Managing Construction Contracts

Implications of the force majeure clause in the context of COVID-19

 Amit Kathpalia, MRICS, FIE, FICCP, AFFMASCE, Member SCL (UK), Infrastructure Contracts Specialist and Trainer

The spread of the coronavirus disease (COVID-19) across the world and the resultant lockdowns in several countries is unprecedented, at least in the past few decades. While a number of epidemics/pandemics have occurred in the recent past, none have had such a widespread disruptive effect across the world.

The effects of COVID-19 on construction projects can be classified into three categories:

  •  Direct effect due to illness: Loss of manpower and staff due to illness/death/hospitalisation;
  • Effects due to resultant lockdowns and restrictions: Idle labour, plant and machinery;
  • Indirect costs: Remobilisation of labour and staff, increased temporary facilities on site to maintain social distance, increased requirement of health and medical facilities, etc.

In addition, issues such as debt/loan repayments, and psychological and mental health issues will have intangible effects. The ultimate effect of all these will be project time and cost overruns. Moreover, construction contract experts across the world are grappling with the impact of these direct, indirect and intangible effects on contract clauses.

Legal and contractual implications of force majeure under the English Common Law and International Construction Contracts

English Common Law judgements lead to the following interpretations of force majeure:

  • Events, even if specifically mentioned as force majeure (for example, strikes and lockdowns), must be beyond the control of either party.
  • The event must make the contract “impossible” to perform. In a recent judgement in the British High Court, the court held that the new government regulations that prevented exports from a particular country during the currency of the contract did not amount to force majeure because the contractor could have sourced these from elsewhere, albeit, at a higher cost and with more difficulty, or the contractor could/should have had these goods delivered earlier under the specified time frame of the contract.
  • Hindrance, even if acute, is not sufficient to prove force majeure; prevention is a must.
  • Force majeure must be the sole cause of delay. In a recent case in the British High Court between Seadrill Garner Operations Limited and Tullow Garner Limited, drilling operations were delayed in certain areas due to a drilling moratorium imposed by the government and in certain other areas (which were unaffected by the moratorium) due to failure on the part of the contractor. The court ruled that the force majeure event must be the sole cause of delay.
  • The burden of proof is on the party relying on the force majeure clause.
  • The contractor must prove that he took reasonable steps to mitigate the effect of the force majeure event.
  • The effects of force majeure must lie on the critical path to be applicable for extension of time (EOT) to contract completion date.
  • The contractor must have records and evidence to prove that an alternative course of action was not possible during the period.

Entitlement of contractor under FIDIC (1999 Edition)

Clause 19.1 in the International Federation of Consulting Engineers (FIDIC) Red Book, 1999, defines force majeure as an exceptional event or circumstance which:

  • Is beyond a party’s control
  • The party could not have reasonably provided against before entering into the contract
  • Having arisen, the party could not have reasonably avoided or overcome
  • Is not substantially attributable to the other party.

FIDIC further categorises force majeure as inclusive of, but not limited, to:

  • War, hostilities
  • Rebellion, terrorism, insurgency, civil war
  • Riot, commotion, disorder, strikes, lockout by other than contractor’s personnel
  • Munitions of war, explosive material, radiation/radioactivity contamination not attributable to the contractor
  • Natural catastrophe such as earthquake, volcanic activity, hurricane, typhoon.

There is no specific mention of epidemic/pandemic in this clause.

FIDIC contract clauses excuse the contractor from his performance under the contract due to force majeure after giving due notice within the specified time limits. The contractor is entitled to EOT under Clause 8.4 and payment of additional costs that he has to incur due to the force majeure event after submission of evidence and in case the event occurs within the country where the project is being executed.

Force majeure beyond a continuous period of 84 days or 140 days in multiple periods, entitles either party to terminate the contract after giving due notice. Termination will entitle the contractor to payment for the work done by him, material ordered by him which he is bound to accept on delivery (such material will become the property of the owner), any other cost/liability that was reasonably incurred by the contractor in expectation of completing the work, cost of removal of temporary works and establishment at the project site, and cost of relocation of staff and labour employed solely for the work.

Clause 8.4 of FIDIC specifically mentions delay due to an epidemic or governmental action but entitles the contractor only to EOT.

Clause 17.3 of FIDIC specifies unforeseen forces of nature that an experienced contractor could not have foreseen or be expected to take reasonable precautions against. Whether a pandemic can be considered a force of nature is debatable. Thus, under FIDIC, either party can argue for the effects of COVID-19 under Clauses 19.1, 17.3 or 8.4. As per most experts, COVID-19 and the subsequent lockouts by the government fall under Clause 19.1. In addition, the contractor is excused from discharge of his obligations and is entitled to terminate the contract and claim costs if the event persists.

General conditions of contracts (GCCs) of Indian public sector projects (other than engineering, procurement and construction [EPC] contracts)

All Indian public sector projects have a force majeure clause, though they may or may not include a clear definition of events that constitute force majeure. All GCCs entitle the contractor only to EOT/rescheduling of milestones with no entitlement with respect to additional costs and/or profit. Timely notices are not so sacrosanct and engineers may grant EOT even in case of non-application by the contractor. No Indian construction contract entitles the contractor to be excused from the discharge of his obligations during the period of contract (right to suspension) or the right to terminate a contract in case of prolonged duration of an unforeseen event. However, all Indian public sector GCCs have a clause for suspension of contract by the employer due to a number of reasons – default by the contractor, lack of proper execution of works or part thereof other than due to contractor’s default, safety of works or part thereof, weather conditions (in case of railway GCCs), and if provided in the contract for any other reason.

This suspension allows the contractor to ask for EOT, reasonable additional time and compensation for certain limited additional costs incurred by the contractor mainly on salary and wages of idle labour and staff at site. In case of continuous suspension beyond 90 days, either party is entitled to terminate the contract after giving due notice and the contractor can claim his outstanding costs for work done and the aforementioned limited additional costs.

Indian EPC contracts (based on NITI Aayog’s model contract document)

Indian EPC contracts categorise epidemics as a force majeure event. The allocation of risks is as follows: parties to bear their respective additional costs; no entitlement of additional claim by any party; project completion schedule to be extended on a day-to-day basis; if force majeure event persists for a continuous period of 120 days or more, either party may terminate contract with due notice; and upon termination, the contractor is entitled only to the value of all the unpaid work done by him which conforms to specifications.

FIDIC versus Indian public sector GCCs versus Indian EPC contracts

There is a vast difference in entitlements between FIDIC and Indian GCCs. Certain other issues that are likely to be faced while deciding on entitlements of parties due to effects of COVID-19 (equally applicable to FIDIC and Indian GCCs) are:

  • Entitlement of the contractor to EOT in case the project was already delayed and proceeding at a slow pace due to the contractor’s fault.
  • Effect of other delays concurrent to the event or immediately preceding the event.
  • What is the reasonable additional EOT after lifting of lockdown?
  • What is the entitlement of the contractor with resepct to additional costs?
  • Could the contractor have executed any other activity during the period or made an effort to mitigate the effects?
  • Cost associated with indirect effects of the event.
  • Long-term impact of the event on the project to cater to all aspects – repayment of loans/debt, movement of labour, requirement of additional health and medical facilities on site, etc.
  • Entitlement of contractor in case the contract was signed after epidemic started but before the announcement of the lockdown. Could an experienced contractor be expected to anticipate effects and lockdown?

The way forward

There is a dire need for policy decisions and guidelines to be issued either by heads of departments or by the central government/NITI Aayog in order to minimise the plethora of disputes that may arise and compensate contractors for legitimate losses. There may also be a need to study the long-term impact of COVID-19 on the infrastructure sector. In the long run, there is also a need to make Indian contract conditions more balanced in terms of risk allocation and incorporate speedy dispute resolution mechanisms.

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