COVID-19 as Force-Majeure in Construction Contracts: What the High Court of Delhi has held

Much like most of the economy, the infrastructure sector in the country has been badly hit by the COVID-19 outbreak (‘pandemic’). This is especially true of road construction projects, with the majority of entities engaged in the sector already suffering from issues such as high debt, liquidity issues, razor-thin profit margins etc. As a means of ameliorating some of the negative effects of the pandemic, and to streamline the response thereto by public authorities, the Ministry of Road Transport and Highways (‘MORTH’) had issued a circular dated 18.05.2020 (‘MORTH Circular’) wherein it had inter-alia classified the pandemic as a force-majeure event and had issued general directions as to how the same was to be treated contractually in public sector contracts.

In so identifying the pandemic as a force majeure event, the MORTH Circular adopted the stand taken by the Department of Expenditure of the Ministry of Finance in its own Circular dated 19.02.2020 (‘DOE Circular’). Though the MORTH Circular, undoubtedly, calls for a project-specific review of the individual contracts in terms of the ultimate extension of time etc. to be granted to the contractors, the overall identification of the pandemic as a force majeure event is unequivocal.

Read MORTH Circular

The aforesaid crucial MORTH Circular has recently witnessed judicial adjudication, and the results of which are far-reaching for the road construction sector. In a recent judgment delivered by the High Court of Delhi in MEP Infrastructure Developers Ltd. v. South Delhi Municipal Corporation and Ors. [W.P. (C) No. 2241/2020 decided on 12.06.2020], the Court was essentially seized of a matter involving a road project under which the contractor/Petitioner was required to make certain payments to the employer/Respondent in return for being allowed to collect toll on the concerned stretch of road.

Shorn of the procedural history of the matter, which witnessed filing of numerous applications by both sides, the Court ultimately relied upon the MORTH Circular, the applicability of which was not contested, to expound upon the changed scenario and the consequently modified rights and liabilities of the parties in light of the same. Though the Court dealt with myriad issues including validity of termination etc., and the contract was seemingly one for “toll tax collection” alone, there are twin observations and findings of the Court from a wider policy perspective which are likely to have significant repercussions on the adjudication of the impact of the pandemic on contractual obligations in road construction contracts in the future.

First, the Court was concerned with the issue of the pandemic constituting a force-majeure event. It was held inter-alia as under:

“27(i) The respondent Corporation itself referred to Circular dated 19.02.2020 issued by the Ministry of Road Transport Highways (MORTH) which notified that the COVID-19 pandemic was a force majeure occurrence. In effect, the force majeure clause under the agreement immediately becomes applicable and the notice for the same would not be necessary. That being the position, a strict timeline under the agreement would be put in abeyance as the ground realities had substantially altered and performance of the contract would not be feasible till restoration of the pre-force majeure conditions.”

As is evident from the above extract, the Court relied upon the MORTH Circular to hold that the same would result in an immediate identification of the pandemic as a force majeure event. Most importantly, the Court observed that on account of the supervening nature of the pandemic and its explicit classification by the Circular as a force majeure event, there was no requirement for a distinct and separate notice postulating the occurrence of the force majeure event.

This observation becomes quite relevant in the light of various road construction projects prescribing for the issuance of an early warning notice as a pre-requisite for the invocation of the force majeure clause. Though one could always invoke an argument centered on Section 28 of the Indian Contract Act, 1872, to overcome the strict rigor of an early-warning requirement, the present judgment addresses the issue squarely. Going further, the Court unequivocally identified the pandemic as being destructive of the contractual status quo, and as justifying a reformulation of the contractual rights and obligations.

Second, the Court also had occasion to expound on the continuing nature of the force majeure event. It was held inter-alia as under:

“23. The nation-wide lockdown was announced on 24.03.2020 to be effective from the next day. The force majeure period has not abated as per any government notification; free movement of traffic is being regulated even now at borders between the States. Evidently, the full operability of the contract is hindered by orders of the National and the State governments i.e. by circumstances beyond the control of the petitioner.”

Despite the recent piecemeal relaxations which have been brought about in the intensity and vigor of the lockdown, the Court observed that the same would not by itself amount to an abatement of the force majeure event in the context of road construction projects in light of various subsisting issues. More importantly, the Court identified the distinct impact of the lockdown imposed by governmental authorities, as compared to the pandemic itself. This observation would be of relevance in various road construction contracts where governmental actions are recognized as a distinct limb under the overall rubric of a force majeure clause and are subjected to a different compensatory regime, as compared to a more restrictive compensatory regime for an epidemic or a pandemic under the force majeure clause.

It goes without saying that inasmuch as the context is controlling, the specific terms of a contract between the parties, the peculiar facts obtaining in each case, and the nature of the construction contract i.e., item-rate, EPC, BOT, Hybrid Annuity etc. would evidently have a large role to play in determining the ultimate impact of the pandemic vis-à-vis the respective rights and liabilities of the parties. The aforesaid judgment of the High Court, however, provides significant guidance as to how the pandemic would be construed in terms of its impact on the contractual obligations in the road construction sector in the days to come.

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The author is an Advocate practicing before the High Court of Delhi.