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COVID-19: Checklist for Invoking Force Majeure Provisions under the Contract
Type of Contract |
Time Extension |
Cost Claims
|
Right to Terminate for Prolonged Force Majeure |
Contracts based on FIDIC contracts
|
✓ |
✓ (Employer to pay the cost except in case of natural catastrophe) |
✓ |
Concession Agreement based on the Model Concession Agreements issued by NITI Aayog[i] |
✓ |
✓
(But each party bears its own cost for non-political events) |
✓
(Termination Payments allowed) |
Other bilaterally negotiated or standard-form contracts |
✓ |
✓
(Each party bears its own cost) |
✓
|
[i] Erstwhile Planning Commission of India, the think tank of the Government of India.
Pandemic COVID-19 or Lock-down – Do they appear in the list of events? A key enquiry to be made in order to claim relief in these circumstances is to determine if the occurrence of a pandemic like COVID-19 and/or the consequent steps taken by the Central and the State Government(s), including the lock-down, appear in the list of events identified by the parties that qualify as force majeure events. Generally, most contracts (including those based on the FIDIC contracts and the Model Concession Agreements issued by NITI Aayog) provide for an inclusive list of events. However, it is possible that such list does not specifically include ‘epidemic’, ‘pandemic’ or ‘lock-down’ as events. In such cases, the principle of ejusdem generis can be applied to establish that these events are similar in nature to those mentioned in the list and fulfil the tests for claiming the relief. In any case, regardless of the list of force majeure events being inclusive or exhaustive, reliance may be placed by the affected party on various notifications issued by the Government of India, where pandemic COVID-19 has been declared to be a force majeure event for claiming relief. For instance, the notification issued by the Department of Procurement, Ministry of Finance on 19 February, 2020, the press release by the Ministry of Road Transport & Highways of 25 March, 2020 or the Office Memorandum issued by the Ministry of New and Renewable Energy on 20 March, 2020. Notice of force majeure It is important that force majeure notices are sent for each event that prevents the performance of obligation(s), regardless of whether such events affect performance of a single or multiple obligations. For instance, installation or testing of a machinery could be affected on account of travel and visa restrictions imposed by the Government of India or on account of the lock-down in the state/country or on account of personnel or employees being diagnosed with COVID-19. In this example, if the obligation to perform installation and testing is affected on account of all three events, then it would be prudent to claim force majeure on account of all these events. Thus, notices for each event and its affect should be sent to the counterparty to claim adequate relief. Following the procedure is critical Courts in India, on various occasions, have held that where a contract provides for force majeure relief in unambiguous terms, the party seeking relief should strictly follow the procedure set out in the contract. Even certain contracts, such as those based on FIDIC contracts, state that the affected party can claim relief if it has given a notice of at least 14 days from the occurrence of the event of force majeure specifying the obligations which are prevented due to the occurrence of such event. Further, any lapse in following the procedure under the contract may lead to disputes with the counter party on the ground that the contractual provisions have not been adhered to and hence no claim is admissible. Reliance on claims from sub-contractors If a party’s ability under a contract to claim force majeure relief is dependent on receipt of force majeure notices from its subcontractors, then the party should analyse such contract(s) to identify the extent to which the contracts are back-to-back. In case the contracts are not back-to-back, the party should prepare a risk mitigation strategy to cover for risks on account of its inability to claim relief. Dos and Don’ts
Dos
|
Don’ts |
✓ Identify the event(s)/provision(s) for relief. Ensure claim is not excluded from force majeure relief ✓ Identify obligations affected by force majeure events ✓ Identify subcontracts affected and reliefs that may be claimed under them ✓ Undertake review of dependencies, business risks and legal rights and remedies ✓ Take mitigation measures to minimize losses. Keep records of measures taken ✓ Identify affected party’s obligations which can be performed ✓ Strictly follow notice requirements ✓ Take corrective actions in case of any adverse communication from counterparties ✓ Follow the news and react to evolving circumstances |
x Miss any contractual timelines for claiming relief and sending notices x Forget to follow procedure prescribed under contracts for claiming remedy or seeking relief x Use ambiguous language when seeking relief. Draft detailed notices with reference to specific provisions of contracts x Forget to include documentary evidence along with claim notices x Fail to expressly reserve rights and remedies while drafting notices or response to notices x Accept claims of subcontractors, which can’t be claimed from employer on back-to-back basis x Omit to inform subcontractors that acceptance of claim is dependent on back-to-back relief received x Omit to exclude admission of any cost claims, escalations or price negotiations, if not allowed under contracts
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A review of contractual provisions and prompt action on the part of parties to a contract, wherever possible, could soften the blow which businesses are likely to suffer in the global aftermath of COVID-19. Authored by :- Ms. Anuja Tiwari, Partner; Ms. Mallika Anand, Senior Associate; Ms. Amoolya Khurana, Associate and Mr. Aman Raj, Associate. 1 - Dhanrajamal Gobindram v. Shamji Kalidas and Co., AIR 1961 SC 1285. 2 - Delhi High Court in its judgment dated 25 March 2008 in Rajindra Nath Kundu v. Union of India. 3 - Erstwhile Planning Commission of India, the think tank of the Government of India.