Open Access Research Article
IMPACT OF COVID-19 ON CONSTRUCTION CONTRACTS AND ARBITRATION IN INDIA (By-Gloria Hancy Purty & Shabri Bose)
Published Paper
Article Details
Authored
By-1. Gloria Hancy Purty
2. Shabri Bose
Abstract
The outbreak of COVID-19 has significantly impacted various industries
negatively as government sanctions, travel restrictions, and geopolitical
upheaval have heightened commercial volatility. The Construction industry across
the world is not immune to this catastrophic phenomenon. This sector of the
industry has always been considered heavily litigious as it is a hotbed of
disagreements; the complicated construction processes with several moving parts
and the enormous project cost amidst the low-profit margin taken by the parties
make it prone to legal disputes. Most of these disputes depend on the terms of
the Construction Contract agreed by the parties. In terms of contract standardisation in construction and engineering,
FIDIC (Foreign Federation of Consulting Engineers) standard contracts are used
in various international jurisdictions, including India. While numerous
countries throughout the world have raised their concerns, and the situation as
a result of COVID-19 is still not totally under control, there are a number of
challenges stemming from these contractual responsibilities, especially the
parties worrying about combating the impact of the pandemic through
arbitration.
1.
The Impact Of Covid-19 On Construction Sector
In India after agriculture,
construction industry is the second largest employer with an industry size of
INR 10.5 trillion.[1] The
sector accounts for 8 per cent of the nation’s GDP, employs 57.5 million people
and comprises around 500 companies.[2]
The World Health
Organization [“WHO”] declared the Coronavirus pandemic on March 11, 2020. The
epidemic has created several unprecedented problems for different businesses
throughout the world, and the building and infrastructure sectors were not
immune to them. Despite efforts made by India to mitigate the negative impacts,
by exempting construction activity or specific critical projects from otherwise
applicable confinement restrictions, the pandemic’s influence on the construction
sector has been undeniably significant.
This paper analyses the
measures taken by India and other countries in response to the pandemic to
understand the consequences of it on infrastructure projects.
1.1.India’s Response to the Covid-19 pandemic
On March 24, 2020, the Modi
administration in India enforced a three-week countrywide lockdown. The curfew
was eventually extended until June 8, 2020.[3]
Construction work on critical construction projects restarted on April 20,
2020. Renewable energy initiatives, for example, were one such type of project.[4]
Non-essential building projects were also allowed to resume on June 8, 2020.
All construction, on the other hand, has been subject to site-wide social
distancing norms, required thermal scanning, and periodic sanitization.
Direct And
Indirect Impact Of Covid 19 On Construction Projects
A full analysis of COVID-19
effects is unattainable due to the range and complexity of national building
projects, as well as uncertainty regarding the pandemic's future course. It is
apparent that the consequences have been or will be substantial for certain
projects, and there is a significant danger that the impacts will continue to
mount in the months or potentially years ahead.
i.
Mobilisation of Personnel: Construction work rely heavily on
manual labour. Most of the construction workers in India are migrant worker who
are from rural areas working in urban cities as seasonal labour.[5] When
the lockdown was imposed putting a halt on construction activities migrant workers
returned to their place of origin.[6] This
caused a severe strain on the supply chain of manpower.
ii.
Procurement of Equipment, Materials and Plant: China is a
prominent global supplier of raw and manufactured building materials, with the
availability of Chinese commodities being particularly important for the Indian
construction sector.[7] As a
result of the stringent lockdown measures enforced, several Chinese industries
slowed or stopped down entirely in the first quarter of 2020, resulting in a
major drop in building material manufacture and export.[8]
iii.
Operation Constraints at site: Those projects that were
obliged to shut down completely during periods of lockdown suffered a sustained
loss of progress. Even where projects have been permitted to proceed, development
has been hampered by the necessity to adhere to tougher health and safety
regulations on the job. These have included (i) temperature checks before
entering the site; (ii) frequent cleanliness of materials, equipment, and
working environments; and (iii) social distance standards, which have limited
the number of people who may operate in a particular place at any one moment.
Access to or within the site frequently necessitates the sharing of restricted
areas (e.g., elevators, voids for heating, ventilation, and air conditioning,
etc.).[9]
iv.
Impaired flow of cash: The majority of construction contracts
tie contractor compensation to the completion of predetermined milestones or
progress indicators. The negative effects of COVID-19-related policies in India
and throughout the world on project development would, in most cases, result in
a direct reduction of the contractors' cash flow. This, in turn, can have
ramifications for suppliers and subcontractors' cash flows, especially with
‘pay when paid' agreements in place.
2.
Construction Contracts In The Post Covid-19 World
Although COVID-19 is an
unusual and unique illness that necessitates the adoption of innovative
containment measures, it is unlikely to cause a paradigm shift in the kind of
disputes that normally emerge from building contracts. COVID-19, on the other
hand, is bound to enhance or complicate the common forms of project conflicts.
Below, we look at some of
the most common options available to contractors under contracts regulated by
Indian law.
2.1.Change in Law
One of the first options
that is open to the contractor to recover the costs and losses through the
contract as a result of Covid-19 is Change in Law. Standard forms of change in
law provisions developed by the International Federation of Consulting
Engineers [“FIDIC”], which expressly state that "a change in the laws of
the country" that affects the contractor's performance of its obligations
may entitle the contractor to both a price adjustment and a time extension.[10] The
term 'laws' is a broad term that encompasses a wide range of legislative and
regulatory actions.[11]
Within the Indian regime this would include actions of the State Government,
Central Government and Union Territories to invoke Epidemic Diseases Act 1897,
Disaster Management Act, 2005 and other such acts to issue regulations,
ordinances and others thereinunder may qualify as a ‘Change in Law’.[12]
After the lockdown from
March 2020, the home ministry issued revised rules for "Lockdown 2.0"
under Section 10 of the Disaster Management Act 2005[13] which
stated that new construction work for highways, renewable energy and
irrigation-related activity, and industrial projects outside municipal
boundaries might begin after April 2020. However, it was up to the various
district administrations or local authorities to decide whether or not these
structures may be built.
The availability of
employees on-site was one of the most important requirements for starting
construction work (in-situ). As a result of this, the government imposed
restrictions on the movement of construction workers between cities and states.
During the second wave, the
national capital went into lockdown on the April 14, 2021 and it was only after
May 31, 2021 that the construction activities were resumed.[14] For
instance, Andhra Pradesh after imposing a partial lockdown, issued a Standard
Operating Procedure [“SOP”] allowing Industries under constructions to continue
in a single shift.[15]
When it comes to restarting
construction activities, the example of Karnataka can be considered. The SOP
contained guidelines that the construction site needed to follow which included
but were not limited to screening of workers with thermal scanners before
entering, disinfections of bathrooms on a daily basis and routine checks.[16]
All the above instances
constitute a relevant change in law depending upon the wordings of the
contractual provisions and the nature and impact of the alleged change. For
example, based on the standard wording in the FIDIC Silver Book forms, it will
be necessary to consider whether the relevant change was to the laws of the
‘Country,' which is defined as ‘the country in which the site (or the majority
of it) is located, and where the Permanent Works are to be executed.'[17] If
the measures in question are lockdown or health and safety precautions that
restrict or delay the continuation of activity on site, there appears to be no
special problem in demonstrating a relevant change in the laws of the
‘Country.' In contrast, if lockdown measures or travel restrictions in other
Country/State have caused delays in key equipment and/or materials deliveries
or prevented labour deployment in the Country/State where the project is
located, it is possible that no relevant change of law has occurred, and thus
no entitlement can be claimed.
2.2.Force Majeure
Black’s Law Dictionary
defines ‘Force Majeure’ as “an event or effect that can be neither anticipated
nor controlled, is unexpected and which prevents someone from doing or
completing something that he or she had agreed or officially planned to do”.[18] In
contractual terminology, Force Majeure refers to an unexpected incident that
prohibits the parties from fulfilling their obligations under the contract. A
Force Majeure provision is required under Indian law and should be expressly
provided in the contract in order to benefit from its protection. Parties
cannot howsoever, invoke an implicit Force Majeure clause.
In the construction sector,
standard form contracts generally include force majeure sections that describe
the particular circumstances that will qualify as force majeure and give a test
to evaluate whether undefined occurrences will also qualify as force majeure.[19] For
example, force majeure occurrences are described in the FIDIC forms as events
or situations that:
(1) are outside the control
of a party;
(2) before entering into the
contract, the party could not reasonably have provided against;
(3) the party could not
reasonably have avoided or overcome the situation that had developed; and
(4) Are not traceable in any
way to the other party.[20]
The specified force majeure
occurrences in the FIDIC forms, which pertain to man-made calamities and/or
natural disasters, do not include pandemics.[21] However,
a party wishing to include COVID-19 and related occurrences within the FIDIC
force majeure provision must show that the four requirements listed above are
met. [22]
The Indian Contract Act of
1872 [the "Act") contains two sections addressing Force Majeure and
Acts of God. Section 32 of the Act addresses contingent contracts, stating that
if a contract is based on the occurrence of a future event that becomes
impossible, the contract is null and void. Contract frustration is addressed in
Section 56 of the Act, which stipulates that a contract is invalid if it
becomes impossible to perform after it is formed due to an occurrence that a
promisor could not avoid.
The Supreme Court has held
in a series of decisions ranging from Satyabrata Ghosh v. Mugneeram Bangur[23] to Energy
Watchdog v. CERC[24]
that when a force majeure event is related to an express or implied clause in a
contract, it is governed by Section 32 of the Act, whereas when a force majeure
event occurs outside the contract, it is governed by Section 56 of the Act.
Because the world has never
seen an epidemic like COVID-19, it's unlikely that any contract would
specifically refer to it as a Force Majeure event. Though the impact of
COVID-19 is still being felt, there are several reasons why the Indian courts
have deemed it a Force Majeure event. The different grounds for invoking the
Force Majeure clause in response to the emergence of COVID-19 are summarised
here:
·
COVID-19 is a natural catastrophe, according to the
Department of Expenditure (Ministry of Finance, Government of India), which said
in an Office Memorandum dated February 19, 2020 that it is covered under the
Force Majeure provision in the Manual for Procurement of Goods, 2017. The
Memorandum further said that contracting parties may terminate their
contractual duties / liabilities by using the Force Majeure provision in
accordance with the contract's terms.
·
Many times, a contract's Force Majeure provision specifically
includes epidemic and/or pandemic sickness as one of the occurrences. In such
situations, it becomes obvious that the COVID-19 will activate the parties'
agreed-upon Force-Majeure provision.
·
A common Force Majeure provision in a contract list
"Governmental orders," "changes in legislation," and/or
"acts of Government" as circumstances that might trigger the clause.
With effect from March 25, 2020, the Government of India declared a state of
lockdown at the national
level for a period of 21
days, as per an order[25]
dated March 24, 2020, read with the guidelines[26] and
addendums[27].
Except for a few necessary services, all commercial and private businesses
including construction were forced to close. It is conceivable to effectively
claim that the execution of contractual duties by parties in a contract has
become not only impossible, but also illegal and contrary to government orders.
Furthermore, the Madras High Court[28] recently
recognised the lockdown as a Force Majeure event.
·
In most contracts, a Force Majeure provision covers
occurrences such as Acts of God that are beyond the control of any of the
parties. COVID-19 was, without a doubt, beyond any reasonable control or
expectation by any of the contracting
·
Although Indian courts have not directly ruled on whether an
epidemic/pandemic like Covid-19 is an "Act of God," an argument to
that effect can be supported by the Supreme Court's decision in The Divisional
Controller, KSRTC v. Mahadava Shetty[29], which
holds that the term "Act of God" refers to natural forces acting
without human intervention, with the caveat that every "Act of God"
is different. The Madras High Court[30] and the
Kerala High Court[31]
have both issued similar rulings.
·
Many times, a contract's Force Majeure provision contains
language like "and other similar events." COVID-19 may be considered
a Force Majeure occurrence under the ejusdem generis rule in such situations.
The limitation period is the
time limit set by law during which legal action can be brought or a right
enforced. Part II of the Schedules of the Limitation Act of 1963 establishes
the statute of limitations for contract-related lawsuits. The limitation period
for particular contracts, such as suits for wages, suits against carriers,
suits involving negotiable instruments, and so on, is set forth in Articles 6
to 53. According to Article 54, the statute of limitations for a claim
involving particular performance of a contract is three years from the day set
for performance or, if no such date is set, from the time the plaintiff
receives notice that performance is denied. Similarly, Article 55 states that
when a contract is broken or where there are successive breaches.
It is worth noting that the
Honourable Supreme Court took cognizance of the request for a limitation period
extension suo moto.[32] The
Hon'ble Supreme Court, in light of the situation created by the outbreak of
COVID-19 and the resulting difficulties faced by litigants across the country
in filing suits, has extended the period of limitation for filing suits with
effect from March 15, 2020 until further orders, irrespective of any statute of
limitations. All Indian courts, tribunals, and agencies are bound by the suo
moto order.
The Honourable Supreme Court
ruled on March 8, 2021, to revoke the extension on limitation from March 14,
2021, citing the restoration of normalcy and a decrease in the prevalence of
the Covid-19 virus. Following that, in 2021, a second wave of the Covid-19
epidemic struck India, crippling the country. The Supreme Court Advocates on
Record Association [“SCAORA”] intervened in the suo motu proceedings,
requesting that the term of limitation be restored. In response to SCAORA's
plea, the Apex Court issued a ruling on April 27, 2021, reinstating the term of
limitation extension until further orders.
2.3.Frustration
Other concepts, such as
frustration and impossibility, may exist to justify non-performance where force
majeure cannot be used for example, under common law systems where there is no
contractual force majeure clause or impracticability.
In most common law
jurisdictions, proving frustration has always been quite difficult. A contract
is frustrated in English law when: (i) a supervening event (ii) occurs after
the formation of the contract, rendering (iii) a fundamental obligation in the
contract physically or commercially impossible to perform, or (iv) renders a
fundamental obligation radically different from that undertaken at the time of
entering into the contract.[33]
The simple fact that
performance would cause great, perhaps fatal, hardship to the performing party
is inadequate, and it is frequently assumed that performance must be truly
impossible.[34]
Courts and arbitral
tribunals will be asked to evaluate the nature of the government limitations,
their length, and their relevance to a party's alleged incapacity to execute
its contract duties when applying frustration, impossibility, or
impracticability. The application of these theories, like force majeure, will
be evaluated on a case-by-case basis.
Frustration, impossibility,
and impracticability excuse the parties from continuing to fulfil their
contractual duties. As a result, one would expect that these doctrines would be
used only in exceptional circumstances, such as when the employer or
contractor, in addition to having a viable case of impossibility of
performance, believes that terminating the relationship and/or the project is
the most advantageous course of action.
3. Impact Of Covid-19 On Resolution Of Construction Disputes
In India, the
construction industry received the 2nd highest FDI in the
period 2000-2020. Under the NIP, India has a $1.4 billion infrastructure
investment budget, with 24 percent going to renewable energy, 19 percent going
to roads and highways, 16 percent going to urban infrastructure, and 13 percent
going to railways.[35] It is
also forecasted that by 2025, India will lead the global construction market by
being the third-largest in the world. The Indian construction industry is
highly prone to litigation and disputes arising out of loopholes in contracts.[36]
Construction
disputes are complex in nature due to various components involved in them but
mainly because the disputes arising are technical or factual or both. Disputes
arising out of construction contracts are distinctly different when compared to
other body of disputes.[37] Further,
due to the nature of the project being time sensitive and involvement of
multiple parties in these, contracts always ask for urgent resolution of it.
These disputes can arise in any stage even in the beginning, from the formation
of contracts to presence of valid contract. Interpretation of key provisions,
inconsistent provisions coupled with shoddy drafting can lead to many disputes
right from the inception.[38] The
majority of this disputes arises while its performance and delay in completion
of the project. Arbitration is becoming a favoured dispute resolution process
in the infrastructure sector owing to the complexities of construction
disputes.[39]
COVID-19 is a
prime example of an unanticipated danger encountered in the building sector.
The epidemic has heightened many of the regular frictions in the building
business while also highlighting new issues.[40]
Project delays are the most visible repercussions of the lockdowns, social
isolation, and
other
restrictions imposed on states and administrations.[41]
Standard form
contracts are currently not extensively used in Indian construction projects.
Government authorities, such as the National Highways Authority of India
(NHAI), employ their own customised contract form that represents their
requirements, notably for public-private partnerships, while the FIDIC, ICE,
NEC, JCT, and ACA forms are often used.[42]
The terms of contract between the parties define the course of arbitration
process.
3.1. Limiting Contractual Provisions to Claim
Damages or Extension of Time
The existing
Indian legal regime provides for provisions which help to secure the rights of
the parties in case of delay in performance of agreement as delay can happen
not just under unexpected extreme situations like COVID-19 but also in the
general course of performance of a construction project. The construction
contracts further contain provisions which clearly define the time period by
which the defaulting party (including case of concurrent delay) or the
aggrieved party can claim for extension or damages respectively. COVID-19 has
caused many uncertainties in completion of performance of a contract project,
one of which is when they should send a notice for non-completion and avail for
extension of time. Determining permitted events of delay are fact-intensive
inquiries, thus fully understanding the impact will take time.[43] Moreover,
if an agreement is governed by the FIDIC clauses -Optional Termination, Payment
and Release provides that “If the execution of substantially all
the orks in progress is prevented for a continuous period of 84 days by reason
of Force Majeure of which notice has been given under Sub-Clause 19.2 [Notice
of Force Majeure], or for multiple periods which total more than 140 days due
to the same notified Force Majeure, then either Party may give to the other
Party a notice of termination of the Contract. In this event, the termination
shall take effect 7 days after the notice is given”[44]
As stated above
the presence of such clauses adds on to the uncertainty because during Covid-19
central government as well as state governments-imposed restrictions and
lockdowns to control the widespread disease by analysing the situation of the
country. Therefore, the impacts of these government restrictions ultimately
caused delay and the same could not have been anticipated by the construction
industry nor these conditions were under the control of the contractor/owner.
The occurrence
of Exceptional Event is a must. Once it has occurred the affected party has to
follow the contractual notice and follow the mitigation provisions. A party who
is unable to perform any of its obligations shall notify the other party of the
Exceptional Event, outlining the event's impact on
performance.[45] States
are generally left free to determine the nature of domestic challenge
mechanisms, to enable alignment with existing national laws and legal systems.[46]
Proceedings In Case Of Breach Of An Arbitration
Agreement
According to the
present Indian Law “the aggrieved party can make an
application under section 8 (domestic) or section 45 (foreign) of the
Arbitration Act, requesting that the court refer the parties to arbitration and
decline to entertain the proceedings”[47].
Arbitration is referred due to flexibility of the mechanism, efficiency
combined with confidentiality. Covid-19 has disrupted the normal court
functioning which consequently has compelled practitioners to look for
alternative efficient methods to resolve disputes.[48]
The Parties who have previously shown reluctance to arbitration are now
mutually agreeing to resolve by opting for mediation / arbitration.
Issues With
E-Arbitration
Covid-19 has
pushed the disputing parties involved in arbitrations to move and carry
proceedings remotely. However, advancement leads to new challenges. According
to a survey conducted by Queen Mary University in collaboration with White
& Case prior to Covid-19 in 2018, a primary concern regarding IT usage in
international arbitrations may be a lack of familiarity with tech-based
infrastructure (including the cost associated with it) that weighs in when
opting for in-person proceedings.[49]
Right to
in-person hearing: - Earlier in India it was observed in State of
Maharashtra v. Praful B. Desai[50], that the Supreme Court held that the parties
have appeared through video conference are present and have recorded their
evidence virtually through electronic means in the virtual presence of the
accused. Therefore, it can be concluded that the right to in-person hearing is
equivalent to oral hearing.
Compliance
of Due process of Law as per Section 18 of the Act: - The impact of
Covid-19 has compelled the judicial forums of India (including Supreme Court
and High Courts) to use electronic means to hear pending matters.[51] The
Honourable Supreme Court of India has released guidelines with respect to the
usage of video-conferencing for court functioning ["SC Guidelines”][52]. Further
by relying to the aforementioned judgement of the SC i.e., Praful Desai’s case
included recording of evidence in the virtual presence of the accused and on a
video conference and thus was concluded to be evidence. All high courts across India have been consistently using
various e-platforms such as Zoom, WhatsApp, Cisco Webex, Vidyo and Skype
amongst others to hear pending urgent cases. Therefore, an arbitration
proceeding thus can be virtually conducted and will be considered to have been
completed with due process of law.
Section 9
of the Arbitration Act, 1996 in Pre-Arbitral: In the recent case
of Mumbai International Airport Ltd. v.
Airports Authority of India[53]
hereinafter referred to as MIAL and AAI respectively on 4th April
2016 executed an agreement of Operation, management and development agreement
[“OMDA”]. The Chhatrapati Shivaji Maharaj International Airport [“CSI”] was
leased by the AAI and MIAL for maintain good condition. Further, the terms of
OMDA, provided that the MIAL have to pay an annual fee which is payable in
twelve equal monthly instalments to AAI. They
after Covid-19 invoked the force majeure clause and informed of the same to AAI
for its suspension of monthly fee and instructed the same to its bank to not
transfer any instalment from April 2021.
Upon disagreement of extension of time MIAL approached the Court seeking
arbitration under Section 9 of Arbitration Act, 1996. The Court decided in favour of MIAL holding that
“OMDA provides for suspension of performance in case of a force majeure event.
Under Section 9, the court is primarily concerned with the need to maintain the
status quo in order to facilitate the arbitral process launched by the parties.
As a result, the Court stated that it was also open to Section 9 courts to
condition such grant by compelling the parties benefiting from it to start
arbitral proceedings within a specific term while passing pre-arbitral interim
measures of protection under Section 9.”[54]
Conclusion
The uncertainty
brought by the COVID-19 has disrupted the course of contractual relationship in
the Construction Industry. The tension between parties have led to increase in
number of disputes especially those of non-performance due to delay. In India,
the practice as stated above provides that these disputes are resolved by the
full dispute resolution methods. The Arbitration Act, 1996 provides for courses
like Arbitration and Conciliation has means to resolve this dispute and resume
the construction which might have been short closed due to the said disputes.
India does not have a special construction court like that of England however
the law in India helps to constitute Commercial Court. Apart from the usual
dispute resolution mechanism the India Arbitration law provides and facilitate
the time-effective disposal of cases. The already existing Indian Arbitration
regime is capable enough to take up e-arbitration in cases when COVID-19
created obstruction not just in completion of Construction projects but also
the arbitral proceedings. Further, the Indian Contract Law and the existence of
clauses such as force majeure and its effective use in the Arbitration
Agreement as stated above can be concluded to be a fairly developed law which
have been previously invoked by parties to suspend their obligations. However,
the question has to whether this can be invoked in in cases of an extreme of
uncertainty was not clear. The Indian Court have had granted the parties to
invoke this clause and later this was concreated by the Government of India’s
Official Memorandum declaring COVID-19 as a force majeure.
Way Forward
As for the
position of India relating to emergency arbitration is not clear therefore the
best resolution for a party is to go for the traditional arbitration and
inclusion of fast-track arbitration in case of emergency arbitration. One of
the main reason why an emergency arbitration is initiated is that there is no
arbitrational tribunal and in time sensitive matters. It is concluded that
emergency arbitration can be a way forward for cases requiring immediate
attention especially where there is a dispute concerning the materials or
valuation of the wages and salaries of employees etc. Further emergency
arbitrational tribunal can be effective as in the case of Centrotrade Minerals v Hindustan Copper Limited[55],
the Supreme Court has recognised that separate arbitral tribunal can adjudicate
different stages of dispute in hand. The Act also permits the invocation of
Emergency Arbitration.
Article Information
IMPACT OF COVID-19 ON CONSTRUCTION CONTRACTS AND ARBITRATION IN INDIA (By-Gloria Hancy Purty & Shabri Bose)
Author Name: Gloria Hancy Purty & Shabri Bose
Title: IMPACT OF COVID-19 ON CONSTRUCTION CONTRACTS AND ARBITRATION IN INDIA
Email Id: Gloria Hancy Purty-ghancy6@gmail.com & Shabri Bose-bose.shabri@gmail.com
- Journal IJLRA
- ISSN 2582-6433
- Published 2022/07/05
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
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