Back in Action | Recommencement of Construction Activities
Aakanksha Joshi believes that one should consider several factors before construction work can resume at sites
While announcing an extension of the lockdown up to May 3, 2020 on April 15, 2020, the Central Government also issued guidelines expanding the list of activities permitted from April 20, 2020. These relaxations indicate a phased easing of the lockdown in order to gradually bring the economy back in action. Construction activities for roads, irrigation projects, buildings and industrial projects in rural areas, projects in industrial estates, renewable energy projects and existing projects within municipal areas with available workers are now permitted. On May 1, 2020, a further extension of the lockdown was announced, subject to the demarcation of the country into red, green and orange zones with different restrictions. In red zones, being the most restricted, in situ construction activities (where workers are available) and construction of renewable projects, are permitted.
Several construction projects have been stalled during the lockdown. Discussions on ‘force majeure’ provisions in contracts are no longer merely academic. The timing of the notice of invocation is written into contracts to clearly indicate the period from when ‘suspension of obligations, and in some cases, sharing of costs can be claimed. However, Covid-19 has not been free from controversy. Not all contracts name epidemics as force majeure. Until the relevant lockdown orders, many employers asserted that Covid-19 did not hinder, delay or render performance impossible. The situation changed with the orders issued by certain State Governments followed by that issued by the Ministry of Home Affairs on March 24, 2020, imposing a near-complete lockdown on the country.
The orders clearly justify the inability to perform most, if not all, of the obligations under construction contracts. Clients are unable to provide access to and contractors are unable to carry on construction activities at site during a lockdown. However, only those obligations that are affected by the force majeure would stand suspended. Accordingly, payment obligations of the client would remain effective, as several judicial precedents establish that commercial hardships cannot equate to inability to perform. Further, where a contract has design, engineering or other obligations not requiring presence at site, work-from-home protocols could be an alternate mode of performance. Courts have often held that where an alternate mode of performance is possible, force majeure cannot be claimed.
‘Change in law’ provisions that are often included in construction contracts may also be considered. The financial impact of a change in law, in this case the costs incurred due to demobilization, change in site and work conditions and mandatory wage payment due to the lockdown orders, may be addressed by these provisions that require the affected party to be put in the same position as it would have been save such change. However, often such clauses only cover only changes in tax laws, in which case no relief is available.
Considering the easing of restrictions from April 20, 2020, clients would likely have anticipated a speedy return to site. Contractors may also be eager to start work. There are reports that construction work on 70% of highway projects and that for the Kochi and Bengaluru metros have resumed. However, resumption of works may not be entirely possible by reason of isruptions in supply chains and scarcity of construction workers given the mass exodus of migrant workers. In such an event, has the force majeure actually come to an end?
Covid-19 is still rampant with the numbers of cases in India seeing a steady increase. While experts debate the impact of the containment measures, a sense of anxiety is still pervasive. A contractor is under statute, and sometimes contractually, required to ensure the health and safety of its workers. While guidelines have been prescribed, it is difficult enforce social distancing to stem the spread of the easily transmissible Covid-19 at construction sites between people working in close quarters. In large construction projects with multiple contractors, a single contractor cannot reasonably take the onus of ensuring the safety of its workers working in close conjunction with others. Further, clients may seek to enforce contractual provisions obligating contractors to ensure the health and safety of its workers, given the client’s legal and contractual obligations.
In this backdrop, could a contractor claim that force majeure still subsists despite the relaxations? The pithy (and correct) answer is –it depends on the contract. As we’ve seen earlier, whether epidemics are covered by force majeure depends on the turn of the contractual phrase. The contractor’s conduct in invoking force majeure is also relevant. Was its claim based on Covid-19 or the lockdown restrictions? Does the contract exclude labour and material shortages from ‘force majeure’? Even if not excluded, it bears repeating that commercial hardship is not an excuse for force majeure. A client can argue that the contractor could procure materials and manpower, albeit at higher costs.
Even a sympathetic client may need to consider the contractor’s difficulties as against its own contractual obligations. In PPPs, concessions contain detailed frameworks for force majeure. Where the authority so requires, the client may in turn require contractors to resume construction, despite its own misgivings. Where force majeure clauses are misaligned, the contractor may be entitled to greater relief than the client, leading to the client incurring contractual liability. The client should find a way to pass down relief to its contractors only to the extent it is entitled to relief itself. The client’s covenants in financing agreements may also need consideration.
Some construction (where the employer is the government) and PPP contracts provide for a distinction between political and non-political force majeure. Political events are those caused by government authorities and non-political ones are those without government intervention. In the current scenario, COVID-19 may be classified as a natural calamity being a non-political event. However, the lockdown squarely falls in the ambit of a political event. The reason for this distinction is that usually political events require the authorities to share the costs of force majeure with the contractor / concessionaire. When considering the impact of COVID-19, a contractor may claim a political event in order to claim costs. At the same time, the lockdown is a finite event that commenced after disruptions were already caused by COVID-19. Further, the disease still prevails and hence the non-political event can still be said to subsist. We are aware of some developers seeking to claim the benefit of both in order to claim time and costs. How this will be seen by an adjudicator is unclear. Certainly, there are two separate heads that COVID-19 and the lockdown orders fall under. However, whether principles of equity would permit the benefit of both due to an overlap in time, needs due consideration. There is nothing in the contract that would prevent such a claim. However, questions as to which such dual claims could be a double-dip of reliefs and whether the contractor would have made the claim even if no lockdown orders were issued, could guide decisions on this unusual issue.
In cases involving government agencies, contractors and developers may like to press upon the Office Memorandum of the Ministry of Finance dated February 19, 2020, acknowledging Covid-19 as force majeure, to the extent appropriate. A similar notification was also issued by the Ministry of Renewable Energy (MNRE) on March 20, 2020. Therefore, it is not merely the lockdown but the disease itself that is force majeure. However, these notifications have limited applicability. Further, since then there have been sector-specific notifications that are pertinent. The Ministry of Power on April 23, 2020 issued a notice directing authorities to permit resumption of construction activities in thermal/hydro power generation projects, expecting the resumption of construction. The MNRE, on the other hand, issued a notice on April 21, 2020 permitting implementing agencies to extend the COD during lockdown and an additional 30 days thereafter for normalisation.
Contractors are faced today with having to perform a neat balancing trick between contractual and legal obligations, commercial considerations and health concerns. The answers reside to some extent in the contract and the contractor’s behavior. The uneasiness remains considering that the effects of Covid-19 would extend beyond its manifestation.
The author is partner at Economic Laws Practice