Covid 19 has had a significant and detrimental effect on India’s infrastructure and construction sectors. The restrictions implemented by the Government of India, State Governments, and Union Territories to contain the virus’s spread and effects have stymied project development, negatively affecting supply chains, plant, equipment, materials, and manpower. Delays and delays to project completion are unavoidable, as are associated losses, costs, and expenses.
Individuals working in the construction business must be vigilant of contractual and other rules governing entitlements to eventual recovery of these exposures. All of these rights are likely to be subject to time-sensitive notice requirements, and while some may be familiar with the idea of “force majeure” as contained in many contracts, asserting force majeure may have unforeseen implications. Contractors and Employers alike must be aware of the presence of specific contractual entitlements to time extensions and payment of additional costs associated with their projects.
Such clauses are almost certainly subject to specific circumstances that regulate their functioning. Because no two contracts are identical and may address similar issues in materially different ways, it is impossible to give a generic contractual panacea for individuals working in the construction sector. However, because many EPC and other contracts in India are based on the FIDIC contract forms, particularly the “Silver Book,” this Note will concentrate on the rights and obligations stipulated by that Form in light of the Covid issues.
Contracts with unique modifications to the FIDIC Form will unavoidably exist, and this Note can only serve as a starting point for thinking about the procedures that should be taken to mitigate the impact of Covid 19 and to preserve and implement contractual rights and safeguards.
COVID-19 and Extenuating Circumstances
Under Force Majeure clauses, if one party is unable to perform its obligations due to certain stated exceptional or unusual circumstances beyond its control, it may be excused from performing those duties, subject to notice. Force Majeure clauses vary by contract but generally provide for time extensions and, in certain situations, financial reimbursement. Clause 19 of FIDIC defines force majeure as I a “exceptional event or circumstance” (ii) “that is beyond a Party’s control”, (iii) “that such Party could not reasonably have provided against prior to entering the contract”, (iv) “that such Party could not reasonably avoid or overcome” and (v) “that is not substantially attributable to the other Party”.
Employers who are prevented from providing access to or possession of the Site or from supplying Employer supplied material may bring a claim for Force Majeure. Employers who are prevented from providing access to or possession of the Site or from supplying Employer supplied material may bring a claim for Force Majeure.
The first point to make for Contractors is the requirement to establish causation – that is, that Covid and the restrictions caused the problems complained about. The pandemic may be viewed as a convenient smokescreen by the Contract Administrator to conceal an inherent problem that is the Contractor’s responsibility, such as a pre-pandemic failure to mobilise adequately.
Second, contractors should be aware that, while Covid is likely (but not guaranteed) to be a Force Majeure event, the FIDIC contract, while providing an entitlement to an extension of time, does not provide an entitlement to cost recovery. This is because cost recovery is permitted only for the very specific events listed in sub-clauses I t.
Thirdly, the FIDIC contract needs periodic updates on the impact of Force Majeure as events unfold; in many contracts, these updates, along with the original Notice, will be a prerequisite to the right of recovery. No notice – no right to claim!
Fourthly, Employers and Contractors alike must be aware that issuing a Force Majeure Notice to avoid non-performance constituting a breach of contract, it will amount to an admission that they are unable to perform their obligations and should be issued only if they are satisfied they can discharge the burden of proof of causation referred to above. This is especially true in the.
Fifthly, it is important to remember that each party to a FIDIC-style contract is contractually obligated to “make all reasonable efforts to minimise any delay in performing the Contract caused by Force Majeure.” This is a continuing commitment.
Thus, what additional options does the Contractor have for recouping the expenses and losses sustained as a result of the Covid 19 issues?
Changes to the Law
Subject to giving Notice, the Contractor may be entitled to an extension of time and additional cost if the delay and cost are caused by a Change in Law or a change in the interpretation of such laws. Under FIDIC, “Change in Law” is broadly defined and includes actions by State Governments and Union Territories to invoke the Epidemic Diseases Act 1897 and other similar Acts to issue Regulations.
Again, subject to providing a Notice, the Contractor may be entitled to an extension of time (but at no cost) if it has “diligently followed” procedures laid down by public authorities but those authorities delay or disrupt the Contractor’s work, as is likely to be the case with the measures enacted to contain the spread of Covid19 through lockdown and suspension of works, among other things.
If, as is likely, the pandemic prevents the Employer from providing access to or possession of the Site at any time, or delays approvals, the release of design information, or the provision of Employer-supplied materials, these would constitute Employer breaches of contract, entitling the Contractor to recover costs and extensions of time.
Adaptations and Modifications to the Works
Numerous terms of FIDIC-style contracts may be applicable to items covered by Covid 19 and may result in increased expense and effort.
A modification to the Works required to account for adjustments required as a result of the pandemic’s influence on the Permanent Works or their means of delivery.
A change in applicable technical standards, environmental regulations, product standards, or other specifications provided by the Employer that is caused or needed by the epidemic may entitle the Contractor to a Variation, with associated time and cost reimbursement.
Changes required by the Employer to the Contractor’s Health and Safety Procedures pursuant to Clause 6.7 may be argued to necessitate a Variation with the associated rights.
Considerations for the Future
Contractors must be vigilant to ensure that their contractual rights to protect themselves from the dire consequences of Covid 19 are maintained and implemented, taking into account the strategic implications of a Force Majeure claim and the need to provide Notice, establish causation, maintain meticulous records and evidence, and provide updates as required. They must carefully evaluate whether the incidents and the Employer’s response offer grounds for claiming breach of contract or requesting a Variation. Ignoring the situation is not an option.
Finally, it should be noted that in the event that contracts are entered into following the WHO’s declaration of a pandemic (and possibly earlier), the protection of a Force Majeure claim is unlikely to be available, as the requirement of foreseeability will be absent, and parties could and should have made appropriate provisions in their contracts.
Contractors will be recommended to include clear terms in all current and future contracts that address the danger of Covid 19 and its implications. Employers may choose to have Covid 19 clearly excluded from Force Majeure, Suspension, and Termination terms, whilst contractors are urged to need a specific extension of time clauses at the very least. Contractors should also request more cost provisions during current talks.
While Employers are unlikely to accept a generic entitlement, Contractors should seek very specific events of relief for costs associated with material availability and supply chain difficulties in general. As the construction sector continues to open up, there is a risk of diminished supply chain capacity as a result of insolvencies and overall financial uncertainty; this risk must be appraised and assigned fairly.
Cash flow enhancements such as shorter payment periods, more advance payments, enhanced price indexation, and lower retentions could also be considered. There is plenty that all sectors of the business can do to guarantee that construction remains India’s economic engine.