A Changing World – Commercial Contracts and the COVID-19 Pandemic Effects on Construction and Real Estate Industry – By Zubin Behramkamdin & Vyom Shah

The Construction and Redevelopment industry in India and Mumbai had been growing rapidly till 2017. Thereafter the real estate sector has has had to face a number of difficulties in view of economic recession and now, the situation due to COVID-19. This has also impacted contracts relating to redevelopments. In this Paper we look at the issues that have now arisen and the law applicable to today’s situation.

As the construction and redevelopment business was not properly regulated Parliament passed the Real Estate (Regulation and Development) Act, 2016 (“RERA Act”) which is applicable to development of buildings in the State of Maharashtra. An Authority (called MahaRERA) has been constituted for the State of Maharashtra, which governs all aspects of construction projects in the state. All such projects have to get registered as RERA projects. MahaRERA is also tasked with hearing grievances of flat purchasers who have complaints against developers. The Maharashtra Ownership Flats Act, 1963 and the Maharashtra Apartment Ownership Act, 1970, both statutes governing construction and sale of flats and apartments respectively, continue to be applicable.

The process of redevelopment and sale of new constructions is essentially governed by contractual terms (commonly called Development Agreement or Redevelopment Agreement) between the developer and the housing societies or owners. These Agreements include the commercial understanding of the parties and provide inter alia the timeline for completion of the project and delivery of the flats. All these contracts commonly contain a force majeure clause that suspends the performance of obligations on the occurrence of an event of force majeure. This is an event which is not in control of the parties but contemplated by the parties as one that would make the performance of the contract impossible for the duration of that event.

PROBLEMS IN REDEVELOPMENT DUE TO PANDEMIC & LOCKDOWN

Due to the COVID-19 pandemic that has swept the world including India and the lockdown following it, most businesses (barring certain notified essential services) are at a standstill. This has had a significant effect on all sectors of the economy be it the construction and real estate industry, financial markets, hospitality industry, entertainment industry, etc.

Some of the issues that have arisen in the redevelopment and construction industry due to the pandemic and lockdown are:

i. Under Section 13 of the RERA Act, developers are unable to sell any flat or accept more than ten percent cost thereof unless an agreement for sale is executed and registered. Registration offices are currently shut and failing payment of consideration by allottees, financing of the project becomes difficult. Banks also insist upon registration of documents before sanctioning amounts.

ii. Section 4(2)(l)(D) of the RERA Act provides that seventy per cent of the amounts realized from the allottees is to be deposited in a separate account to cover the cost of construction and the land cost. In view of the pandemic and the lockdown some allottees are not able to pay their instalments to the developer as per agreed terms. This impacts the successful and scheduled completion of the project.

iii. Obtaining statutory approvals for sanction of plans and construction is also currently not possible because offices of municipal and other authorities are shut or not operating with full workforce.

iv. Allottees are often contractually required to make some payment at the time of taking possession. If allottees have difficulties in making their contractual payments, does a developer’s obligation to hand over possession still stand?

v. In the case of a completed building where even the Occupation Certificate has been obtained by the developer, the developer’s obligations towards payment of transit rent stands extinguished. However in today’s scenario the allottees and housing society members may not be able to take possession during the lockdown. Is the developer still liable to pay the transit rent amounts to such allottees and members?

vi. Procurement of raw material is severely affected and this will continue even after lifting of the lockdown. This may arguably constitute an act of force majeure. The Procurement Policy Division of the Government of India has issued a circular dated 19^th February 2020[1] that disruption in supply chains due to spread of coronavirus in China and other countries would be classified as a “natural calamity” and would be covered under the scope of the force majeure clause in the Manual for Procurement of Foods issued by the Government.  

vii. Restrictions on construction continue till date in major metropolitan areas in Maharashtra. In Mumbai and Pune there are many construction and redevelopment projects which are at a standstill. While the lockdown and restrictions are not permanent, the lockdown has caused a cessation on all activities pertaining to construction and redevelopment.

FORCE MAJEURE RECONGNIZED BY RERA ACT

The concept of force majeure is recognized in Section 6 of the RERA Act. This provides that the registration granted under Section 5 of the RERA Act may be extended by the MahaRERA Authority on an application made by the promoter due to force majeure[2]. The MahaRERA Authority may then extend the registration of a real estate project if the case of force majeure is made out[3]. The Explanation to Section 6 states that 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 date for granting possession of flats to allottees under the RERA Act would then be the extended date of registration.

If an agreement between a developer and an allottee has a force majeure clause, delays due to the prevailing lockdown may be covered under that clause. In the event of there being no such clause, it is arguable that a purchaser may approach the MahaRERA Authority for compensation or for withdrawing from the project under Section 18 of RERA Act. The MahaRERA Appellate Tribunal[4] has delivered an interesting judgment. It was held that even if there is a force majeure event which delays the project, an allottee can exercise his option of withdrawing from the project under Section 18. The allotee would be entitled to a refund of the amount paid with interest. It was held that the extension of time granted by MahaRERA to the project could only save the developer from criminal liability under the RERA Act. Such extensions did not have the effect of modifying the date of handing over possession as stated in the contract. It was then held that if the allottee chooses to continue with the project and claims compensation for delayed possession under Section 18, then the force majeure period must be discounted while calculating the compensation.   

The MahaRERA Authority has recognized the current crisis and has issued Order No. 13 of 2020 on 2^nd April 2020[5]. This Order states that for all MahaRERA registered projects in which completion date (whether initial, revised or extended) expires on or after 15^th March 2020, the period shall be extended by 3 months. The Order also extends the time limit for all statutory compliances that were to be done in accordance with the RERA Act from March, April and May 2020 to 30^th June 2020. It remains to be seen whether the MahaRERA grants a further extension if the circumstances do not improve.

IS THE LOCKDOWN OR THE PANDEMIC AN EVENT OF FORCE MAJEURE?

An interesting issue that arises is whether the COVID-19 pandemic is to be considered an event of force majeure or is the lockdown ordered by the Government considered to be an event of force majeure. While considering issues of force majeure it is imperative to ascertain what is claimed to be the event of force majeure and what is contained in the contact regarding force majeure. There are distinct aspects relating to the pandemic and the lockdown :

i. The characteristics and immediate effects of the lockdown and the pandemic are both very different. By illustration, while the lockdown as an event of force majeure may render construction activities impossible during its continuation, the pandemic may render health emergencies but may not have an immediate and proximate consequence of stalling of construction activities.

ii. The lockdown as an event of force majeure would end on the date the lockdown ends and economic consequences thereafter may not necessarily be considered as events of force majeure. The pandemic is likely to last longer and it may be argued that economic consequences arising during such time are inextricably linked to it and should also be considered as an event of force majeure.

iii. While force majeure clauses as commonly drafted are likely to include governmental orders and prohibitions that may cover the prevailing lockdown, it is unlikely that the clauses specifically include the word “pandemic”. Acts of God are commonly included as events of force majeure in contracts but is the pandemic an act of God? An act of God has been considered and elaborated upon by the Supreme Court in Divisional Controller, KSRTC[6] which has stated inter alia: “The expression “act of God” signifies the operation of natural forces free from human intervention, such as lightning, storm etc. It may include such unexpected occurrences of nature as severe gale, snowstorms, hurricanes, cyclones, tidal waves and the like. But every unexpected wind and storm does not operate as an excuse from liability, if there is a reasonable possibility of anticipating their happening. An act of God provides no excuse unless it is so unexpected that no reasonable human foresight could be presumed to anticipate the occurrence…”

iv. The terms of the force majeure clause are consciously and expressly limited by the language and terms adopted by the parties.  It is arguable that a pandemic could not be implied as a term of force majeure because that would be contrary to, or beyond, the expressed terms of force majeure. The Supreme Court in Naihati Jute Mills Ltd. V/s Khyaliram Jagannath[7]  has refused to imply a term in the contract which was not expressly included in the contractual clause.

LONG TERM ECONOMIC (UN)VIABILITY & EFFICIENT BREACH THEORY

Besides the delays due to the lockdown, policy changes and resultant disruptions in the supply chain of raw materials and labour will undoubtedly make construction take longer and in turn, more costly. A question then arises as to whether contracts would still be liable to be performed if performance thereof has become significantly more onerous.

Our courts have dealt with cases when performance of a contract became onerous on account of other events of force majeure such as war and policy changes by the Government. Our Courts have held that if the question does not relate to frustration or impossibility of performance of contract but is simply a matter of performance becoming more onerous, the contract still has to be performed as per its terms. A party cannot seek amendment to agreed terms or claim escalation of price[8]. These cases refer to and follow the decision of the Supreme Court in Alopi Parshad’s case[9]. The doctrine in Alopi Parshad’s case is a departure from the English law, which states that a change of circumstances outside the contemplation of parties at the time when the contract was made would justify a Court in departing from the express terms of the contract.

The judgments rendered so far however are cases arising out of commercial contracts for supply of materials or products. The cases did not involve an event of force majeure (like the pandemic) which was continuous and which was essentially incapable of contemplation. Since the present circumstances affecting the redevelopment and construction industry are (i) beyond contemplation of parties (ii) likely to continue even after the lockdown is lifted and (iii) make performance much more onerous the Courts may reach a conclusion that the contract stands frustrated – has become impossible, or impractical[10] to perform.  

There is another interesting view, known as the efficient breach theory of contract, which may be used to decide matters differently from what is set out in the judgments hereinabove. This theory has not been considered by Indian Courts so far. As per the efficient breach theory, a party should be allowed to voluntarily breach a contract and pay damages, if doing so would be more economically efficient than performing the contract. The efficient breach theory has been favourably considered by the Supreme Court of Canada.[11]

The efficient breach theory is particularly prevalent in the field of law and economics, which has been resorted to by the Indian judiciary on occassion. In several recent judgments our Supreme Court has propounded the rule of interpretation – the economic analysis of law.^[12]  The Supreme Court has interalia held that the economic impact of judicial decisions on the economy of the country must be kept in mind while rendering decisions. It is possible that in the near future economic considerations of the country as a whole are suitably weighed in to adopt a particular course of action in redevelopment and real estate matters too.

The efficient breach theory would have to be reconciled with provisions of the Specific Relief Act, 1963, as recently amended, which mandates specific performance of the contract if the non-breaching party is ready and willing to perform the contract. However a Court  may exercise discretion and consider that specific performance of the contract is not the solution if (i) the performance of the contract has become significantly more onerous than what was contemplated by parties when making the contract and (ii) the termination of the contract can be allowed with payment of adequate compensatory damages to the other party and (iii) the result of termination and payment of damages brings about a more efficient solution than ordering specific performance of such an onerous contract.

SUSPENSION OF OBLIGATIONS DUE TO FORCE MAJEURE  

Due to the difficulties faced as result of the lockdown as set out above, it is to be considered whether developers’ obligations such as payment of transit rent and delivery on possession date stand unaffected or get suspended. This would firstly depend on the terms of the force majeure clause of the contract itself, if any and on the invocation thereof. If the force majeure clause clearly includes the event and suspends obligations of the contract then the parties have to go by the contract.

In the event there is no force majeure clause and a dispute in regard to prevalence of force majeure and suspension of obligations is raised by either party, three aspects would be of utmost relevance:

All three aspects would necessarily differ from contract to contract and as according to the facts of each case.

The Supreme Court in Naihati Jute Mills Ltd.[13] has noted that the question of absolving a party from its obligations would depend upon whether the contract provides for best endeavors to be made or whether the contract provided for absolute performance of the obligation, failure of which would render a party liable for breach.

Obligations may be suspended if performance is hindered. The Supreme Court has considered an argument on hindrances as regards invocation of force majeure in the recent Energy Watchdog case[14] and held therein that the expression “hindered” must be construed with regards to the words which precede and follow it and also with regard to the nature and general terms of the contract. The Court ultimately held that there had been no hindrance in the facts of that case.

The observation by the Supreme Court in M.D., Army Welfare Housing Organization’s case[15]wherein the Court has discussed the concepts of frustration under Section 56 in the context of a construction agreement is relevant:

“114. In Emden and Gill: Building Contracts and Practice, 7th Edn., pp. 162-63, it is stated that liability to pay damages for non-performance for an impossibility only arises where the contract is absolute and unrestricted by any condition, expressed or implied. It is further stated that a difficulty may not in all circumstances amount to an impossibility. But even in that event the terms and conditions relating to performance of the contract may stand eclipsed.”

Some developers have already sought to discontinue payments towards transit rent citing the reasons of financial difficulties, bad market conditions, a standstill in construction, sales and collections and on the basis that remobilizing of contractors and workforce for the construction to recommence would take further time.[16] While the reasons appear to include some restrictions (which could be considered as force majeure events) they also include some conditions in the present market which merely make performance onerous. In this situation it remains to be seen whether such suspension is upheld by the Courts. The Courts would also be considering the exact contractual terms while deciding cases like this.

BANK GUARANTEES RELATING TO CONSTRUCTION PROJECTS

The governing statutes, rules and regulations place significant emphasis on developer’s obligations to allottees. In almost all cases allottees are secured to a certain extent by a bank guarantee issued by the developer. The issue of bank guarantees assumes some significance on account of the settled position in Indian law that a bank guarantee is a distinct contract and can be stayed only on very limited grounds. The Supreme Court[17] had held that a right conferred by a contract of guarantee is an independent right and is also recognized by the Indian Contract Act. Such a right cannot be diminished without a just cause.

In the context of guarantees/letters of credit issued pursuant to commercial contracts, the Bombay High Court[18] and the Delhi High Court[19] have had the opportunity to look at the issue in the times of COVID-19 and lockdown and have passed varying judgments. The Bombay High Court did not restrain encashment of Letters of Credit whereas the Delhi High Court stayed invocation of the Bank Guarantee due to the lockdown.

The difference in the stands taken by the two Courts can however be easily understood as there was one important difference in the matters. In the case before the Bombay High Court, the main contract provided for carrying on an activity which was declared an essential service and which was a permitted activity even during the lockdown. On the other hand the Delhi High Court noted that the contractual activity was an activity which had to be stopped due to the lockdown.

CAN THE CONTRACT BE TERMINATED OR DISCHARGED DURING CONTINUATION OF THE FORCE MAJEURE?

If the contract includes a force majeure clause, ipso facto termination or discharge of the contract would be unlikely because a force majeure clause is an agreement between parties to keep the contract suspended (and not have the contract discharged) on occurrence of an event of force majeure. The Supreme Court has also held in Satyabrata Ghose[20] that if the intervening circumstances are as contemplated by the parties then the contract would stand despite the occurrence of such circumstance. The very fact that the parties have considered and added such an event in the force majeure clause indicates that it was the parties’ intent that the contract be suspended for the duration of the events of force majeure and not frustrated as per Section 56 of the Indian Contract Act. Some contracts do however provide that if the force majeure event continues for more than a specified period then the contract stands frustrated or that the parties then get a right to terminate the contract.

It would also be relevant whether there are any restrictions post lifting of the lockdown and if so, whether those would constitute a partial restriction and continuous event of force majeure. As on date, we read of proposed policies such as reduction in number of workers working together, requirement to work in a measured manner in shifts and construction in the urban areas being contingent on special permission by the municipal authorities[21]. These would necessarily impact the construction timeline that was agreed between the parties. Would such partial restrictions then constitute continuous force majeure? In the event of an argument of continuous force majeure, how long can this be continued? At some point of time a party would state that the disability is such that the contract has stood frustrated under Section 56 of the Indian Contract Act. What exactly is the time at which a temporary disability (event of force majeure) turns into frustration of the contract is another interesting question and will vary with the facts of each case.

When there is no force majeure clause and the performance of the agreement is impossible, the agreement stands frustrated under Section 56 of the Indian Contract Act. The Supreme Court’s decision in DDA Vs. Kenneth Builders[22] is of relevance in this matter. Under the construction contract therein, the parties had proceeded on the basis that certain environment approvals were not required. The Supreme Court however held that the contract could not be performed without the environmental approvals. The Supreme Court held that the contract stood frustrated under Section 56 of the Indian Contract Act because the obtaining of those environmental approvals had not been considered a requirement in the contract and that both parties had been ad idem that the construction project did not require those approvals.

A construction contract would be frustrated if it is not capable of being performed as per its terms. The Supreme Court in K. Narendra vs. Riviera Apartments Pvt. Ltd. [23]came to a conclusion that the contract stood frustrated and refused to grant specific performance of the contract because:

FORCE MAJEURE OR BREACH?

The courts have also considered whether the consequence of alleged impracticality or impossibility is attributable to the event of force majeure or is otherwise a result of a party’s breach. The Bombay High Court has held that if a party to a Development Agreement has not performed its obligations under the contract, then it cannot be permitted to cite impossibility to allege frustration of the contract[24]. This also ties in with the longstanding principles that self-induced frustration cannot be a ground for frustration under Section 56 of the Indian Contract Act[25]. It stands to reason that a Development Agreement cannot be unilaterally avoided for the sole reason of it being unfeasible or economically not viable at the contractual agreed rates.

For all of these reasons, on invocation of the clause of force majeure in real estate contracts it is probable that developers and societies/flat purchasers will sit down and decide on amended terms, including revised consideration and delivery timelines. With the matters that do go into litigation though, there is bound to be an interesting expansion of the law and further elucidation of the nuances regarding the law relating to force majeure.

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Zubin Behramkamdin has been practicing as a Counsel since 1993, mainly in the Bombay High Court and Supreme Court of India as well as before statutory tribunals like the, National Company Law Tribunal and Debt Recovery Tribunals. He has a number of reported judgements to his credit covering a variety of subjects. He also undertakes Dispute Resolution through Arbitrations and has acted as both counsel and Arbitrator. These arbitrations cover contractual disputes and often involve large works contracts.

Vyom Shah was enrolled with the Bar Council of Maharashtra and Goa in August 2008 and holds a Masters in Law from the University of Chicago Law School, United States. He practices as a Counsel and regularly appears in the Bombay High Court, Statutory Tribunals such as the NCLT, the MahaRERA Authority and MahaRERA Appellate Tribunal, and also before Arbitral Tribunals.

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[1] Available at https://doe.gov.in/sites/default/files/Force Majeure Clause -FMC.pdf

[2] This is also considered in the judgment of the Bombay High Court in Neelkamal Realtors Suburban Pvt. Ltd. vs. Union of India, 2017 SCC Online Bom 9302

[3] As per Section 6 of the RERA Act, read with Rule 7 of the Maharashtra Real Estate (Regulation and Development) (Registration of Real Estate Projects, Registration of Real Estate Agents, Rates of Interest and Disclosures on Websites), Rules 2017,

[4] Mantri Dwellings Pvt. Ltd. vs. Rajesh Saxena & Anr., Appeal No. 006000000010792 and Mantri Dwellings Pvt. Ltd. vs. Ravendra Saxena & Anr., Appeal No. 006000000010793 common Judgment dated 11^th July 2019 available at https://maharera.mahaonline.gov.in/Upload/PDF/AT006-1079210793Mantri Dwellings Vs Rajesh Saxena Ors.pdf

[5] Available at https://maharera.mahaonline.gov.in/Site/Upload/PDF/Final Order for Revision of Duration v4.pdf

[6] Divisional Controller, KSRTC vs. Mahadeva Shetty & Anr., 2003 7 SCC 197

[7] Naihati Jute Mills Ltd. vs. Khyaliram Jagannath, 1968 1 SCR 821

[8] Travancore Devaswom Board vs. Thanath International, 2004 13 SCC 44 and Ram Abhoshan vs. PEC Ltd., 2018

[9] Alopi Parsad & Sons Ltd v UoI, AIR 1960 SC 588

[10] As interpreted by the Supreme Court in Satyabrata Ghose vs. Mugneerem Bangur & Co., 1954 SCR 310 for triggering Section 56 of the Indian Contract Act.

[11] Bank of America Canada v Clarica Trust Company, [2002] 2 SCR 601

[12] Most notably being Shiv Shakti Sugars Ltd v Shree Renuka Sugar Ltd and Ors, 2017 7 SCC 729

[13] Naihati Jute Mills Ltd. vs. Khyaliram Jagannath,1968 1 SCR 821

[14] Energy Watchdog vs. CERC & Ors. 2017 14 SCC 80

[15] M.D., Army Welfare Housing Organization vs. Sumangal Services Pvt. Ltd., 2004 9 SCC 619

[16] “Mumbai: Promoters of X BKC project invokes force majeure clause” dated 14^th April 2020 available at https://content.magicbricks.com/property-news/mumbai-real-estate-news-industry-news/mumbai-promoters-of-x-bkc-project-invokes-force-majeure-clause/112675.html

[17] Industrial Finance Corporation of India Ltd. vs. Cannanore Spinning and Weaving Mills Ltd. & Ors, 2002 5 SCC 54

[18] Order of Bombay High Court in Standard Retail Pvt. Ltd. vs. G.S. Global Corp & Ors. Commercial Arbitration Petition (L) No. 404 of 2020 dated 8^th April 2020

[19] Order of Delhi High Court in M/s Halliburton Offshore Services Inc v Vedanta Limited & Anr in OMP (I) (Comm) & IA 3697/2020 dated 20^th April 2020

[20] Satyabrata Ghose vs. Mugneerem Bangur & Co., 1954 SCR 310

[21]  The Supreme Court in MD Army Welfare Housing Organization vs. Sumangal Services Pvt. Ltd., 2004 9 SCC 619 has held that even a statutory injunction by an authority may lead to impossibility to fulfill contractual obligations

[22] DDA Vs. Kenneth Builders and Developers Pvt. Ltd. & Ors, 2016 13 SCC 561

[23] K. Narendra vs. Riviera Apartments Pvt. Ltd., 1999 5 SCC 77

[24] Nirmal Lifestyle Ltd. vs. Tulip Hospitality Services Ltd., 2013 SCC Online Bom 1505

[25] MD Army Welfare Housing Organization vs. Sumangal Services Pvt. Ltd., 2004 9 SCC 619 and Ganga Retreat and Towers Ltd. & Anr. vs. State of Rajasthan & Ors., 2003 12 SCC 91

Disclaimer: The views or opinions expressed are solely of the author.