbitrator and Mediator. In 2010 Mr. Harman was appointed CBE (Commander of the British Empire) by her Majesty the Queen for services to international trade and the legal profession.