In India, on 24 March 2020, the Government of India has imposed a nationwide lockdown, as a preventive measure against the COVID-19 pandemic. As the imposition of lockdown has impacted the businesses, it is very relevant to understand the impact of such action on the parties to the business contract.
In general, parties to the contract fulfil their part of contract, however in case of any breach of contract, the party commit breach gets liable to compensate for the same to the other party. An exception to the aforesaid rule is provided in Section 56 of Indian contract act, which deals with frustration of contract.
Doctrine of Frustration: Under certain conditions, when performance to the contract is impossible, the parties to the contract are relieved from any liability arise out of contract & contract shall be deemed as Void. The basic principle behind the Doctrine of Frustration is “the law will not compel a man to do what he cannot possibly perform”.
Therefore, it is very relevant to see if a performance under the contract is possible to execute or not. If the performance gets impossible due to present pandemic, then the doctrine of frustration shall apply and parties to the contract gets relieved from any liability arise out of contract. However, if the performance to the contract is possible (may be with extra cost) the doctrine of frustration shall not apply. Under that circumstance, Force majeure clause mentioned in respective contract to be referred.
Force Majeure: Generally, Acts of God, act of any Government, War, Sabotage, Riots, Civil commotion, Police action, Revolution, Flood, Fire, Cyclones, Earth quake and Epidemic and other similar causes over which the contractor has no control, shall amount to Force Majeure.
The contract consisting of force majeure clause has to be referred in present scenario and accordingly, the major issues arise out under present situation are mentioned hereunder:
i.
Applicability of Force majeure clause.
ii.
Applicability of Compensation such as Idling
compensation, Price variation Compensation and Over run compensation etc. during
force majeure period and during time Extension period due to force majeure.
iii. Period of Time extension to be granted due to Force majeure.
A. Applicability of Force majeure clause.
a. The lockdown implemented in four phases i.e. Phase 1 (25 March – 14 April), Phase 2 (15 April – 3 May), Phase 3 (4–17 May) & Phase 4 (18–31 May). In which, no work could be executed during phase 1 lockdown. Also in Phase 2, Phase 3 & Phase 3 lockdown were with lots of restrictions. Therefore, it can be concluded that the work due to lockdown were impacted due to directly through complete restriction to work and indirectly through several restrictions such as no transportation etc.
b. Vide Notification dated 19.02.2020 & 13.05.2020, Govt. of India has clarified that due to disruption of service on the account of lockdown situation, parties to the contract may not fulfil contractual obligations. Therefore, parties to the contract may invoke Force Majeure Clause (herein after referred as ‘FMC’) for all construction/Works Contract, goods and Services contract.
c. It is observed that aforesaid notification also clarifies that Invocation of FMC does not absolve all the nonperformance of a party to the contract with Government Agencies, but only in respect of such non-performance as is attributable to a lockdown situation or restrictions imposed under any ACT or Executive order of the Govt./s on account of COVID 19 global Pandemic.
d. In view of the fact that the lockdown due to present pandemic was an action taken by government of India, on which parties has no control, therefore the present pandemic situation qualifies under Force Majeure Condition. Also, as the lockdown was imposed nationwide and in public notice, the condition of issuing ‘immediate’ notice (if any) to be dispensed off by the parties under contract to invoke the Force Majeure clause under Contract.
e. To complete the balance work effected/delayed due to Force Majeure Period, on the request of parties to the contact (in specified format - Annexure I; mentioned hereunder), party shall grant time extension for completion of balance work.
B. Tenure of time extension for the delay arise out of force majeure –
a. Vide aforesaid circular Govt. of India had instructed that for the contracts liable to complete the contractual obligations on or after 20th Feb 2020 shall be extended for a period not less than 3 months and not more than 6 months, without imposition of any cost or penalty on the contractor.
b. However, the lockdown was imposed from 25.03.2020 and majority of restrictions was continued till 31.05.2020 in four phases.
c. Therefore, Parties to identify the commencement of force majeure period based on their nature of work, i.e. agencies to identify the point at which the performance to the contract get effected due to present pandemic situation.
d. Therefore, in-line with Govt. of India Notification and Contract Agreement, the party may request for extension to complete the balance work by invoking Force Majeure for a period of 3 months or less, without supporting documents. The other party may grant time extension for the period, extension is being sought by contractor or 3 months whichever is lower.
e. The party may request for extension to complete the balance work by invoking Force Majeure for a period of more than 3 months, along with supporting documents to justify the request for extension beyond 3 months. The other party shall scrutinize the supporting documents and in line with contract clause, may grant time extension for the period, extension is being sought by contractor or 6 months whichever is lower.
C. Applicability of Compensation –
a. Under Force Majeure Clause, party shall not be entitled for any compensation arising out of force majeure (until mention otherwise in contract), however the party shall remain entitled for any compensation arising out of other contractual terms.
b. To understand the Applicability of compensation, the present situation to be reviewed under two scenarios, (i.) where the force majeure period is during awarded contract period & (ii.) where the force majeure period is during Extension period.
c. Accordingly, if the Force majeure period occur during Contract period, the contract shall be extended on the request of Contractor. Also, Price Variation Compensation (if PVC clause is applicable only in Extension period) & Over Run Compensation shall not be payable, as the same were not payable during the awarded contract period.
d. Also, if the Force majeure period occur during Contract Extension period, the contract shall be extended on the request of Contractor and PVC & ORC shall be dealt as per contract clause/Extant Time Extension.
e. Similarly, Other contractual compensation including Idling compensation & Quantity variation compensation, not arising out of Force majeure, shall be applicable as per contract.
_________________________________________________________________________________________________________
ANNEXURE-I
(on letter head)
To Date:
________________________
____________________________
____________________________
____________________________
Subject: Invocation of Force Majeure Clause of Contract
Ref: Contract Agreement no.: ____________________________________________________
Dear Sir,
As you are aware that the present pandemic situation of spread of COVID-19, nation vide lockdown imposed by Govt. of India and further restrictions imposed by local authorities qualifies for the Force Majeure.
In this regard, this is to bring to your kind notice that we are suffering delay in the due execution of the contractual obligation due to delays caused by force majeure and hence invoke force majeure clause _______________ of our contract agreement.
In view of the above, you are requested to kindly grant Extension for __________ Months to complete the balance work delayed due to Force Majeure covered in aforesaid contract. It is reiterated that during this Extension due to force Majeure, we shall not be eligible for any compensation arising out of Force Majeure.
It is to ensure you that Invocation of Force Majeure Clause and subsequent Time extension does not absolve our earlier performance/non-performance to the contract.
(If requested Time Extension is beyond Three Months – Supporting documents to be submitted.)
Seal & Sign
Authorized Person
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