ARTICLE
22 April 2020

Impact Of Covid-19 On Construction And Engineering Sector

In today's globalised world, there is hardly any place that has remained unaffected by the severity of the Novel Coronavirus or the Covid-19 pandemic.
India Coronavirus (COVID-19)
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In today's globalised world, there is hardly any place that has remained unaffected by the severity of the Novel Coronavirus or the Covid-19 pandemic. Almost every commercial activity is suffering at the hands of the ruthless Covid-19. Because of the inherent nature of business activity, some industries may unwittingly prosper under the pandemic, while some would weather the storm, albeit with much difficulty, but of the hardest affected, construction and engineering sector is definitely on the wrong end of the curve.

Construction and Engineering sector, which was already reeling with multiple challenges from lack of capital and credit avenues to insolvencies, multiple frauds and regulatory burden under the Environment Laws and the Real Estate (Regulation and Development) Act, 2016, is now marred by the Covid 19 pandemic, with no likely relief in sight.

To contain the pandemic, like many nations, Government of India has also imposed a lockdown, currently till 14 April 2020, restricting the movement of people and gatherings. In the construction sector, hordes of workmen toil together to meet the timelines. However, due to the restrictions put in place by the Government, all the construction activity and most of the business activity across the country has halted.

There are multiple consequences of the lockdown, which would further stretch the troubles for the sector like reverse migration, disruption of supply chains, amongst others. Cumulatively, the above circumstances would cause hindrance in meeting the obligations under the construction and engineering contracts and would lead to multiple legal wrangles for the industry post lifting of the current restrictions.

The problem for the construction and engineering sector in India is aggravated and difficult to address as there is no standard form or format for contracts followed by the industry. There could be innumerable variations in as many General and Special Conditions of a Construction and Engineering Contract. Although, standard forms of construction and engineering contracts by International Federation of Consulting Engineers ("FIDIC"), Institution of Civil Engineers ("ICE") or Indian Institute of Architects ("IIA") are widely adopted, but, at times they are zealously negotiated and hence modified/amended so as to lose uniformity. Additionally, there are separate standard forms of contracts adopted by the National Highway Authority of India ("NHAI"), Public Works Department ("PWD"), Delhi Metro Rail Corporation ("DMRC"), Central Public Works Department (CPWD"), National Building Construction Corporation ("NBCC"), Model Engineering Procurement and Construction ("EPC") Contract for construction works by Niti Aayog. The Ministry of Finance has issued various standard contracts for procurement of works such as item rate contracts and lumpsum contracts, Model EPC Agreement by Indian Railways, etc., making it impossible to exhaustively deal with issues that could arise on account of Covid-19 and their solutions.

However, some of the common issues that could arise in some form in most of the construction and engineering contracts are addressed below.

Time is the essence of contract:

In many construction and engineering contracts, parties generally specify the time for completion and/or expressly state that time is the essence of the contract. A contractor should be careful about such clause(s), as any breach would make the contract voidable at the cost and consequence of the defaulting contractor. Alternatively, the contractor under force of law may be obligated to complete the project beyond the stipulated completion date and also pay compensation for delay to the opposite party/Employer.

Section 55 of the Indian Contract Act, 1872 ("Contract Act") provides for the effect of failure to meet the specified timeline. However, the intention of the parties has to be looked at and not the letter of the clause. The time is generally considered to be of essence the contract:

  1. Where the parties have expressly agreed to treat time as the essence of the contract;
  2. Where any delay would operate as an injury to the opposite party;
  3. Where the nature and necessity of the contract requires it to be so construed.

However, law in certain situations permits extension of time to the contractor. Generally, construction and engineering agreements also provide for a buffer period, beyond the stipulated completion date. Such conditions are generally subject to payment of damages or deductions from the payments due to the contractor. However, in case of failure to perform, even in the extended period(s), the aforementioned rigours of Section 55 of the Contract Act would be invoked against the defaulting contractor.

It is stated that even in contracts, where time may not be the essence of the contract, upon delay in performance, the innocent party/Employer may sue for any loss that may be caused by delay.

Thus, it is imperative that any delay beyond the stipulated completion date, is condoned by the doctrine of force majeure or the doctrine of frustration of the contract can be applied in favour of the contractor. It is imperative to evaluate if Covid-19 can be considered as force majeure event or can be invoked for frustration of a contract.

Force Majeure:

Force majeure is a contractual term giving refuge to a party to absolve from performing part of the contractual obligations due to reasons beyond its control. Although not defined under the Contract Act, the essence of the doctrine of Force Majeure is imbibed in Section 56,which inter-alia, provides for effect of an unforeseen event that may prevent a party from performing its obligations under an agreement. The intention is to save the performing party from the consequences of anything over which the contractor has no control.

Since the Contract Act does not provide for any particular form or condition for a force majeure clause, parties are free to define the events and conditions that may be covered by the force majeure clause. Thus, it is imperative that each force majeure clause or in the absence of the same, the entire contract is understood independently to define the boundaries of force majeure under each agreement and to test if the travesties of Covid-19 would be permitted or not.

In the melee of orders/directions passed by the Central and the State Government to give urgent reliefs to businesses, an Office Memorandum dated 19 February 2020 by the Department of Expenditure, Procurement Policy Division, Ministry of Finance has been quoted extensively, as the same provides that Covid-19 would be covered in the force majeure clause of the Manual for Procurement of Goods, 2017 issued by the Department and serves as a guideline for procurements by the Government.

The said Office Memorandum is in relation to the procurement contracts of the Government of India for goods and services and is not applicable to interpretation of the force majeure clauses under private contracts. As stated, each contract has to be examined independently to determine if Covid-19 is a force majeure event under its ambit.

It may be stated that the force majeure event has to be notified to the opposite party/Employer at the earliest. Delay in invoking the force majeure clause robs the efficacy of the same, as the opposite party may allege afterthought on part of the contractor.

Thus, the effect of the Government, Administrative and legislative actions has to be considered, even if not expressly stated in the contract. Even the immediate effects of lockdown have to be considered, while adjudicating on any default/breach of contract on account of Covid-19.

It is pertinent to note that the onus of proving that the contract has fundamentally altered due to the occurrence of Force Majeure event is on the party invoking the clause. The party is also under an obligation to mitigate damages, wherever possible, in such a case.

Doctrine of Frustration:

While the Indian law does not define Force majeure, Section 56 of the Contract Act provides for frustration of contract, if:

  1. performance of the obligations under the contract become impossible or unlawful due to change of circumstances beyond the control of the parties after the contract has been executed;
  2. The object of the contract is lost.

However, merely because of occurrence of an event not anticipated by the parties, but making the performance is onerous or costly will not frustrate a contract.

It is impossible to lay down an exhaustive list of situations on which the doctrine of frustration can be applied. However, destruction of subject matter, non-occurrence of the contemplated event, death or incapacity of a party, etc. could be certain grounds for invoking doctrine of frustration of a contract. However, in order to claim that the contract is frustrated, it must be established that the performance of the contractual obligations has become impossible by reason of some event which the parties had not anticipated at the time of entering into the agreement.

Conclusion:

To say that the companies engaged in the construction and engineering sector, would be affected due to the current unprecedented situation would be an understatement. The various restrictions put in place by the Governments to control the effects of the virus may trigger shortage of raw material and manpower, disrupted supply chain, further creating handicaps in performing contractual obligations. Contraction in consumption demand should be the least of the worries for the sector. Some elements in construction and engineering are imported from countries, which may be more badly affected, creating a domino effect on the entire sector.

However, one must safeguard against the inevitable by adopting corrective measures in time. The first step is to evaluate the contract clause(s)to ascertain the extent of liabilities upon breach and the last step is to proactively adopt all measures to mitigate the liability by timely invoking the correct legal doctrine(s).

This article is for information purpose only. It is not intended to constitute, and should not be taken as legal advice, or a communication intended to solicit or establish commercial motives with any. The firm shall not have any obligations or liabilities towards any acts or omission of any reader(s) consequent to any information contained herein. The readers are advised to consult competent professionals in their own judgment before acting on the basis of any information provided hereby.

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