Introduction
The COVID-19 pandemic has brought the world to a standstill and has greatly impacted the ability of businesses throughout the world to fulfil contractual obligations and sustain operations. The World Health Organization (“WHO”) declared COVID-19 a pandemic on 11th March 2020 [1] and the Indian Government imposed unprecedented travel restrictions, social distancing, large-gathering bans and complete nationwide lock down on 25th March 2020[2].In light of these unforeseen circumstances, it is important to understand the impact on performance of various contracts and applicability of the Force Majeure clauses.
Definition
Force majeure in the Cambridge Business English Dictionary is defined as an unexpected event such as a war, crime, or an earthquake which prevents someone from doing something that is written in a legal agreement. Force majeure translates literally from French as “superior force”. Generally these events are beyond the control of the parties to the contract and prevents the performance of the contact as originally agreed upon.
Applicability and Contractual Provisions
Now each contract may have a differently worded Force Majeure clause and the applicability of the clause under the current COVID-19 situation shall depend on the way it has been drafted. If the Force Majeure clause in the agreement includes reference to words such as “pandemic”, “epidemic”, “health emergency” or any other such similar words, it would be easy for the parties to trigger the clause. Certain contracts use an umbrella clause such as “forces beyond its control” or “cause or event beyond such party’s control”. In such clauses where specific inclusions are not made, detailed complete reading of the agreement should be made to understand if Force Majeure can be triggered.
For example, the Force Majeure clause in the Model Agreement to Sale as prescribed under Rule 9 (1) of the Gujarat Real Estate (Regulation and Development) (General) Rules, 2017 [3] has been worded as:
6. Provided that the Promoter shall be entitled to reasonable extension of time for giving delivery of Apartment on the aforesaid date, if the completion of building in which the Apartment is to be situated is delayed on account of –
i. war, civil commotion or act of God ;
ii. any notice, order, rule, notification of the Government and/or other public or competent authority/court.
Under Section 6(2)(i) of the Disaster Management Act, 2005, the National Disaster Management Authority has issued Order No. 1-29/2020-PP (Pt.II) dated 24.03.2020 [4] directing the Ministries/ Departments of Government of India, State/UT Governments and State/UT Authorities to take effective measures so as to prevent spread of COVID-19 in India. In exercise of powers conferred under Section 10(2)(l) of the said Act, the Ministry of Home Affairs, Government of India came up with guidelines under Order No 40-3/2020-DM-I(A) dated 24.03.2020 [2]. Under the guidelines all commercial and private establishments except for essential services listed were asked to remain closed for a period of 21 days with effect from 25.03.2020. The list of exceptions of essential services did not include construction services and hence all construction of real estate projects have come to a halt from the date. Hence contractually, if the Force Majeure clause of the Model Agreement to Sale as stated above has been adopted by the promoter then Force Majeure can be triggered under Part (ii) of the clause. However, depending on the clause adopted, each agreement should be looked at in the spirit in which it was entered into.
Statutory and General Provisions
The Real Estate (Regulation and Development) Act, 2016 [5] under Section 6 has envisaged the force majeure condition as under:
The registration granted under section 5 may be extended by the Authority on an application made by the promoter due to force majeure, in such form and on payment of such fee as may be specified by regulations made by the Authority:
Explanation — For the purpose of this section, the expression “force majeure” shall mean a case of war, flood, drought, fire, cyclone, earthquake or any other calamity caused by nature affecting the regular development of the real estate project.
The explanation to Section 6 defining Force Majeure includes “any other calamity cause by nature”. Calamity has not been defined under the RERA Act, 2016. However, Section 2 (d) of The Disaster Management Act, 2005 [6] defines disaster as:
(d) “disaster” means a catastrophe, mishap, calamity or grave occurrence in any area, arising from natural or man made causes….
COVID-19 has been described as “threatening disaster situation” under the aforementioned Order by National Disaster Management Authority. Thus the meaning of ‘disaster’ may be assigned to ‘calamity’ under The Real Estate (Regulation and Development) Act, 2016, and Force Majeure be invoked. However, strictly speaking, the invoking of the Section 6 is not automatic and the promoters shall have to make an application to the Authority.
Further, on 19th February, 2020, through an Office Memorandum No. 18/4/2020-PPD the Department of Expenditure of the Ministry of Finance had clarified that disruption in supply chain due to spread of corona virus in China or any other country will be covered in Force Majeure Clause (FMC). It further clarified that it should be considered as a case of natural calamity and FMC may be invoked. [7]
The Maharashtra Real Estate Regulatory Authority in its Order 13/2020 dated 02.04.2020 [8] has extended the completion dates of all projects, with completion dates on or after 15th March 2020 by 3 months. The Authority has cited lockdowns, disruptions in supply of construction material and migration of labour force for issuance of the Suo Moto Order. The Karnataka Real Estate Regulatory Authority also in a similar Circular No Sec.CR.04/2019-20 dated 04.04.2020 [9] has extended completion dates by 3 months
Though these Orders may not be exactly in line with the letter and spirit of Section 6 of the RERA Act, 2016 where application by promoter needs to be made, the orders are a welcome step to reduce the administrative burden of granting extensions and greatly increased the ease of doing business in these uncertain times.
Impact
The closure of construction activity through Government Orders may be for a limited period of 21 days or more if extended, however the ability of a promoter to execute the project will be impaired for a greater period of time. Bottlenecks in supply of essential building construction materials and project specific engineered items are expected to be removed over a longer period of time considering shut down of factories and workshops. Migrant labour force which forms a major part of labour force in construction industry may also not return immediately. The normalcy in construction industry, based on current estimates by promoter groups is expected to return in 3 to 6 months. However, scientific study for assessment of the impact needs to be undertaken for each project separately to ascertain and justify the time extension required.
It is also prudent to point out that if the Force Majeure clause in an agreement is established to be triggered, the COVID-19 situation shall not frustrate the entire contract or absolve the promoter of delivery of units but merely give a time extension to perform the agreement. Hence, the promoter of a real estate project shall get extension of time to handover the possession of the constructed property and the allottee shall get the time extension in payment of money based on percentage of completion of the project.
A promoter of real estate projects, hence in order to invoke the Force Majeure conditions has to undertake the following steps:
(i) Provide notice to the allottees as soon as being aware of the force majeure event happening.
(ii) Demonstrate the impact of the COVID-19 upon the project and how it has directly impacted ability to perform the obligations including quantifying the time extension that shall be required.
(iii) Apply for extension of time with the State Real Estate Regulatory Authority under Force Majeure conditions.
The allottee on the other hand will also be able to delay the payments to be made based on extended period of construction where the payment is linked to construction stages in the agreement to sale executed.
Conclusion
Force Majeure clauses in most construction agreements may get triggered by the 21 day lockdown where the construction activities were at a standstill. However, the drafting of the clause in each agreement is essential to identify the applicability of Force Majeure in the current COVID-19 pandemic scenario.
Where Force Majeure is made applicable, the promoter shall get an extended period to perform under the contract. However, the duration of such extension shall depend on the impact of COVID-19 on the project and terms of the agreement. The promoter along with notice to the allottee for Force Majeure shall also have to apply to the state RERA Authority for extension of project end date. While Maharashtra and Karnataka RERA Authorities have already extended project time lines by 3 months, it shall be interesting to see if the other states follow the suit as well.
References:
[1] WHO. (2020, March 11). WHO Director-General’s opening remarks at the media briefing on COVID-19 – 11 March 2020. Retrieved from who.int: https://www.who.int/dg/speeches/detail/who-director-general-s-opening-remarks-at-the-media-briefing-on-covid-19—11-march-2020
[2] MHA. (2020, March 24). Minsitry of Home Affairs Order No 40-3/2020-DM-I(A) dated 24.03.2020. Retrieved from https://taxguru.in/corporate-law/21-days-lock-due-covid-19-epidemic.html
[3] GujRERA Rules. (2017, May 4). Annexure ‘A’ – Model Form of Agreement to be entered into between Promoter and Allottee(s). Retrieved from https://gujrera.gujarat.gov.in/resources/staticpage/RERA-General%20Rules.pdf
[4] NDMA. (2020, March 24). National Disaster Management Authority has issued Order No. 1-29/2020-PP (Pt.II) dated 24.03.2020. Retrieved from https://mha.gov.in/sites/default/files/ndma%20order%20copy_0.pdf
[5] RERA Act. (2016, March 25). The Real Estate (Regulation and Development) Act, 2016. Retrieved from https://taxguru.in/corporate-law/president-assents-real-estate-regulation-development-act-2016.html
[6] DMA Act. (2005, December 23). The Disaster Management Act, 2005. Retrieved from https://www.ndmindia.nic.in/images/The%20Disaster%20Management%20Act,%202005.pdf
[7] Office Memo. (2020, February 19). Office Memorandum Force Majeure Clause (FMC). Retrieved from https://taxguru.in/corporate-law/disruption-supply-chain-due-spread-corona-virus-china-natural-calamitiy.html
[8] MahaRERA Order 13. (2020, April 2). Revision of Project Registration Validity and Extended Timeline for Statutory Compliances, in view of COVID 19 Pandemic. Retrieved from https://taxguru.in/corporate-law/maharera-revision-project-registration-validity-extended-timeline-statutory-compliances-view-covid-19-pandemic.html
[9] KRERA Circular 04. (2020, April 4). Revised Project Registration Validity, Extended Timeline for Statutory Compliances and adjournment of hearing, in view of COVID 19 Pandemic. Retrieved from https://rera.karnataka.gov.in/circularPage
About the Author
Mr. Sarthak Bhansali is a practicing Fellow Chartered Accountant and a RERA Expert. He is qualified LLB and FCA. He practises in the name of M/s S S Bhansali & Co and area of expertise is real estate laws. He can be reached at ssbhansalico@gmail.com
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