Impact of COVID-19 on the Roads Sector in India
– Mani Gupta & Vedant Kumar
With the imposition of a nation-wide lockdown, construction activity in India came to a grinding standstill. Road construction, maintenance and toll-collection are no exception. In fact, in the context of toll-collection, the Ministry of Road Transport & Highways specifically advised the National Highways Authority of India to shut down toll plazas. Following from an earlier post, we take a closer look at contracts in the roads and highways sector to assess the potential areas of concern. In doing so, we have relied on the Model EPC Agreement (2018 edition), Model EPC Agreement (2019 edition) and Model Concession Agreement in Public Private Partnership in Tolling, Operational Maintenance and Transfer of Highways (2017 edition).
For the purpose of this post, the Model EPC Agreement (2018 edition), Model EPC Agreement (2019 edition) are hereinafter referred to as “Model EPC Agreements” and the Model Concession Agreement in Public Private Partnership in Tolling, Operational Maintenance and Transfer of Highways is referred to as “TOT Agreement”. Collectively, these agreements are referred to as “Model Agreements”. All other capitalized terms, not defined herein, have the meaning ascribed to them under the applicable Model Agreement.
Has a Force Majeure Event Occurred?
The definition of Force Majeure or Force Majeure Event (“FM”) is identical in the Model Agreements. The main elements are:
(a) the event should have occurred in India;
(b) it should affect performance of the party claiming the benefit of FM;
(c) should be beyond the reasonable control of the party;
(d) the affected party could not have prevented or overcome by exercise of due diligence and following Good Industry Practice;
(e) the event or act should have a material adverse effect on the party claiming to be affected.
The various aspects of force majeure definitions have already been discussed in an earlier post. What is unique in the Model Agreements is the requirement that the event or act should have a “material adverse affect” on the party claiming such FM. The definition of “material adverse affect” under the Model Agreements is vague and offers no objective criterion. The party claiming FM would have to establish that the event or act causes “material financial burden or loss” to it. If Contractors have to establish that they have suffered “material” financial burden or loss, they may have to rely in metrics such as total time for completion versus time lost due to FM, and costs incurred during the subsistence of the FM.
Further, each of the Model Agreements further define Non-Political Event, Political Event and Indirect Political Event as FM events. As the word “epidemic” is included specifically in the definition of Non-Political Event, contract parties affected by COVID-19 could certainly rely on the same. This position is further bolstered by the invocation of the Epidemic Diseases Act, 1897 by different states and union territories.
However, where disruptions in road contracts are a result of the government enforced lockdown or other executive instructions, it may be possible to argue that the contractors (that is, the road developer/ concessionaire) have been practically prevented from carrying out construction, road maintenance or toll-collection (as applicable) due to the lock-down under the Disaster Management Act, 2005 and thus, the FM event is a “Political Event” or an “Indirect Political Event”.[i] The view is supported by the fact that the definitions of both Political Event and Indirect Political Event contain not only specified events but a general category of events which are ‘analogous’ to any of the other events mentioned. Therefore, actions such as executive instruction to enforce lockdown, directions to defer collection of toll, or of powers under the Disaster Management Act, 2005 are arguably events analogous to other events set forth in the definitions of Political Event and Indirect Political Event.
What should the Contractor / Concessionaire Do?
Once the Contractor/ Concessionaire decides that FM has occurred, it is required to inform the occurrence of the event to the other party by way of a notice. Such notice should be given to the Authority (as defined) within a period of ten (10) days (under the Model EPC Agreements) and seven (7) days (under the TOT Agreement) after the Affected Party knew or ought to have reasonably known the existence of such FM.
Under the Model Agreements, the notice is required to state:
(a) the nature and extent of each Force Majeure Event which is the subject of any claim for relief with evidence in support thereof;
(b) the estimated duration and the effect or probable effect which such Force Majeure Event is having or will have on the Affected Party’s performance of its obligations under this Agreement
(c) the measures which the Affected Party is taking or proposes to take for alleviating the impact of such Force Majeure Event;
Apart from the notice, the contractor also has to give periodic (but no later than weekly) reports during the subsistence of the FM.
Contractors should be mindful to comply (to the extent practical) with the mode of giving notices under their agreements.[ii]
What is the Effect of Invocation of a FM Clause?
Model EPC Agreements
Depending on the nature of the FM – i.e. Non-Political Event, Indirect Political Event and Political Event, the consequences would vary. If COVID-19 is construed as a Non-Political Event, the contractor and Authority shall bear their own costs. However, if the steps taken to prevent its outbreak by the Government are treated as a Political Force Majeure, then the Authority will be under an obligation to pay the costs incurred by the contractor owing to such FM. In such scenario, contractors would do well to maintain meticulous records of salaries and wages paid, costs of maintaining site offices, duration of the FM to determine the idling of machinery etc.
In all cases where the FM occurs during the construction phase, the scheduled time for completion of the project would also be extended for the affected work on day for day basis till the subsistence of the FM.
Further, if the FM continues for a period of 60 days or more within a continuous period of 120 days, the Affected Party can also terminate the agreement. Such termination would entitle the Contractor to ‘Termination Payments’ in accordance with the clause of the contract depending upon the phase of the project.
Under these agreements, if the FM occurs after the Appointed Date (as defined in TOT Agreement), and the Concessionaire is unable to collect the tolls or it is directed by the Authority to suspend such collection (as has happened in the current situation), the period of the concession would be extended by a period equal in length to the period during which the Concessionaire is unable to collect tolls. That may still expose the concessionaires to cash flow risks for the period in which the toll collection may be inadequate to meet their financial commitments. It will be open to the concessionaires to build a case for claiming costs on account of inadequacy of cash flow.
In addition, the other difference from Model EPC Agreements is that in case of Political Event or Indirect Political Event, the Concessionaire would have to bear the costs attributable to such FM up to the insurance cover. The authority is only required to reimburse 50% (fifty percent) of the costs in excess of the insurance cover. Therefore, those contractors who have entered into agreements such as the TOT Agreements would be well-advised to have a look at their All Risk Insurance Policies and see if the present epidemic, lock-down and consequences of various executive instructions affecting the contractor is covered in the risks or not. One more notable feature of the TOT Agreements is that it specifically includes as costs attributable to FM, the interest payment on debt, which would reduce the dispute to some degree.
Can the Government invoke the FM Clause?
It most certainly can! Under the Model Agreements, the obligations of the government include giving Right of Way and assistance with obtaining permits and licenses. If (in exceptional circumstances) any government does invoke these provisions, the contractor would not be able to sue for any damages for delay in providing Right of Way and other losses that it may incur due to the mobilization of manpower and machinery. In so far as existing payment obligations are concerned, it is our opinion that those cannot be and should not suspended and the government must make payments (as early as possible) to alleviate financial burden.
Deemed Termination under the 2019 EPC Agreement
One significant manner in which the Model EPC Agreements differ from each other is that under the 2019 EPC Agreement, if no appointed date is declared by the Authority, the EPC contract is deemed to be terminated and the contractor is entitled to one percent (1%) of the contract price as damages. While contractors who are awaiting declaration of the appointed date in accordance with such contracts may like to argue that the contract is deemed to be terminated, in light of the extra-ordinary situation, the authority may consider declaring FM (in line with contractual requirements) to suspend such obligation.
The COVID-19 and the following disruptions are generation-altering events. Notwithstanding the impact on human beings globally, in the context of the roads sector, not only will this mean a delayed completion of the projects, but it will also result in increased financial liability on the government due to large-scale invocation of the FM. The Ministry of Road Transport & Highways has already indicated that the current situation should be treated as FM. Given this position, the contractors may be relieved from the burden of proving the material adverse effect on them. However, disputes on payment of costs associated with the FM, if any, should be resolved through cost-effective, timely mechanisms such as amicable settlement between parties or mediation or pursuant to the Conciliation and Settlement Mechanism of the NHAI/ MoRTH. That would most certainly be in the national interest!
[i] See: https://economictimes.indiatimes.com/news/economy/infrastructure/nhai-clears-contractors-bills-worth-rs-25000-cr/articleshow/74923644.cms
[ii] In some of the Model Agreements, we noticed that the notice is required to be given by email and by hand, where the contractor is based out of Delhi. In other cases, the notice could be sent by courier or post. In light of the lock-down and the near total ban on the movement of people within the city, the requirement of delivering the notice by hand would be required to be complied with immediately on cessation of the present lock-down.