EPC CONTRACTING: ENERGY

SECTOR

Legal, Taxation, Commercials and

Risk
7th-8th November, 2012, Crowne Plaza
Today, New Delhi

K E Y L E G A L I M P E R AT I V E S -
OWNER AMD CONTRACTOR

STRICTLY PRIVATE – NOT FOR

PERSPECTIVES

CIRCULATION
Deepto Roy
Partner
PXV Law Partners
 “It is not enough to attain a degree of precision which a
person reading in good faith can understand. It is necessary to
attain, if possible, a degree of precision which a person
reading in bad faith, cannot misunderstand”
- Justice Stephen, quoted in “Practical Legislation”

By Long Thring (1902).

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INTRODUCTION
• EPC Contracts- Risk Analysis and Allocation
• Owner and Contractor Considerations in EPC Contracts
• Key focus areas
 Risk and Title: pass through issues
 Liquidated Damages
 Limitation of Liability
 Force Majeure
 Suspension, delay and termination of contract

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CONTRACTUAL MATRIX IN AN
INFRASTRUCTURE PROJECT
Sponsor Support
Sponsors Lenders

Shareholders Agreement Loan Agreement

Security Documents

Government
Government Engineering, EPC Contractors
Support
Procurement,
Implementation
Construction Contracts
Agreement

Fuel Supply Contract O & M Contract Offtake Contract

Fuel Suppliers Offtaker

Operator

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RISK MATRIX
Country and Regulatory
Specific Project Risks
Risks

Development Construction Risk Operation Risk

Risk

• Political Risk including

expropriation risk
• Design Risk
• Country Legal • Delay Risk • Technical Risk
infrastructure Risk • Specifications Risk • Demand Risk
including regulatory • Delay Risk • Input Risk Delay
risk and legal • Completion Risk Risk
• Planning Delay • Cost Overrun Risk
enforcement risk Risk • Performance
• • Material
Physical infrastructure • Approval Risk shortfall
Cost • Approval Risk
risk • Land • Labour Cost
• • Land Acquisition
Foreign Exchange Risk Acquisition • Equipment
Risk Risk
• Devaluation Risk Cost • Cost Escalation
• Force Majeure Risk Risk
• Compliance Risk • Management Risk
• Compliance Risk

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CONTRACTUAL MECHANISMS TO
ADDRESS RISK
• Fixed Price, Lump-sum, “Turn-key” Contracts with limited provisions in
relation to price escalation
• Contractually prohibiting changes in scope of works without variation/
change orders
• “Time is of essence”- strict compliance of timelines and limited
grounds for claiming an extension of time
• Strict performance targets, usually for project output, efficiency and
reliability, which the facility must meet
• Testing and rejection rights
• Liquidated damages for delay and underperformance
• Independent payment security mechanisms
• Extended warranties (defects liability, latent defects liability)
• Passage of risk and title

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KEY OBJECTIVES OF THE OWNER
AND THE CONTRACTOR
Owner’s Objectives responsibility
• Certainty of costs with limited Contractor’s Objectives
escalation
• Rational allocation of risk
• “Back-to back” with project
• Pass-through of taxes and other
contracts
external costs
• Adherence to timelines and
• Extension of time and
time for completion
increased costs for delay as a
• Compliance with specifications result of circumstances beyond
and warranties the contractor’s control
• Pass-through of compliance • Force Majeure protection
risk
• Timely payment
• Interface with other
• Certainty of total outside
contractors
liability
• Single point of contact and

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LIQUIDATED DAMAGES
• Liquidated damages (LDs) are pre-quantified damages which the parties to a
contract agree shall be payable in case of breach of such a contract.
• Provides certainty where damages are difficult to ascertain, for example in
case of delay
• Typically subject to aggregate caps
• Acts in two ways, provides certainty to the claimant of the amount that can be
claimed and also provides a limitation to the liability of the contractor
• Legal Basis- Section 74 of the Indian Contract Act, 1956 - in case a contract is
breached by a defaulting party and such a contract provides for a specific sum
to be paid in case of such a breach, then the non-defaulting party is entitled to
receive reasonable compensation not exceeding the amount so specified
• Typically for delay and underperformance, but can sometimes address specific
issues, e.g., EHS liability
• Delay Liquidated Damages (DLDs) are usually expressed as a rate per day
which represents the estimated extra costs incurred (financing charges,
supervision fees etc.) and losses suffered (revenue foregone) for each day of
delay
• Performance Liquidated Damages (PLDs) are damage that the facility will
suffer over its life if a specified technical characteristic is not met.

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… LIQUIDATED DAMAGES
• Key legal issues in relation to the LDs are:
• No need to prove the quantum of damages if the damages have been specified in the
contract, but some loss needs to be proved. Union of India v. Raman Iron Foundry, (1974)
2 SCC 231).
• Cannot be in the nature of a penalty
• The damages stipulated would be a cap, i.e. a court would not award damages in excess
of the amount specified - Fateh Chand v. Balkishan Das (AIR 1963 SC 1405)
 Supreme Court in the case Oil & Natural Gas Corporation Ltd vs. Saw Pipes Ltd (AIR 2003
SC 2629) has laid down the following principles to be considered while awarding
damages:

 The terms of the contract are required to be considered before arriving at a

conclusion on whether a party claiming damages is entitled to the same;
 If the terms stipulating liquidated damages are clear and unambiguous, the party who
has committed the breach is required to pay such compensation, unless it is proved
that such estimate of damages/compensation is unreasonable or is by way of penalty.
 In every case of breach of contract, person aggrieved by the breach is not required to
prove actual loss or damage suffered by him. The Court is competent to award
reasonable compensation in case of breach if the non-defaulting party proves that it
has suffered some loss.
 In some contracts, it is not possible for the Court to assess the actual loss arising
from breach and the Court can award damages, as stipulated by the parties, if such
damages are a genuine pre-estimate of the losses that may be incurred.
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… LIQUIDATED DAMAGES
• Some drafting issues in relation to liquidated damages clauses
• Performance LDs and Delay LDs should be drafted separately
• “Prevention Clause”- in case delay is as a result of failure by the Owner or
another of the contractors employed by the Owner.
• Treatment of “Concurrent Delays”, i.e. where different causes of the delay
overlap, some by the Owner and some by the Contractor
• Exclusive Remedy Clause
• If the contract contains an exclusive remedy clause, then the Contractor
will only be liable to liquidated damages for the specific events and not for
any other damages
• Owner does not have a right to claim damages other than LDs- risk that
certain events will be excluded from liability
• If no exclusive remedies clause is there, Owner is free to seek damages in
law for other breaches
• Failsafe Clause- in case the liquidated damages clause is held to be
unenforceable

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LIMITATION OF LIABILITY
• The clause helps in identifying and limiting the liability of the Contractor in
relation to the works done under the contract
• Covers three main aspects
 Nature of liability, i.e. the remedies that the Owner will have against the
Contractor, such as damages, indemnity or replacement of goods or
reconstruction of portions of the infrastructure in case the Contractor is
in breach of the Contract.
 Extent of liability i.e. the maximum aggregate liability that the Contractor
may incur.
 Duration i.e. the period during which the Contractor may be held liable.
The Contract may provide for different time period for which the
Contractor will be liable for different aspects of the project. For example,
a defect liability period may be 1 year from the date of completion of
contract, whereas liability latent defects may extend up to 3 to 5 years.
• Sitaram Brindavan v Chiranjilal Brinjlal , AIR 1958 Bom 291. In law, parties
have the right, by contract, to exclude certain remedies and liabilities,
including the right to claim damages
• Overall liability is almost always capped at 100% of the Contract price
• DLDs and PLDs are individually capped as well as capped in aggregate
• Consequential and indirect damages are excluded- Hadley v Baxendale,
11 (1854) 9 Exch 341.
• Specific exceptions for gross negligence or fraud, or incidents such as death
FORCE MAJEURE
• One of the most important clauses in the contract- typically receives little
drafting attention
 An event “that can be neither anticipated nor controlled” and is not “reasonably foreseeable”
 The Indian Supreme Court has noted that “force majeure” is not a mere French version of the
Latin expression “vis major”. It is a term of wider import and encompasses situation which
may not qualify as “vis major”. The Supreme Court has held that “where reference is made to
"force majeure", the intention is to save the performing party from the consequences of
anything over which he has no control. This is the widest meaning that can be given to "force
majeure”. [Dhanrajamal Gobindram v. Shamji Kalidas, 1961 SCR (3)1020]
 Force Majeure is a civil law concept and the only common law analogy, is the doctrine of
frustration (Section 56 of the Indian Contract Act, 1956). However, since the scope and
applicability of doctrine of frustration is significantly different, parties contractually agree on a
force majeure clause.
 “Sphere of influence” concept
 Force Majeure of Subcontractors- included or excluded?
 Impact on the “Critical Path”

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WHAT DOES NOT CONSTITUTE FORCE
MAJEURE
Unless expressly specified by the parties, the following have been held to not qualify as events of
force majeure:

 Events which merely increase the cost of performance of the contract (Amuruvi Perumal v. Sabapathi Pillai,
AIR 1962 Mad 132)

 An order of restraint passed by a court in proceedings brought before it by a party to the contract does not
amount to an act of the government and has been held to not constitute event of force majeure [ Interore
Fertichem Resources SA v. MMTC of India Limited, Delhi High Court, judgment dated 10 October 2007]

 Changes in law that make the performance of the contract more onerous commercially (but not impossible to
perform) than what is contemplated at the time of entering into the contract (Naihati Jute Mills Ltd. v.
Khyaliram Jagannath, AIR 1968 SC 522)

 Delay by a supplier, who is affected by an event of force majeure unless affected party can prove that it could
not have procured the goods form another supplier (Shri M.L. Narang v. Union of India, Delhi High Court,
judgment dated 15 December 2003)

 Bad weather conditions, which usually interrupt work (Matsoukis Vs Priestman & Co, 1915 1 KB 681)

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 KEY ISSUES IN THE FORCE MAJEURE
CLAUSE
Issues Owner’s Perspective Contractor’s Perspective
 Definition of force To minimise instances where a force  Expressly state events, which may
majeure majeure clause may be invoked, expressly adversely affect the performance of the
state events which are foreseeable and obligations by the Contractor, such as
may be excluded from the definition. labour disputes, change in law etc.

 Consider if force majeure affecting sub-

contractor shall be included.
 Effect of force majeure  Usually, the obligation of the owner to  Clause must provide that the obligations of
event on the pay the contractor for the work already the contractor will stand suspended during
obligations of Parties undertaken is not affected by an event the period that the event of force majeure
under the Contract of force majeure. continues.
 Usually, the clause will state the maximum
 The clause must state that the accrued period for which the obligations of the
rights and liabilities of the Parties will Parties will stand suspended, after which
not be affected by the happening of an the Parties may terminate the contract.
event of force majeure.  Contractor should have time to restart
activities once the force majeure event has
ceased
 Procedure for invoking Clearly outline the procedure for invoking force majeure clause such as giving particulars of
the Force majeure the event of force majeure, providing supporting documentation, giving an estimated duration
clause for which the event would last etc.

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KEY ISSUES IN THE FORCE MAJEURE
CLAUSE
Issues
Obligations of the Parties during
event of force majeure
Allocation of costs
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Owner’s Perspective
 Provide that the Contractor will take
all measures to minimize and
mitigate damage/losses to the
project.
 Provide for regular reporting
requirements.
Ensure that the Contractor is liable to
bear its own costs and risks in relation to
the happening of an event of force
majeure.
Contractor’s Perspective
 Contractor’s obligation must be
limited to taking all
“commercially reasonable
measures” to comply with the
obligation to mitigate losses.
 Right to discuss and re-work
the time schedule for the
project.
 Negotiate provisions enabling
escalation of contract price if
substantial delay is caused due
to an event of force majeure.
 Taking insurance for mitigating
losses may be considered and
included in the project costs.
 SUSPENSION
 Under an EPC contract either the Owner (in case of emergencies, interface issues or breach by
the Contractor) or the Contractor (in case of breach by Owner and non-payment) can suspend
the Contract
 Also invoked in case of change in circumstances that make it impossible to carry out construction
in the short run
 During suspension the obligations of the contracting parties continue as the Contract is not
terminated.
 Once the suspension is lifted parties must resume performance under the Contract
 Consequences of Suspension- Extension of Time and Increased Costs

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TERMINATION
 A termination clause in a contract usually is of two types:
 For convenience; and
 For cause or on default.
 Termination for convenience:
 Termination for Cause
 Contractor’s Right to terminate
 Non payment of contract price
 Material Breach by Owner
 Owner’s Right to Terminate is usually wider
 Failure to meet the time for completion
 Underperformance
 Aggregate limits of LDs having been exhausted
 Other termination events
 Insolvency
 Prolonged force majeure

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 KEY OBLIGATIONS ON TERMINATION
Issues Owner’s Perspective
 Termination Payment  If termination is due to default of
owner then the payment under
different categories should be subject
to the ceiling of the total contract price.
 An owner may want to limit payment to
price of completed works only.
 Return of Contractor  Return of possession by contractor of
Equipment and Sub- equipment in which title has passed to
contractors the owner.
 Right to take possession of the work in
progress
 Avoidance of obligation to purchase
contractors’ equipment on termination.
 Step into the shoes of the contractor in
relation to the sub-contractors
 Right to complete construction
Other Obligations of Contractor include prompt return and delivery of various project related documents,
assignment of sub-contracts to the owner upon termination, discontinuation of all purchase activity and sub-
contracting and co-ordinating and co-operating with the new contractor.
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Contractor’s Perspective
 In case of default by contractor, it will
attempt to limit its liability to the cost of
completing of construction in excess of
value of works as on the date of
completion.
 The Contractor would limit its liability to
pay other costs, forfeiture of retention
money etc. as such clauses may be in the
nature of penalty.
 The contractor may want the owner to
purchase other equipment upon
termination.
 In the absence of obligation on owner to
purchase its equipment, the contractor will
have to remove it from the site at its own
cost.
 Release of liability in relation to sub-
contracts

THANK YOU

Deepto Roy
deepto.roy@pxvlaw.com
+919654400716