Abstract

One may like to believe the industry is better prepared for the second wave of COVID-19 than at the Onset of the pandemic last year. When the first wave shook everyone, it was an unprecedented situation that caught the world by surprise. The Onset of the Second Wave, which has perhaps now reached its peak, seems to have brought back a temporary bane in the Sector, again being felt at both the development & construction and the operations stage. However, the bane also brings in opportunities for investment as the world is better prepared to handle the pandemic. The article explains how the second wave will impact the economy differently.

Introduction

Apart from the health sector, every Sector globally is in deep waters due to Covid-19 and its economic impact since January 2020. The infrastructure sector in India is no different and is pitifully enduring the impact of Covid-19, given the global disruption of essential infrastructure projects. The global economy’s chances barely seemed to have raised its head between December 2020 and February 2021. However, they were knocked back with unrelenting force by a sledgehammer in the form of the second Covid wave in March 2021. Lack of investment and Force Majeure declaration has led to funding gaps in infrastructure development. With oil prices nose-diving, economies are battling survival, and even developed economies are either staring at recession or are already in recession. Seeing the grim circumstances during the first wave, it appeared that financing in the infrastructure sector would take a downward plunge in the short term, especially given the Force Majeure condition announced by the Ministry of Finance more specifically in relation to procurement and the Ministry of New and Renewable Energy concerning Grid Solar Power Division. As expected, it did. However, it was believed that once the pandemic is contained, attention would move from crisis management to invest in the infrastructure sector. The policymakers’ collective discerning minds had to ensure not to focus on future development but also to take appropriate steps for mitigation.

Challenges due to lockdown

The lack of preparedness for the first wave posed various challenges where the sudden lockdown compelled the world to shift from a physical mode of operation to a completely virtual mode. While it brought a boon in the IT infrastructure sector, the Sector was unprepared to handle a load of this nature. In a country like India, where language and technology vary within 5kms, shifting life to a virtual mode during the lockdown was a big challenge. Uncertainty and initial denial only added to the misery as the industry expected normalcy in a couple of weeks by breaking the chain and preferring shutting operations for such a period. While countries are better prepared to deal with such a situation now, the suddenness leading to the lockdown last year did not accord the industry any time to prepare for a Plan B. The contagious nature of the virus and lack of a confirmed treatment has caused uncertainty. The world was approaching a hit and trial method while trying to contain the damage that was being caused to human life by the virus. While primacy was given to containing the spread, uncertainty surrounding the fate of the contracts remained an issue of utmost concern too. Most of the first wave went by understanding the situation, formulating a strategy for containing the damage, and taking corrective measures to tackle the unpreparedness. 

Invoking Force Majeure

An important term that gained prominence during such a time was “Force Majeure”. With disputes being put on hold and Courts hearing matters of only urgent nature, Force Majeure held the limelight for a long time. Traditionally, courts invoked force majeure clauses in cases of acts of God, floods, hurricanes, typhoons, strikes, explosions, governmental actions. In contrast, the act of God covered a pandemic too but was not invoked to such an extent. The most prominent instance of invocation of Force Majeure and its interpretation during a pandemic has been in the last year, where Courts have had to interfere time and again. While most of the contracts in the infrastructure and construction space contain a clause for Force Majeure, however, before the Onset of Covid-19, such clauses were rarely invoked and were an esoteric part. Covid-19 has changed the entire jurisprudence surrounding Force Majeure, paving the way for newer interpretations of the Clause.  

A significant judgment on the issue of Force Majeure was rendered by Hon’ble Justice Ms Pratibha M. Singh of the Hon’ble Delhi High Court in a matter titled M/s Halliburton Offshore Services Inc. v. Vedanta Limited[i]In this case, the Hon’ble High Court unequivocally declared COVID-19 as a force majeure event. However, the Hon’ble clarified that before a party can take benefit of Force Majeure, the Court would have to ascertain if the non-performance by such party was due to Covid-19 and the resulting lockdown or not. In another decision on the issue of Force Majeure, Hon’ble Justice Pratibha M. Singh, on 21.05.2020, denied the protection of Force Majeure to a tenant, explicitly holding that a tenant will be liable to pay rent if such a tenant owns the property. The denial of this protection was irrespective of whether such a tenant has been unable to use the property given the pandemic or not. 

In the realm of infrastructure space, the most critical judgment is the decision rendered by the Hon’ble Delhi High Court in a matter titled MEP Infrastructure Developers Ltd. v. SDMC[ii], wherein the Hon’ble High Court granted relief in toll collection due to reduction in traffic occasioned due to the lockdown. In this case, MEP is a contractor of a highway development project that was contractually obligated to collect toll and share revenue. MEP failed to make the contractual payment to the employer due to a reduction in traffic owing to the lockdown, under which a dispute arose between the parties. Following the disputes having arisen, the Petitioner approached the Court, claiming that the Contract had become impossible to perform temporarily due to COVID-19 lockdown. In the application, the Petitioner sought three reliefs:

  1. Protection against the notice of termination of the Contract with the Respondent
  2. Protection from potential coercive steps against the Petitioner
  3. Time accorded for payment of the second and third instalment of the arrears to be extended

During the pendency of the dispute, SDMC terminated the Contract. MEP sought the benefit of the nationwide lockdown. The Hon’ble High Court recognised that the opposite party had acknowledged the Force Majeure situation. Once a party acquiesces to the same, it cannot challenge the non-performance subsequently. It also explained that since Covid-19 is classified as a Force Majeure event across India, a specific notice of Force Majeure is not required. The Hon’ble High Court importantly laid down as under

 “29. Once the Respondent’s force majeure clause is acknowledged as of 23.03.2020, given the public declaration of COVID-19 pandemic, the force majeure comes into effect w.e.f. 19.02.2020 itself. This critical change in ground reality was not brought to the Court’s notice when the order dated 02.03.2020 was passed. Had it been known to the Court that the pandemic had been declared as force majeure by the Government of India, the relevant clause 15(1) of the Contract between the parties immediately gets operational, which in effect means that the amount payable by the Petitioner to the Respondent would have to be put into abeyance, i.e. the strict timelines would not be applicable.

  1. The interim order of 2nd March subsumed the previous directions and claims or arrears. The arrears were quantified at Rs. 115.04 crores. This was payable before the ground reality was altered because of the global pandemic/nationwide lockdown or reduction of traffic volume as a consequence thereof. Therefore, the said amounts ought to be paid as directed. The first instalment was payable on 17.03.2020, which was duly encashed through the Bank Guarantee, and the second amount was payable on 02.04.2020, and the third was on 02.05.2020. However, because of the interim orders, the said amounts have not been paid to the Corporation. The balance amount of Rs.77.04 crores shall be made available to the Respondent within ten working days from the date of this order, failing to vacate the interim order.
  2. Regarding the weekly payment of Rs.20 crores, the same would stand suspended given the force majeure clause. Nevertheless, the amounts collected by the Petitioner shall be deposited into the account of the respondent Corporation after deduction of 15% towards operation and maintenance charges, subject to final adjustments. The requisite post-dated cheques shall be issued within two weeks.”

This judgment was vital as it set the ground for various construction contracts which mandate a notice for Force Majeure. What sets it apart from the other judgments is that the adjustments/relaxations offered by the Government did not amount to a waiver regarding the Force Majeure event in road construction projects despite the changes in the Covid situation. Courts have been proactive in acknowledging the impact of Covid-19 on infrastructure and construction projects. With Covid-19 impacting everyday life due to the ensuring lockdown, a reduction in footfall would either frustrate the Contractor put one party in an unfair position. Whether a contract is frustrated as per Section 56 of the Indian Contract Act, or it is affected by Force Majeure in terms of the Contract, would depend on each case’s facts. 

With the Delhi High Court setting the ground clear, the Mumbai High Court did not shy away from interpreting the law either. In a matter[iii]the Hon’ble Bombay High Court restrained IDBI bank from acting upon the sale notices issued by them. However, in a departure from the said logic, the Bombay High Court, in a matter refused to grant interim measures to the Petitioner regarding an essential item. The said approach would make it manifest that there is no “one size fits all” approach or formula adopted by any Court regarding issues related to Force Majeure. Whether a situation constitutes Force Majeure or not would depend on the facts and circumstances surrounding every case. While interpreting Force Majeure, courts have distinguished the cases where performance was possible from cases where the Contract was affected by Covid-19 conditions, making it impossible to perform. In the realm of infrastructure contracts, for a party to benefit from force Majeure, it would have to establish the impact of Covid restrictions on their contractual obligations. 

Second Wave and its Impact

With the second wave, which is far more deadly than the first one, workforce mobilisation has become the most significant task, even if projects in the essential category sector such as Health, Coal, Power are to be completed. Operations in essential service sectors such as Coal, Power, IT are way off target and lax. Construction activity in the essential infrastructure sector is also slow-paced due to a lack of staffing and supplies, amongst other things. Even if one mobilises a workforce, a flip side is usually that a contractor would not be keen to deliver a project during a pandemic. This lack of willingness is because the Contractor is entitled to the extension of time and entitled to an additional cost if such delay and cost are incurred due to such Force Majeure condition. What constitutes an act of God may not always constitute an event of Force Majeure under a Contract absolving a party from its obligations for such period. The Hon’ble Supreme Court of India has recognised the distinction between ‘Act of God’ and ‘Force Majeure’.[iv] While both the terms are different in their nature and operation, both excuse the non-performance of a party and absolve it from the consequences of something over which it has no control.

Several business leaders have indicated that the industry is better prepared for the second wave of COVID-19 than it was at the Onset of the pandemic last year. When the first wave shook everyone, it was an unprecedented situation that caught the world by surprise. On the one hand, organisations are minimising their spending in Sector due to the recession brought in by Covid-19; on the other hand, contractors are delaying works by issuing notices of Force Majeure in ongoing projects, further crippling the entire situation and creating a cash crunch. This cash crunch will create deserted assets for lack of funds/sponsors/investors. While this may seem all negative, one must not forget that the night is at its darkest just before dawn. The pandemic brings in an opportunity for capable investors who can acquire assets at a cheaper value and subsequently reposition them for the future. The Onset of the Second Wave, which has perhaps now reached its peak, seems to have brought back a temporary bane in the Sector, is again being felt at the development & construction and the operations stage.

At this stage, the restrictions imposed by several State Governments to contain the spread and reduce the damage have again brought all the projects to a standstill besides affecting supply, erection and commissioning of the projects. Due to migrant labours panicking and returning home given the lockdown, projects are getting delayed even in the essential services sector, remembering last year’s ordeal. Force Majeure is not a statutory principle, and how it must operate would solely depend on the wordings in the Contract. Usually, the wording of such clauses is standard. Thus, where a party cannot perform its part in circumstances defined as Force Majeure therein, such a party, usually upon written notice, may either be accommodated for delays or be excused entirely at the other party’s option. While the Clauses might be drafted differently, the essence remains the same. One also needs to understand that in the case of infrastructure contracts that have been entered into post the first wave, de facto protection of Force Majeure is unlikely to be available since the requirement of un-foreseeability is absent. Parties ought to cover the possibility in their contracts. Whether the benefit of a Force Majeure clause will be available to a contract or not depends on how the Contract is interpreted by a Court, as the right is contractual. 

Contractors should ensure that all contracts (current contracts to be amended) contain specific provisions regarding Covid 19 and its consequences. While the owner/employer may not quickly negotiate on the same, the Contractor should negotiate to add time provisions. Even though slow down and recession are natural by-products of such a prolonged pandemic, contractors should not feel hard-pressed and abstain from entering into unprotected contracts. Such contracts would only entail future losses for the unpredictability of the disease and the lack of an effective method to contain the pandemic. 

Conclusion

The impact of human lives with a collapse in the healthcare Sector during the second wave is writ large for everyone to see. With vaccination rates rising, industry players understand that we might be heading towards normalcy, making it the perfect time to invest in the infrastructure sector. Many players are interested in bailing out the Sector, and companies are investing in augmenting their capacity and backend infrastructure. If one compares the two waves, things have still been much better in the second wave, as the systems and emergency mechanisms are in place. Covid is no more a surprise, and the industry seems to be better prepared to handle a lockdown provided the health care infrastructure does not collapse further. According to a statement by the All-India Management Association, the Chairman of Hero Enterprise sees a huge opportunity to invest, both for the financial investors and industrial companies. “The Capex cycle, which was slow for 12-14 quarters, is reviving and companies are making serious Capex commitments for the next few quarters“, he said.

Once vaccinations increase globally, the infrastructure sector would likely open up. People would have fresh energy to start the second stint of their life after an intermission of almost two years. The new energy would bring in new opportunities and investments in the Sector. While initially there may be issues such as reduced supply capacity due to lack of materials, mobilisation, insolvencies, financial.

About the Author

Mumtaz Bhalla is a Partner at L&L Partners and Advocate-on-Record at the Supreme Court of India.

Editorial Team

Managing Editor: Naman Anand

Editor in Chief: Akanksha Goel and Aakaansha Arya

Senior Editor: Aakaansha Arya

Associate Editor: Jhalak Srivastav

Junior Editor: Kshitij Pandey

Preferred Method of Citation 

Mumtaz Bhalla, “Second Wave Covid-19 and its Impact on Infrastructure” (IJPIEL, 5 June 2021)

<https://ijpiel.com/index.php/2021/06/05/second-wave-covid-19-and-its-impact-on-infrastructure/>

Endnotes

[1] M/s Halliburton Offshore Services Inc. v. Vedanta Limited, (I) (COMM) 88/2020 & IA 3697/2020.

[2] MEP Infrastructure Developers Ltd. v. SDMC, WP (C) No. 2241/2020 decided on 12.06.2020.

[3] Rural Fairprice Wholesale Ltd. & Anr. v. IDBI Trusteeship Services Ltd. & Ors., [Commercial Suit L 307 of 2020, decided on 30-03-2020].

[4]Dhanrajamal Gobindram v. Shamji Kalidas & Co., AIR 1961 SC 1285.