A. Introduction:
Under Part 1 of the Government of India’s (GoI) comprehensive Covid relief package (Atmanirbhar Bharat Abhiyan) (“Part 1”) dated 13 May 2020, GoI announced a handful of overarching policy measures promising relief to stressed private contractors engaged in public sector/infrastructure projects. As per GoI, the relief measures will apply to projects awarded by Central Government Agencies (such as Railways, Ministry of Road Transport & Highways, Central Public Works Dept, etc.). Further, Part 1 clarifies that the relief package applies to construction works, and goods and services contracts both under direct procurement and under the PPP/concession agreement route.
The relief measures that are stipulated in Part 1 are:
(i) Extension of contract/concession tenor by up to 6 months to be provided by all Central Agencies;
(ii) The extension granted will be “without costs to contractor”; and
(iii) (As an interim liquidity measure to cash strapped contractors) a partial release bank guarantees given by contractors as performance security to public contracting authorities. The release of BGs will be pro rata to the works completed by the contractor as a proportion to the total contract value of such works.
In furtherance of Part 1 of Atmanirbhar Bharat Abhiyan, on 13th May 2020 the Ministry of Finance (MOF) issued two notifications aimed at clarifying, in a bit more granular detail, the reliefs that contractors of goods and service contracts and concession agreements will be entitled to. The two notifications are : (A) a notification on relief to contractors on grounds of force majeure‘FM Notification’ ; and (B) a notification on the terms on which performance security would be partially released by public authorities (“Performance Security Notification”) . For the sake of brevity, I have referred to both notifications collectively as “the Notifications”.
Both Notifications derive from cluster of Manuals of the Ministry of Finance (Manual for Procurement of Works, 2019; Manual for Procurement of Goods, 2017 and General Financial Rules (GFR) 2017). As the Manual for Procurement of Works, 2019 says, these Manuals “are to be taken as generic guidelines, which have to be necessarily broad in nature”, with various Ministries/ Departments at liberty to supplement these Manuals to suit their local/ specialized needs. The MOF’s Notifications on FM and Performance Security need to be seen in this context.
This note analyses the text and regulatory philosophy underlying the Notifications, and suggests practical ways in which FM relief claims in public infrastructure contracts can be both preserved, sustained and persevered, despite prescriptive inconsistencies between the Notifications on the one hand, and project contracts/concession agreements on the other.
B. FM Notification – Key Stipulations and their Implications:
Stipulations
The MOF’s FM Notification dated 13th May 2020 sets out the following provisions:
(i) The Notification recognises that the nationwide lockdown on the movement of goods, services and manpower and government notifications under India’s Disaster Management Act 2005 constitute an event of force majeure (FME);
(ii) FME entitles contractors to apply to their counterparts, i.e. the relevant public authority seeking an extension of time for performance of their contractual obligations;
(iii) Relief from contractual obligations under the public contract/concession agreement and any extension of time, if granted, will begin to apply in respect of the contractor’s obligations that were scheduled to be fulfilled on or after 20th February 2020;
(iv) When contractors apply for the relief above, the concerned public authorities have the discretion to grant an extension of time/relief for a period of not less than three months and not more than six months. The date of calculation of such extension period shall be taken from 20th February 2020. The precise period of extension (between 3 months and 6 months) shall be decided by the relevant authority based on the specific circumstances of the case and the period for which the contractor’s performance was affected because of force majeure;
(v) Any extension granted shall be without the imposition of any cost or penalty on the contractor/concessionaire. This means that the contractor is excused from liquidated damages or any other penalty for delay or non-performance under its contract for the duration of such extension;
(vi) A contractor will be entitled to the aforesaid contractual immunity for force majeureonly if it is not in default as on 19th February 2020;
(vii) Further, the benefit of force majeure only applies to contractual non-performances that are attributable to the lockdown or any restrictions imposed under any legislation or executive orders of a Government on account of Covid-19. Where a contractor has already claimed FM for floods or other natural calamities, it will need to carefully separate the current Covid related FME from its overall pack of claims;
(viii) All contractual obligations shall revive upon expiry of the extension period granted by the relevant concessioning authority (“Authority”)
Observations
(i) FM Notification 2 says that for a contractor to invoke FM, it must first and foremost follow “due procedure” under the contract or concession agreement that governs the relevant project. For instance, if the affected contractor is a concessionaire under an NHAI toll road project, the contractor will need to follow the steps prescribed under its executed concession agreement with the Authority, for invoking FM.
(ii) When claiming relief for FM, the contractor will need to satisfy the Authority that: (A) its inability to perform is attributable to the lockdown and Covid-related restrictions imposed by the relevant governments involved; and (B) the contractor/concessionaire was not in default as on 19th February 2020.
(iii) As per the FM Notification, the Authority is empowered to grant an extension for between 3 months to 6 months from the commencement of the FM event. Thus, the maximum relief/extension that the contractor is entitled to, is until 20th August 2020.
(iv) Where a contractor has already claimed relief from the concerned Authority (i.e. prior to the FM Notification), and (or) where the Authority has responded with some relaxations or allowances, the contractor will now need to consider carefully on to how to bring further claims relying on the FM Notification.
(v) There may be conflicts between the FM Notification on the one hand, and the FM provisions in the concession agreement on the other. I have addressed this in more detail in the concluding section (Section V) below.
C. Performance Security Notification – Key Stipulations and their Implications:
The second notification by the MOF, i.e. the Performance Security Notification, essentially, amplifies the policy announcements of GoI in Part 1 promising liquidity support to contractors, through a partial release of bank guarantees and performance security. The Performance Security Notification provides that:
(i) If a contractor has invoked the force majeure clause in its contract, and is not in any other (non-Covid FM related) default, the government counterparty “may return the value of the performance security to the contractor in proportion to the contract work completed to the total contract value”.
(ii) A contractor is entitled to avail of this relief (for a partial return of its performance security) as long as it is not already in default of its obligations under the relevant project/construction contract for any reason not attributable to FM. Further, the contractor’s inability to perform the contract should be attributable to the lockdown or restrictions imposed under any Act or executive order on account of Covid-19.
(iii) This Notification is, obviously, of greater relevance and utility to under-construction projects/pre-COD.
D. Conclusion – What should contractors now do?
The FM Notification and the Performance Security Notification are clearly well intentioned in their objective to provide contractual relief and liquidity to stressed and cash strapped contractors in the infrastructure sector. The problem however arises because these Notifications may, unintentionally, contradict the contractual procedure to claim FM relief that is set out in the relevant contract or concession agreement. Common interpretational problems that may arise, include, for instance:
(i) A road concession agreement may entitle a contractor for both an extension of time and compensation for force majeure. Whereas the MOF’s current FM Notification only stipulates an ‘extension of time’ for the completion of contractual obligations ‘without the imposition of cost of penalty’. Could this mean that a concessionaire invokes the Ministry of Finance’s FM Notification for an extension of time, may end up foregoing its claim for an extension of time plus compensation? One would assume that this wouldn’t be the case, but given the definitive wording of the FM Notification, it creates some ambiguity on this point.
Many public works contractors and concessionaires were already in recession-induced stress andproject delays before the lockdown/cut-off date in the FM Notification of 19 February 2020. Thesecontractors may (or may not) have applied to their contracting authorities seeking an extension oftime. If for these supervening reasons, contractors are construed to be in pre-existing default, theymay not be entitled to take the benefit of the FM Notifications and Performance Security Notification. If a number of contractors for pre-existing slippages are disallowed from claiming FMrelief, the objective of Atmanirbhar Bharat Abhiyan would be compromised.
(ii) It may also be the case that for pre-existing delays or defaults, contractors may have approached the Authority, but may have not heard back from them. The bureaucratic reality in many infrastructure projects is that ground level approval by the project director may have been granted, but the ‘official’ reprieve letter granting milestone extension or extension of COD may be awaited from the department’s head office or a senior engineer up the public chain.
(iii) The real fear then is that the somewhat hard line taken by the FM Notification on pre-existing defaults may end up hurting FM discussions that may have already commenced between contractors and their governing authorities.
(iv) Lastly, given the urgency of the problem, the FM Notifications may have served better to have placed the onus on Authorities to revert to FM relief requests in a timebound manner.
What should contractors/concessionaires now do?
Our recommendations are as follows:
(i) Wait for a bit of clarity!: As mentioned in the beginning of this Note, the Notifications derive from a unified set of ‘motherhood principles’ in the procurement Manuals and financial rules of the Ministry of Finance. These principles are intended to apply across projects and sectors. It is for various Ministries/ Departments to supplement this Manuals to suit their local/ specialized needs. From our previous experience in this lockdown period, typically, government ministries, sector regulators and contracting authorities such as NHAI (roads) and MNRE (renewable energy) usually take a cue from MOF and other Central Government notifications and respond by issuing their own sector-specific notifications on force majeure. Once such a ‘follow-on’ notification from the concerned sector regulator e.g. NHAI or MNRE is issued, it provides a more credible hook for a private contractor to invoke FM. That said, the MOF’s Manuals and Notifications carry significant persuasive value in their own steam, being the foundation and genesis to corresponding provisions in works contracts and concession agreements down the line. Therefore, in our view, a contractor seeking FM relief can nevertheless invoke the FM Notification to claim FM relief (irrespective of where a sector regulator or concessioning authority has or has not issued a specific follow-on notification incorporating FM relief).
(ii)Take stock and evaluate your current FM correspondence with the contracting Authority: Given that the lockdown has been in force for over seven weeks, most contractors/ concessionaires will have already approached their respective Authorities for some relief. Therefore, evaluate whether any existing FM relief granted by the Authority can be further strengthened or bettered by FM Notification. For example, most Authorities will have taken 22nd March 2020 as the starting point for relief (i.e., when the Ministry of Home Affairs’ first lockdown circular was issued). However, MOF’s FM Notification sets the date of commencement of FM relief as 20th February 2020. Contractors may therefore be able to claim an extra month of relief, if the same has not been granted by the Authority. Therefore, supplement your ongoing FM conversations judiciously.
(iii) Claims covering a future period: By way of the FM Notification, the Ministry of Finance has recommended relief to private contractors for up to 6 months (i.e. until 20 August 2020). However, the ultimate discretion on FM relief and its duration rests with the concerned contracting Authority. Therefore, to maximise its chances of being granted an extension of time, a contractor must be able to demonstrate in its claim that lockdown restrictions are ‘persisting’ the effects of which will endure for a long period. For contractors making a claim, it is advisable to draw support from state government circulars on continuing lockdown and labour restrictions, including social distancing, to argue that the contractor requires a longer tenor of FM relief.
(iv) Exercise FM-related right of termination?: A concession agreement will provide that where an FM event subsists beyond a certain period (for example, 90 days), the contractor becomes entitled to terminate the concession agreement with compensation for force majeure. Thus, when making an FM claim for time and money, the contractor must be mindful of its existing right to terminate. While it is nobody’s case that a contractor should precipitate termination, in infrastructure contracts, a cost benefit analysis – using sound commercial prudence as well as the project’s future prospects, may be an important exercise to undertake at this juncture. If a contractor is availing of an extension of time, do make sure that it preserves its other rights on a “without prejudice” basis, for future relief.
(v) Release of Performance Security: With respect to partial recovery of performance security, as mentioned before this is more relevant to pre-COD projects; or projects that have achieved COD but are within the defects liability period when the performance security is held back by the Authority. Contractors under pre-COD or pre-defects liability can now claim this. A refund of BGs will not only replenish the contractor’s non-fund limits, it may also result in direct cash benefit through a release of cash collateral that the contractor will have given its bank. The devil, however, lies in the detail. Given this time of lockdown, how will contractors/concessionaires demonstrate the percentage of work completed? Will public authorities allow self-certification in these times when contractors require urgent fiscal relief?
These are some of the questions that – one would hope – sector regulators, authorities and government departments will take a more sympathetic view of in times to come.
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The material contained in this alert is for informational purposes only. The views expressed are not those of K Law and do not constitute legal advice. K Law disclaims all liability to any person or entity for any loss or damage caused by errors or omissions in this alert. The author is this article is Vishal Bhat (Partner).
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