KEY LEGAL IMPERATIVES- OWNER AMD CONTRACTOR PERSPECTIVES

1. EPC CONTRACTING: ENERGY SECTORLegal, Taxation, Commercials and Risk7th-8th November, 2012, Crowne Plaza Today, New Delhi KEY LEGAL IMPERATIVES- OWNER AMD CONTRACTOR PERSPECTIVES STRICTLY PRIVATE – NOT FOR CIRCULATION Deepto Roy Partner PXV Law Partners

2. “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).

3. 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

4. Contractual MATRIX IN an Infrastructure project Sponsor Support Sponsors Lenders Shareholders Agreement Loan Agreement Security Documents Government EPC Contractors Government Support Implementation Agreement Engineering, Procurement, Construction Contracts Fuel Supply Contract O & M Contract Offtake Contract Offtaker Fuel Suppliers Operator

5. RISK MATRIX Country and Regulatory Risks • Political Risk including expropriation risk • Country Legal infrastructure Risk including regulatory risk and legal enforcement risk • Physical infrastructure risk • Foreign Exchange Risk • Devaluation Risk Development Risk Construction Risk Operation Risk • Planning Delay Risk • Approval Risk • Land Acquisition Risk • Design Risk • Delay Risk • Specifications Risk • Delay Risk • Completion Risk • Cost Overrun Risk • Material Cost • Labour Cost • Equipment Cost • Force Majeure Risk • Compliance Risk • Technical Risk • Demand Risk • Input Risk Delay Risk • Performance shortfall • Approval Risk • Land Acquisition Risk • Cost Escalation Risk • Management Risk • Compliance Risk Specific Project Risks

6. 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

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

8. 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.

9. … 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 PipesLtd (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.

10. … 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

11. 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. • Durationi.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. • SitaramBrindavan v ChiranjilalBrinjlal, 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, (1854) 9 Exch 341. • Specific exceptions for gross negligence or fraud, or incidents such as death or injury. • Limitation on liability clauses are always strictly interpreted and any limitation and exclusion agreed between the parties must be clearly specified for them to be excluded

12. 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”

13. 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:

14. Key issues IN THE Force Majeure Clause

15. Key issues IN THE Force Majeure Clause

16. 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

17. 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

18. Key Obligations on Termination 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.

19. ThaNK You Deepto Roy deepto.roy@pxvlaw.com +919654400716