India: Applicability & Interpretation Of Change In Law Clause With Respect To Covid-19 Pandemic

INTRODUCTION

In any commercial contract, ideally, the contract price is fixed keeping in mind the current legal rights and obligations of the parties. However, a long-term contract is more susceptible to the risk of an unexpected change in the legal or regulatory framework which was not foreseeable by the parties at the time of execution of the contract. Such changes might impact the operating cost or capital expenditure of the project execution and render the project execution under the contract commercially unviable. To account for such unforeseeable contingencies, a traditional commercial contract usually contains a Change in Law clause to safeguard the interests of the contractor by restoring it to the same position as it would have been if such a change would not have occurred. Generally, the change in law clause would deal with the enactment of any law including repeal, modification or re-enactment, change in interpretation or application of any law by a final judgment of a court of record or any change in rates under Tax law.

In the current scenario with the outbreak of COVID-19 pandemic and the threat of a third wave still looming in the near future, it is pertinent to discuss whether COVID-19 pandemic can qualify as a Change in law event and consequently whether the contractors can seek relief of restoration under the umbrella of a Change in law clause.

JUDICIAL INTERPRETATION OF THE SCOPE OF CHANGE IN LAW CLAUSE

The apex court in the case of Energy Watchdog vs. Central Electricity Regulatory Commission and Ors.1 recognized that changes in domestic coal regime i.e., National Coal Distribution Policy (NCDP of 2007) is a change in law event. However, the increase in the prices of imported coal due to change in a foreign law was not considered as a change in law event. Therefore, 'Change in law' relief under the contract is applicable to changes in Indian law and not changes in foreign law. It is pertinent to note that the apex court's ruling on the argument surrounding 'Change in Law' was contained in Article 13 of the Long-Term Power Purchase Agreement which stipulated that any change in law would require the affected party to be put in the same economic position they would have been, if such change in law would not have occurred. This judgement has widened the scope of applicability of a Change in Law clause by holding that any change in government policy would also count as 'Change in Law'.

Furthermore, in the case of Uttar Haryana Bijli Vitran Nigam Ltd. vs. Adani Power Ltd.2 and Jaipur Vidyut Vitaran Nigam Ltd. vs. Adani Power Rajasthan Limited3 the apex courtrelying on the ratio of Energy Watchdog judgment opined that the Change in Law clause is an in-built restitutionary principle which compensates the party affected by such change in law, i.e., the party must be given the benefit of restitution as understood in civil law. The court also clarified that adjustment in monthly tariff payment on account of Change in Law under the Long-Term Power Purchase Agreement shall be effected from the date of the Change in Law coming into effect.

However, the Supreme Court while interpreting the Change in Law clause of a works contract in the case of South East Asia Marine Engineering and Constructions Ltd. vs. Oil India Limited4 held that the wide interpretation of the Arbitral Tribunal to expand the meaning of Change in Law clause to include change in the rate of High-Speed Diesel (HSD) cannot be accepted. Further, the court also stated that the Arbitral Tribunal should have adopted a literal approach to interpret the contract rather than a wider one. In the arbitration proceedings, the tribunal used the principle of liberal and wide interpretation to hold that the hike in price would constitute a 'Change in Law' thereby, allowing the appellant to be compensated for the increased cost incurred in the operations under the contract.

The court also observed that the contract was based on a fixed rate. The party, before entering the tender process, entered the contract after mitigating the risk of such an increase in the price of HSD. The court, therefore, opined that a prudent contractor would have taken into consideration in the margin, such price fluctuations while bidding for the tender. Such price fluctuations could not be brought under the Change in Law clause unless specific language points to the inclusion.

CONCLUSION

It can be seen that there is no straitjacket rule on the applicability of a Change in Law clause and depends on the facts of each case. On one hand, the apex court broadened the scope and application of the Change in Law clause under the Jaipur Vidyut judgment and on the other hand, in the same year (2020), the apex court itself gave a narrow interpretation to the Change in Law cause under the South East Asia judgment.

In our humble opinion, pursuant to the interpretation of Change in Law clause given by the Supreme Court in the aforesaid judgments, it would not be wrong to observe that the notifications and orders issued by the Ministry of Home Affairs and respective State Governments under the Disaster Management Act, 2005, to contain the spread of COVID-19 pandemic, having the force of law would also be covered under the expression of Change in Law.

In view thereof, claiming a relief of restitution due to COVID-19 pandemic under the Change in Law clause would be more appropriate and effective than claiming relief under the Force Majeure clause. However, it would be interesting to see how the courts and arbitral tribunals interpret the applicability of Change in Law clause with respect to COVID-19 pandemic.

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