COVID-19 Should Qualify as Force Majeure in Defence Contracts
(Source: Manohar Parrikar Institute for Defence Studies and Analyses; issued April 6, 2020)
The COVID-19 pandemic has, among other things, disrupted the manufacturing activities and left the supply-chain in disarray across the globe. Its impact on the ongoing contracts must be agonising the vendors as they may not be able to adhere to the delivery timelines, potentially exposing them to the penal clauses in the contract.

The question in everyone’s mind seems to be whether the Force Majeure Clause (FMC)1 in the contract provides some protection against such penal consequences and, if so, in what way. A big spending department like the Ministry of Defence (MoD) would do well to allay this and other related anxieties. What would it take to do this?

Need for a Comprehensive Clarificatory Order

The Ministry of Finance had issued a clarificationin February 2020 to the effect that the outbreak of coronavirus in China or any other country should be considered as a case of natural calamity and FMC may be invoked, wherever considered necessary, following the due procedure.2

Since this clarification is in the context of that ministry’s Manual for Procurement of Goods, 2017 which does not govern the defence contracts, MoD needs to issue a separate clarificatory order on similar lines covering every conceivable aspect of the problem. This will not require prior consultation with the finance ministry so long as the order does not violate the spirit underlying the clarification issued by that ministry in February.

Applicability of Clarificatory Order

The clarificatory order should be applicable to the contracts and supply orders concluded under any edition of the Defence Procurement Procedure (DPP), Defence Procurement Manual (DPM), or the purchase manuals followed by the Defence Research & Development Organisation (DRDO) and the Ordnance Factory Board (OFB).

It will be desirable to issue a single order for all contracts/supply orders, irrespective of the manual under which these were concluded/placed. If that is not possible (as these are administered by various departments in MoD), similar orders should be issued by all the departments concerned simultaneously, though the Department of Defence Production may have to issue a separate policy directive to the Defence Public Sector Undertakings (DPSUs).

Other Issues Requiring Clarification

There are some other issues that need to be clarified, some of which are illustrated below with reference to the standard FMC in the defence contracts covered by DPP 2016. Article 24 on Force Majeure in DPP 2016 reads as follows:

--24.1 Should any Force Majeure circumstances arise, each of the contracting party shall be excused for the non-fulfilment or for the delayed fulfilment of any of its contractual obligations, if the affected party within (days) of its occurrence informs in a written form the other party.

--24.2 Force Majeure shall mean fires, floods, natural disasters or other acts, that are unanticipated or unforeseeable and not brought about at the instance of, the party claiming to be affected by such event, or which, if anticipated or foreseeable, could not be avoided or provided for and which has caused the non-performance or delay in performance, such as war, turmoil, strikes, sabotage, explosions, beyond the control of either party.

--24.3 A party claiming Force Majeure shall exercise reasonable diligence to seek to overcome the Force Majeure event and to mitigate the effects thereof on the performance of its obligations under this contract.
--24.4 Provided the acts of The Government or any state parties of the seller which may affect the discharge of the Seller’s obligation under the contract shall not be treated as Force Majeure.3

Communication in Writing

Some vendors may find it difficult to convey to the MoD in writing, as required by the first sub-clause of the FMC, that there is likely to be a delay in achieving the delivery milestones because of the disruption in postal and courier services. It should, therefore, be acceptable if such communication is sent by email at the address(es) to be notified in the clarificatory order. If even that is not possible for a vendor, any communication sent after the period stipulated in the sub-clause should be acceptable. The vendors should not also be required to submit any document or government notification regarding shutdown/closure of units, etc. along with the communication.

Duration of Force Majeure

The standard FMC presumes that there would be a determin able starting and end dates for a force majeure situation. This may not be a valid presumption under the present circumstances.

To ease the difficulty in determination of the duration of force majeure, the clarificatory order could stipulate that the force majeure will be deemed to have commenced from the date the World Health Organisation (WHO) declared the outbreak of Novel COVID-19 as a pandemic, which is March 11, 2020, in the case of foreign vendors, or from March 24, 2020 when the nation-wide lockdown was announced, in the case of Indian vendors. If these dates do not suit a vendor, he could be permitted to request for the date on which his production/supply chain was disrupted to be determined at a later stage after the situation normalises.

It is difficult to say when the situation would normalise. This may differ from one vendor to the other. The clarificatory order could stipulate that the date of cessation of force majeure will be determined in individual cases, based on the information provided by the vendors. This problem could also be discussed with the industry representatives in due course and supplementary orders issued in the next couple of days.

Liquidated Damages

The first sub-clause of the FMC simply says that the contracting parties shall be ‘excused’ for non-fulfilment or delayed fulfilment of any contractual obligation because of the force majeure. There is nothing in the FMC or the standard clause related to liquidated damages (LD) which specifically says that LD, or any other penalty, will not be applicable for delays caused by force majeure. It will be reassuring if the MoD clarifies that the duration of force majeure will be excluded while calculating the delay in delivery of contracted equipment or services and imposition of LD.

Acts of Foreign Governments

The last sub-clause of the FMC provides that the acts of the governments or any state parties of the seller which may affect the discharge of obligation under the contract shall not be treated as force majeure. This sub-clause should be declared as inoperative where the delay is on account of causes attributable to the ongoing crisis, as it was clearly intended as a bulwark against actions taken by a foreign government on geopolitical considerations which threaten to disrupt the performance of an ongoing contract.

Assurance Against Termination of Contract

The standard termination clause in defence contracts gives MoD the right to terminate a contract, partially or in full, if, inter alia, delivery of the goods or services is delayed due to force majeure beyond the period stipulated in the contract. This may be a matter of great concern for the vendors as no one knows when it will be possible to resume normal activities. It is important that MoD assures the vendors that the termination clause will not be invoked where delay is only on account of the present crisis.

Supply Orders Without FMC

Some supply orders, and possibly some contracts, may not contain an FMC. These should be deemed to have been amended to include a standard FMC, whose text can be specified in the clarificatory order. This will go a long way in dousing the anxiety of the vendors who find themselves in the unenviable situation of having to execute a supply order that does not have an FMC.

To conclude, there is a need to act quickly on this time-sensitive issue to scotch all speculations about how the MoD is going to deal with the inevitable delay in performance of contracts and instil confidence in the vendors that the matter will be dealt with equitably and, above all, with compassion which is the need of the hour.

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