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Legal Issues For Contractors During Force Majeure Events
This suspension allows the contractor to ask for extension of time, compensation for additional costs incurred by the contractor for salary and wages of idle labour at the construction site.
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A ‘Force Majeure’ event is a common law principle which defers the performance the obligations under a contract when an extraordinary circumstance arises which makes performance beyond the control of the party. On the other hand, frustration of a contract is a statutory right, envisaged under The Indian Contract Act, 1872, which, as originally formulated, results in termination of the contract when its performance is rendered impossible for the reasons beyond the control of the party. If in a contract, a ‘Force Majeure’ event is not specifically covered, then in that case, frustration may be claimed by the affected party. ‘Force Majeure’ and frustration operate independent of each other, even though the rights may arise due to similar events.
A ‘Force Majeure’ clause cannot be implied under the Indian laws. It must be expressly provided for under the contract and the protection afforded to the affected party will depend on the language of the ‘Force Majeure’ clause. In the event of a dispute as to the scope of the ‘Force Majeure’ clause, the courts are likely to apply the usual principles of contractual interpretation.
If there does not exist a ‘Force Majeure’ clause in an agreement and the performance of the contract later became impossible the doctrine of frustration as provided in Section 56 of The Indian Contract Act 1872 would apply to the said contract/agreement.
Unlike International Federation of Consulting Engineers (commonly known as “FIDIC”) contracts which have well defined ‘Force Majeure’ events, the Indian public sector projects usually do not clearly define ‘Force Majeure’ events.
The Indian public sector contracts usually entitle the contractor only for extension of time or rescheduling of milestones with no entitlement to with respect to additional costs or profits, if a ‘Force Majeure’ event has occurred. Furthermore, most of the Indian construction contracts do not entitle the contractors to be excused from the discharge of their obligations during the period of contract or the right to terminate a contract in case of prolonged duration of a ‘Force Majeure’ event. However, most of the Indian construction contracts, have clause which specifically deals with suspension of contract by the employer for a number of reasons.
This suspension allows the contractor to ask for extension of time, compensation for additional costs incurred by the contractor for salary and wages of idle labour at the construction site. Most of the Indian construction contracts have clause by way of which either of the party is entitled to terminate the contract by giving notice to the other party in case there is continuous suspension of work for a duration specified in the contract.
During the occurrence of a ‘Force Majeure’ event, the contractors have to incur the liability for delayed performance of contractual obligations, cost overruns, disruption in revenues and unmanageable repayment obligations. Moreover, if a ‘Force Majeure’ event has global implications, movement of goods are restricted, production units come to a standstill, there is also an increase in costs of products due to sourcing of components from alternate locations, contractors face labour shortage, amongst other issues.
In construction or infrastructure contracts, there are specific provision incorporated for suspension of work for certain duration or till the time force majeure events exist. Presently, due to spread of COVID-19 which was declared pandemic by the World Health Organization (WHO) and declaration of consequential lockdown by the Government, the contractors are invoking force majeure clause on both counts and are seeking excuse from performance of their obligations. The contractors are invoking both force majeure clause as well as frustration depending on the nature of obligations in the contract.
Certain projects, especially real estate projects involve leasing of land. In the case of a lease deed, the position in law is somewhat different from what governs the usual construction contracts. It is a settled position of law that the provisions of The Indian Contract Act, 1872 do not apply to lease deeds, as the special law, governing leases in India is Transfer of Property Act, 1882. Thus, the protection available to the affected party in a construction contract under Section 56 of The Indian Contract Act, 1872 pertaining to frustration of contract, shall not apply in the case of a lease created in favour of a lessee.
When it comes to real estate projects, The Real Estate (Regulation and Development) Act, 2016, under Section 6, provides for extension of the project registration due to occurrence of a ‘Force Majeure’ event.
During the occurrence of a ‘Force Majeure’ event, parties have to make an attempt to mitigate their financial as well as contractual burden, and the same can only be done by way of assessing the scope of the terms of the contract and how far such mitigation is possible in the said contracts. Force Majeure clause generally impose condition of invoking force majeure by giving written notice. In case of failure to notify occurrence of force majeure, the effected party may not successfully assert its right.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.