Force Majeure In The Construction Industry: Lessons Learned & Best Practices

The force majeure clause in contracts has always been crucial, but its significance was sometimes overlooked until the epidemic drew attention to it. After this disaster, it is crucial to comprehend the concept of force majeure from the standpoint of the construction sector.

Legal concept of Force Majeure in Indian Law

In Indian legal framework, force majeure is not officially stated in statutes, but its interpretation is typically derived from principles of contract law. It is commonly associated with Section 56 of the Indian Contract Act, 1872, which pertains to the concept of frustration. It is important to emphasize that frustration and force majeure are separate concepts, with frustration being a more severe situation where the contract becomes impossible to fulfil. Hence, a mere financial setback on the project does not tantamount to frustration of the contract.

The Importance of Force Majeure in the Construction Sector

Force majeure occurrences pose a high risk to the construction industry because of the intricate nature of projects, which can entail lengthy schedules, numerous stakeholders, and substantial financial commitments. Construction projects can be significantly affected by natural catastrophes, political upheaval, supply chain disruptions, and epidemics. These factors can result in delays, increased costs, project suspensions, and contract terminations.

A generic force majeure provision may not be adequate, as it must be customized to match the specific characteristics of the project, the geographical area in which it is carried out, and the procurement specifications.

Key Factors in Evaluating Force Majeure Clauses

1. Characteristics of Events

The specification of the events that qualify as force majeure is a crucial element of a force majeure clause. These events should be thoroughly evaluated according to the project's specifications.

If the project is situated in a location that is susceptible to monsoons, floods, cloudbursts, landslides, water scarcity, labor strikes, or political upheaval, it is necessary to specifically include these events in the force majeure clause.

In a particular instance I encountered, due to the road's deteriorated state, it was necessary to transport materials by barge for a specific project. Insufficient rainfall resulted in a decrease in the river's water level, rendering the barge inoperable and causing delays in delivery. This scenario emphasizes the significance of taking into account all possible hazards, including environmental variables, when formulating force majeure provisions.

Exclusions/Exceptions

Within comprehensive clauses, it is common to encounter a sequence of exceptions that are excluded from the force majeure clause. These exceptions should also be assessed in relation to the precise nature of the project. Acceptable exceptions consist of financial difficulties or fluctuations in the market, predictable occurrences, inability to obtain funding, anticipated alterations in legislation or regulations during the contract period, labor strikes in the contractor's control, and the contractor's own actions or omissions.

We also need to exercise prudence when omitting government activities or regulatory changes, especially in areas where such changes can exert a substantial influence on projects. It is important to carefully evaluate exclusions related to utility failures or disruptions in infrastructure, such as electricity, water, or transportation. This is particularly crucial if the success of the project relies on these services.

It is also important to thoroughly evaluate exemptions for delays caused by suppliers or subcontractors, particularly when unforeseeable events beyond anyone's control impact the supply chain.

Supply chain disruptions in the construction industry can greatly affect project schedules and expenses. It is important to assess the risks involved in supply chains when acquiring materials or equipment from regions that are susceptible to war.

For instance, if the raw materials are obtained from Israel or Ukraine, or if the supply route goes through these regions, the force majeure provision should consider the potential for delays or interruptions caused by geopolitical tensions. Likewise, the clause should take into account the influence of worldwide events on the accessibility of resources and the feasibility of transporting them to the project location.

2. Notification

Contracts usually stipulate that the party affected by a force majeure incident must inform the other party within a stipulated timeframe, typically 7-14 days. Nevertheless, in reality, this limited period of time for notification might be impractical, particularly in the construction sector, where the consequences of an occurrence may not be immediately evident. Implementing a flexible notice time that permits parties to submit regular updates may be a more feasible strategy.

For instance, the complete magnitude of the disturbance created by a natural calamity or an epidemic may need several weeks or even months to evaluate. Hence, it is recommended to incorporate more adaptable notification periods in force majeure clauses, permitting a suitable duration to assess the situation and ascertain the optimal course of action.

3. Termination due to Prolonged Force Majeure Event

The significance of this clause was underscored by the COVID-19 epidemic, as numerous construction projects had prolonged suspensions as a result of lockdowns and other limitations. Contracts lacking a provision for termination in cases of extended force majeure experienced substantial financial losses and legal conflicts.

In order to safeguard the rights of all parties involved and minimize potential risks, it is essential to clearly define the circumstances in which the contract can be terminated and establish the necessary steps for resolving any remaining obligations.

Drafting considerations

When drafting force majeure clauses, it is crucial to precisely outline the occurrences and tailor them to correspond with the distinct characteristics and demands of the project. It is essential to include adaptable notice periods to allow the parties the time to evaluate the consequences. In order to demonstrate an intent to reduce any negative impacts on the project, it is important to incorporate mitigation duties. Moreover, it is crucial to incorporate a just termination provision that permits parties to be relieved of their responsibilities in case of extended suspension due to a force majeure event, thereby avoiding additional expenses when it becomes apparent that the consequences of the force majeure event are unlikely to be resolved.

In conclusion, force majeure is a crucial aspect of construction contracts that can help reduce risks and minimize the impact on profit margins, which are often vulnerable to various obstacles. However, it is important to ensure that the clauses pertaining to force majeure are meticulously crafted and closely examined. By carefully considering and planning for probable force majeure occurrences, parties can enhance their ability to safeguard their interests and successfully overcome unexpected challenges.