Force Majeure in Construction Contracts

Abhishek Tripathi & Anubhav Tiwari

In India, the construction industry has not yet adopted a uniform model of contracts. Certain model contracts were prepared by the Planning Commission of India for various purposes, including for construction works where government or its agencies were involved. These contracts were also adopted in practice by various government bodies. Niti Aayog too has prepared Model Contracts for various activities.[1] In their treatment of FM, the model agreement for engineering, procurement and construction of civil works, issued by the both Planning Commission and the Niti Aayog are identical to the Model EPC Agreement for Ministry of Road Transport and Highways. The Model EPC Agreement for Ministry of Road Transport and Highways has been already examined in an earlier article, which may be found here.

Amongst internationally prevalent models, Conditions of Contracts of the Federation Internationale des Ingenieurs-Conseils’ (“FIDIC”) are widely followed in India both amongst public sector as well as private sector. In a number of cases, while the constructions contracts may not be exact replica of FIDIC’s contracts, they are heavily influenced by them. This write up examines the treatment of Covid-19 like pandemics under FIDIC’s Conditions of Contract. For a more general understanding of force majeure (“FM”) clauses and frustration of contract under Indian law, please see our earlier post here.

FIDIC Contracts

FIDIC Rainbow Suite first published in 1999, consists of four contracts namely, (a) Conditions of Contract Construction (also referred to as the New Red Book), (b) Conditions of Contract for Plant and Design-Build (also referred to as the New Yellow Book), and (c) Conditions of Contract for EPC/Turnkey Projects (also referred to as the New Silver Book) (d) Short form of contract (collectively referred to as the “FIDIC Contracts”). For the purposes of this article, we are examining the first three of the four FIDIC Contracts.

FIDIC Contracts address the issue of FM event or an unforeseeable event of the magnitude of a pandemic at various different levels, from the early detection to discharge of contracts. Notice of the FM event too plays an important role for risk allocation purposes in the FIDIC Contracts. Eventually FIDIC Contracts seem to create a balance between the employer and the contractor, with each bearing a part of the risk, and neither party being allowed to profit from the event.

Early Detection and Warning

From project management perspective, Clause 8.3 [Programme] of the FIDIC Contracts casts an obligation on the contractor to notify the engineer (i.e. the engineer appointed under the Contract) or the employer[2] of probable future events or circumstances that may adversely affect the work, increase the contract price or delay the execution of the works. Under the Red Book and the Yellow Book, upon such notice the engineer may seek a proposal for variation of the contract in accordance with the procedure set out in Clause 13.3. In such contracts, if the event has been fully predicted, and variation has been effected pursuant to a notice under Clause 8.3 and Clause 13.3, it can be argued that the FM clause shall not apply. Silver Book, however, does not contemplate variation, though it does, like the Red Book and the Yellow Book, require the contractor to modify its programme where the programme fails to comply with the contract due to such probably future events affecting or delaying the execution of the works. Where the contractor failed to foresee an event, and give the warning under Clause 8.3, it may not be fatal as long as the event is exceptional and qualifies as an FM event. The rights arising out of FM event under Clause 19 are independent of the obligation of the contractor under Clause 8.3.

FM and Unforeseeable Events

Clause 19 of the FIDIC Contracts defines FM as an exceptional event,

(a) which is beyond a party’s control;
(b) which such party could not reasonably have provided against before entering into the contract;
(c) which, having arisen, such Party could not reasonably have avoided or overcome;
(d) which, is not substantially attributable to the other party.

Thereafter, certain exceptional events or circumstances have been identified, which are illustrative in nature. While a pandemic, like Covid-19, does not find a specific mention in the identified FM events, the broad scope of the definition in the first part should normally enable a party to claim the existence of FM.

Notice Requirements

Upon identification of the risk as FM, the affected party is required to provide a notice to the other party. Such notice is to be given only if the affected party is prevented or expects to be prevented from performing its obligations under the contract on account of FM. Please note that future likelihood of being prevented from performing is sufficient for invoking the FM clause.

This notice is to be given within 14 days, after the party becoming aware of the relevant event constituting FM, or when it should have become aware. This notice is different from the early warning notice under Clause 8.3, and it needs to clearly identify the FM event and specific obligations that are prevented or will be prevented due to FM. Only upon serving of the notice, the performance of the party, to the extent affected and specified in the notice, is excused for the period of the FM event. Payment obligations, however, are not excused. In view of the implications arising out of the notice, it is be advisable for parties to seek legal advise in drafting of this notice. Once the FM event has ceased to affect the performance, another notice needs to be given by the affected party to the other.

Consequences: Extension of time and costs

Upon serving of the notice of FM, the following consequences may follow:

(a) The party serving the notice is excused to perform the obligation to the extent set out in the notice for the period of FM.
(b) The contractor is entitled to extension of time.
(c) The contractor or the employer may terminate the contract, entitling the contractor to termination payments.

In the Red Book and Yellow Book contracts, the extension of time is also available, with or without an FM event, when there is an Unforeseeable[3] shortage in the availability of personnel or goods caused by epidemic or governmental actions[4]. Similarly, where a government action delays or disrupts the contractor’s work which is Unforeseeable[5], the contractor is entitled to extension of time in accordance with Clause 8.5 of the FIDIC Contracts.

While, extension of time is available for any delay arising out of any FM event, the cost is available only for four identified FM events, and it is not available for natural catastrophes, such as earthquake, hurricane, typhoon or volcanic activity. Pandemic, which is an unidentified FM event under the definition, therefore, would not entitle the contractor to costs. Such risk will have to be met by contractor through insurance, if any.

Termination Payments

FIDIC Contracts empower the parties to terminate the contract where the FM event subsists for a continuous period of 84 days or in aggregate 140 days for the same FM, of which notice has been given. The termination may be initiated by either party by giving of notice, and the termination takes effect only after 7 days’ from the date of notice. In the event of such termination, the contractor may seek from the employer, the following:

(a) Amount payable for the work carried out for which price is stated in the contract.
(b) Cost of any plant and machinery which has been order for the works, and which has been delivered to the contractor or of which the contractor is liable to take delivery. This cost is payable on the condition that the plant and material shall become the property of the employer when paid for by the employer.
(c) Any cost or liability which was reasonably incurred by the contractor in expectation of the completion of works.
(d) Any cost of removal or temporary works and contractor’s equipment from the site.
(e) Cost of repatriation of contractor’s staff and labour.

It is pertinent to note that in each case the contractor is entitled to costs, and not profits. Cost has been defined in Clause 1.1.4.2 of the FIDIC Contracts to mean ‘all expenditure reasonably incurred (or to be incurred) by the contractor, whether on or off site, including overhead and similar charges, but does not include profit’. Also, for contracts that provide for milestone based payments and termination occurs before a specific milestone for payment has been achieved, it may be possible to claim a part of such payment under (b) and (c) above.

Mitigation

Clause 19.3 of the FIDIC Contracts oblige the parties to minimise the delay in performance of the contract due to FM event. It is similar to the concept of mitigation for damages available in common law jurisdictions, including India. The principle of mitigation obliges a party which has suffered damages due to breach of contract to mitigate its damages.

Frustration of contract and termination payments

FIDIC Contracts expressly recognise the remedy of frustration as available under local laws. However, to address the issue of compensation when contracts are frustrated, FIDIC Contracts provide that the employer’s liability to pay to the contractor shall be same as the liability it has in the event of termination of the contract due to the FM event.

Duty of Care in Force Majeure

Clause 17.2 of the FIDIC Contracts casts certain obligations on the contractor to take care of the works. Duty of care under Clause 17.2 will apply even during the period when the contract is suspended during a FM event. Clause 17.3 provides exception to the general duty of care of the contractor, by classifying certain risks as Employer’s Risks, which risks are materially similar to the identified FM events in Clause 19.1. Of these identified events, Clause 17.3(h) in the Red Book and the Yellow Book deals with Unforeseeable events[6], which may be interpreted to cover a pandemic. Silver Book does not recognise this category. For Employer’s Risks, Clause 17.4 entitles the contractor to claim extension of time and cost for rectifying losses or damages to any Works, Goods, or Contractor’s Documents due to identified Employer’s Risks. This right is available specifically when the contractor is asked by the engineer to rectify the damages or the loss.

Covid 19 induced Change in Laws

Covid 19 has prompted a flurry of changes in legislations, and subordinate legislations, which are likely to delay the works, and also increase the cost for the contractors. Clause 13.7 of the FIDIC Contracts entitles the contractors to seek extension of time for delay and adjustment in the contract price, where any change in laws[7] from the base date (i.e. 28 days before the date of submission of the tender) result in or are likely to delay the completion of works, or result in extra cost. It is to be noted that variation in the Contract Price will only entitle the contractor to cost, and no profits.

Conclusion

While a pandemic may be classifiable as a FM event under FIDIC Contracts, to the contractor governed by FIDIC Contracts, it will only enable the right to seek extension of time and not costs, unless the FM event is prolonged and the contractor chooses to terminate the contract. Parties also need to take care to issue appropriate notices, in the agreed formats and within agreed timelines to ensure that FM exception is available to the relevant party. Since the payment obligations are not excused even in an FM event, the contractors may heave a sigh of relief. However, contracts particularly the Special Conditions of Contract, if any, should be carefully screened to assess the impact of any deviations from the General Conditions of FIDIC Contract on the respective obligations of the parties.

[1] There are other versions being followed by various government organisations, such as public works departments, public sector undertakings, metro rail corporations, and bodies like National Highways Authority of India from time to time, for construction contracts, however, in the absence of an identifiable model, the contracts will need examination on case to case basis.
[2] While the obligation is to notify the Engineer under the Red and the Yellow Book, in the Silver Book the notification has to be to the Employer.
[3] Clause 1.1.6.8 of the Red Book and Yellow Book define “Unforeseeable” to mean ‘not reasonably foreseeable by an experienced contractor by the date for submission of the Tender’.
[4] Clause 8.3(d) of the Red Book and Yellow Book.
[5] Id. In addition, Clause 8.5 of the Silver Book too uses identical language to refer to Unforeseeable delay or disruption.
[6] Clause 17.3(h) in Red Book and Yellow Book reads as “any operation of the forces of nature, which is Unforeseeable or against which an experienced contractor could not reasonably have been expected to have taken adequate preventive precautions.”
[7] Laws has been defined in Clause 1.1.6.5 of the FIDIC Contracts to mean ‘all national (or state) legislation, statutes, ordinances and other laws, and regulations and by0laws of any legally constituted public authority’