6/8/2020 Managing Construction Contracts - Indian Infrastructure

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Managing Construction
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Implications of the force majeure clause in the context of COVID-
19 T

 April 2020

 Amit Kathpalia, MRICS, FIE, FICCP, AFFMASCE,

Member SCL (UK), Infrastructure Contracts
Specialist and Trainer elcos request government
to allow self KYC process to
The spread of the coronavirus disease (COVID- issue SIM cards and port
19) across the world and the resultant lockdowns numbers
in several countries is unprecedented, at least in April 2020
the past few decades. While a number of Telecom operators
epidemics/pandemics have occurred in the have reached out to the
recent past, none have had such a widespread government requesting
disruptive e ect across the world. it to allow a self-KYC
process in order to
The e ects of COVID-19 on construction projects can be classi ed into issue new …
three categories: Read More »

  Direct e ect due to illness: Loss of manpower and sta due to TRAI allows six-week
illness/death/hospitalisation; extension to telcos for ling
E ects due to resultant lockdowns and restrictions: Idle labour, monthly and quarterly
plant and machinery;
reports
Indirect costs: Remobilisation of labour and sta , increased
April 2020
temporary facilities on site to maintain social distance, increased
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6/8/2020 Managing Construction Contracts - Indian Infrastructure

requirement of health and medical facilities, etc. T

h
In addition, issues such as debt/loan repayments, and psychological and e
mental health issues will have intangible e ects. The ultimate e ect of all T
these will be project time and cost overruns. Moreover, construction e
contract experts across the world are grappling with the impact of these l
direct, indirect and intangible e ects on contract clauses. e
c
Legal and contractual implications of force majeure under the English om Regulatory
Common Law and International Construction Contracts Authority of India has
allowed a six-week
English Common Law judgements lead to the following interpretations of extension to telcos for
force majeure: ling their monthly and
quarterly reports, …
Events, even if speci cally mentioned as force majeure (for example, Read More »
strikes and lockdowns), must be beyond the control of either party.
The event must make the contract “impossible” to perform. In a C
recent judgement in the British High Court, the court held that the a
new government regulations that prevented exports from a b
particular country during the currency of the contract did not i
amount to force majeure because the contractor could have n
sourced these from elsewhere, albeit, at a higher cost and with e
more di culty, or the contractor could/should have had these t
goods delivered earlier under the speci ed time frame of the a
contract. pproves three schemes to
Hindrance, even if acute, is not su cient to prove force majeure; boost electronics and
prevention is a must.
components manufacturing
Force majeure must be the sole cause of delay. In a recent case in
April 2020
the British High Court between Seadrill Garner Operations Limited
The cabinet has
and Tullow Garner Limited, drilling operations were delayed in
approved three key
certain areas due to a drilling moratorium imposed by the
schemes to boost
government and in certain other areas (which were una ected by
electronics and
the moratorium) due to failure on the part of the contractor. The
components
court ruled that the force majeure event must be the sole cause of
manufacturing exports
delay.
and production in the
The burden of proof is on the party relying on the force majeure
country. These …
clause.
Read More »
The contractor must prove that he took reasonable steps to mitigate
the e ect of the force majeure event.
The e ects 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, de nes 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

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6/8/2020 Managing Construction Contracts - Indian Infrastructure

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 speci c 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
speci ed 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 sta and labour
employed solely for the work.

Clause 8.4 of FIDIC speci cally mentions delay due to an epidemic or

governmental action but entitles the contractor only to EOT.

Clause 17.3 of FIDIC speci es 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 e ects 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 de nition of events that constitute force
majeure. All GCCs entitle the contractor only to EOT/rescheduling of

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milestones with no
entitlement with respect to
additional costs and/or
pro t. 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
sta 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 speci cations.

FIDIC versus Indian public sector GCCs versus Indian EPC contracts

There is a vast di erence in entitlements between FIDIC and Indian GCCs.

Certain other issues that are likely to be faced while deciding on
entitlements of parties due to e ects 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.
E ect 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 e ort to mitigate the e ects?

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Cost associated with indirect e ects 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 e ects
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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