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Due to the global lockdowns and restrictions imposed to prevent the spread of the COVID 19 pandemic, it is quite possible that the force majeure clauses in the concession agreements of various Public Private Partnership projects will be triggered. It is, therefore, advisable that the parties to the PPP projects be aware of, and analyse, the effects of the pandemic, and consequent actions of various Governments, on their projects. A typical PPP concession agreement in India will have provisions to cover force majeure events. Some of the usual provisions are as follows:
Force Majeure Events
The Concession agreement would provide for, some or all of, the following force major events:
- Non-Political event – such as act of God, epidemic, extremely adverse weather conditions.
- Indirect Political event – such as acts of war, embargo, blockade, terrorist action.
- Political event – such as expropriation of assets of the project in national interest, unlawful/unauthorized revocation of or refusal to grant/renew clearances required by the concessionaire to complete the project not caused by a breach of the conditions of such clearances by the concessionaire or its contractors.
Due to the COVID 19 pandemic, a Non-Political event could be triggered under the concession agreement. The parties may also like to analyse whether an Indirect Political event gets triggered due to the embargo imposed by Governments consequent to the epidemic.
Notice of occurrence
Upon the occurrence of a Force Majeure Event, the party claiming the benefit of such event must comply with the provisions of the force majeure clauses in the contract. These are likely to include reporting such occurrence within the stipulated timeframe, along with providing the requisite information such as the nature and extent of the Force Majeure Event and proof of its occurrence, its estimated duration and effect on the performance of obligations by the affected party, the measures that it is proposing to take to mitigate the impact of such event etc. to the other party.
Effect and Excuse for performance
Force Majeure Events clauses ordinarily permit an extension of the timelines prescribed in the concession agreement. The extensions are granted in the following manner:
- If the Force Majeure Event occurs before the timeline prescribed for fulfilment of the conditions precedent, the timeline for such fulfilment should be extended by a period equal to the duration of the Force Majeure Event;
- If the Force Majeure Event occurs after the fulfilment of the conditions precedent but before the commencement of commercial operations of the project, the period of the concession agreement and the timeline for completion of the project should be extended by a period equal to the duration of the Force Majeure Event;
- If the Force Majeure Event occurs after the commencement of the commercial operations, the concession period should be extended.
Further, during the continuance of the Force Majeure Event, if the affected party is unable to perform its obligations, it will be excused from performing such obligations for the scope and duration reasonably required, provided that the affected party takes reasonable steps to mitigate the loss caused to the other party. The affected party must, when it is able to resume performance, give notice of such ability and the actual resumption of performance.
Allocation of Cost
In the event the Force Majeure Event occurs after the fulfilment of the conditions precedent to the concession agreement, the costs directly relating to the project and attributable to such event are likely to be allocated under the contract as follows:
- for a Non-Political event – the parties will bear their respective costs;
- for an Indirect Political event – if the costs exceed the insurance cover for such event, the concessionaire will bear the costs up to half of the excess, and the other half of the excess would be reimbursed by the authority; and
- for a Political event – all costs attributable to Political events would be reimbursed by the authority.
Termination notice and payments
In addition to the afore-mentioned extensions and suspension, the agreement may also stipulate that if the Force Majeure Event subsists for a period of 180 days in a continuous period of 365 days, a party may terminate the concession agreement by giving a 15 days’ notice.
Upon termination due to Force Majeure Events, the authority could be liable to pay certain amounts to the concessionaire as termination payment.
Some of issues to be considered by the parties whilst analysing the current situation will be:
- The effect of the lockdowns imposed due to COVID 19 on the performance of the obligations under the contract.
- Strict compliance with the provisions of the force majeure clauses.
- Analysis of provisions of subsisting insurance policies to ascertain claims that can be made (if any) under such policies.
This Article has been authored by Avinash Kumar Khard (Associate Partner) and assisted by Mr. Archit Gupta of DSK Legal. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views and opinions of DSK Legal.