QUO VADIS THE CONTRACTOR
IN THE TURBULENT TIMES OF COVID-19 ?
M.
SIVARAMAN
Contractor
Hues & Covid-19 Woes:
The creation of a nation’s critical infrastructure
like roads, bridges, airports, seaports, dams, hydro-electric projects, power
projects, telecommunication and internet, special economic zones and their
continued operation and maintenance is no more the sole preserve of the
sovereign governments. Even the generally reserved activities of a national
like atomic energy, defence, space technology has never been fully
self-reliant. There have been an army of
contractors, developers and concessionaires who have catered to this
infrastructure development of a country and India is no exception with the
private sector contractors’ role displaying a continuum ranging from a humble
supply of goods or services contract through turnkey and Engineering,
Procurement and Construction (“EPC”)
contracts to the Build, Own, Operate and Transfer (“BOOT”) variant concession agreements under the Public Private
Partnership (“PPP”) formats. Besides the Central and State Governments,
their Public Sector Enterprises and the local bodies, several private
infrastructure developers and other contractors who have been awarded such
public contracts also in turn engage sub-contractors, suppliers, vendors and
other service providers from the private sector. Now, what happened to all these private
contractors when the Covid-19 global pandemic onslaught began in our
country?
The outbreak and
rapid spread of Covid-19, as a global pandemic, to almost every country in the
globe wrecked catastrophic damage to precious of human lives and led to the
clamping down of virtual lockdown of human activity into quarantine and curfew
restrictions in several parts of the globe, including India. In our country, initially employees were
advised to practice social distancing, very soon to be directed to work from
home and thereafter abruptly directed to be confined in their homes, with the
result all the contractors’ offices, as well as project sites and contractual
performances were constrained to be suspended since the beginning of March
2020. Several State Governments in India
also announced additional or more stringent measures, including containment
zone restrictions, thereby adversely affecting the ability of staff and
employees of the contractors to perform their services. Travel of the project and other staff, both domestic and
international, have been abruptly stopped with the cancellation of
international and domestic flights, cessation of train and other surface
transportation in India affecting project execution and completion activities. Their suppliers and vendors, both in India
and abroad, have also been in turn affected by similar suspension of all
activities, including the lockdown, non-processing or production and consequent
non-supply of equipment/materials, non-rendering of services to the Indian
contractors, affecting the entire supply chain.
Almost the entire migrant labour who were working in all the project
sites have fled to their home states thereby crippling the project execution
capabilities. Besides, there are severe
lockdown and interstate as well as intrastate movement restrictions in several
parts of the country which is also affecting project execution activities. Project and contractual collections from the
employers drastically fell through to nil and the contractors were soon left
with no revenue realisation, despite their obligation to provide for staff
salary, overhead, statutory and tax outgoings. The scope, effect and impact of
this global pandemic on various aspects of human resource availability and
applicability, closure of offices and project operations, inability to achieve
project milestones, loss of projected revenues, statutory and tax outgoings,
idle wages to employees, repayment obligations towards lenders and operational
creditors is presently incalculable, unprecedented and unpredictable and way
beyond the reasonable control of the contractors. Under these circumstances, it is only just
and necessary that the contractual obligations need to be excused from
performance till such circumstances cease to exist.
Central
Government Succor to the Contractors:
The Modi 2.0 Government stepped in with all the
alacrity it deserved and unleashed a slew of relief measures to tide over
Covid-19 pandemic. It readily came
forward to extend force majeure condition
to the outbreak of Covid-19 so as to ensure that contractors do not end up in
default in relation to all supply contracts with the Central Government(1).
For its part, the Reserve Bank of India (“RBI”) had declared and extended moratorium on term loans and
working capital facilities effectively for a period of 6 months(2).
The Central Government realized the need to prevent the defaulting
contractors, inter-alia, from being
hauled over the coals of the Insolvency and Bankruptcy Code, 2016 (“IBC”) which could render them
commercially extinct by promulgating relaxations, moratorium on initiation of
corporate insolvency resolution process and associated liquidation process(3).
However, while ensuring liquidity of cash into the hands of the
contractors and preventing a financial default and its resolution under the
aegis of IBC are welcome, it was a dire legal imperative that the contractors
need to be provided contractual reprieves and relaxations in their contract
conditions and stipulations, which was also duly taken cognizance of by the
Modi 2.0 Government.
Contractual
Performance Relaxations:
In continuation to the February 19, 2020 notification
of the Finance Ministry permitting Covid-19 as a force majeure condition, the Finance Minister announced on May 15, 2020, inter-alia, to the effect that “All central agencies like Railways,
Ministry of Road Transport and Highways and CPWD will give extension of up to 6
months for completion of contractual obligations, including in respect of EPC
and concession agreements.” The Finance Ministry further clarified that
for all contracts which were due to be completed on or after February 20, 2020
shall be duly extended by a period of 3 months to 6 months without imposition
of any cost or penalty on the contractors or the PPP concessionaires(4). Besides the above, in order to ease the
working capital requirements and save the bank guarantee commission charges,
the Central Government also issued orders to the Government Departments and
central agencies to reduce the value of the performance bank guarantees submitted
by the contractors to the extent of work already completed by them(5).
In order to
support the Indian contracting companies, the Central Government also notified
that no global competitive tendering shall be any more mandatory for contracts
valued less than Rs.200 crores(6). The Ministry of Defence also extended the
delivery time of Indian contractors for all capital acquisition contracts by
four months without computing the said period for imposition of liquidated
damages(7).
Relief
to PPP Concessionaires:
The Ministry of Road Transport & Highways on June
3, 2020 announced relief measures to the contractors, concessionaires and
developers in the road sector, inter-alia,
providing for release of the retention money pro-rata to the work completed by them; extension of time under the
contracts between 3 to 6 months depending on site conditions; direct payment to
sub-contractors through escrow accounts; waiver of penalty for delay in
submission of performance bank guarantee; extension of the concession period to
compensate the loss in toll fee collections etc.(8). Real estate developers
were also accorded extended timelines for registration and completion of their
projects in terms of the Real Estate (Regulation & Development) Act, 2016(9).
In case of thermal power generating companies, the
Ministry of Power exhorted them to utilize domestic coal for blending purposes in
the face disruption in global supply chain and offered to make the same
available on priority basis(10). The Ministry of New & Renewable
Energy permitted the granting of suitable extension of time for the achievement
of Scheduled Commissioning Date for the renewable energy projects(11) and subsequently the entire
lockdown period plus 30 days normalization period was also directed to be
automatically granted as force majeure
period(12) and it also permitted
that all the renewable energy projects can raise invoices and bills through
emails by relaxing the mandatory norm of hard copy submission(13).
DISCOMS were also directed to avail power from the renewable energy
generators with a ‘must-run’ status
during the lockdown period and that DISCOMS should make payments to the
renewable energy generators as done prior to lockdown(14). Certain relaxations
and extension of time was also provided to the developers, co-developers as
well as units functioning in the Special Economic Zones(15).
Deferment of revenue share, royalty and equipment hire
charges was directed to be provided to port concessionaires, besides granting waiver
of lease rentals and licence fees as well as relaxation in minimum guaranteed
through-put (“MGT”) obligations and
performance standards obligations(16). In order to enhance the competitiveness
of the Indian contractors and to ward off Chinese contractors, the Minister for
Road Transport & Highways recently declared a ban on Chinese contractors in
all road projects and recommended the lowering of the project experience
qualifications and financial eligibility criteria for Indian contractors(17).
No
Panacea for Contractors:
An illustrative list of the measures as above
highlighted may accord an impression that that the contractors, developers and
concessionaires have been ring-fenced against all the adversities caused by the
Covid-19 pandemic in India.
Unfortunately, the fact is otherwise.
It would be palpable that all the above advisories and relief measures
have been announced by the Central Government and are therefore binding only on
the Central Ministries and Departments and the central agencies and their
public sector. Firstly, even these Central Government advisories did not have any
salutary effect to secure interim measure of protection/ mandatory injunctions
against private parties(18). Secondly, in the matter of granting injunction
against bank guarantees and letters of credit, the courts have held that
although Covid-19 qualifies as a force
majeure, if there had been defaults committed by the contractors prior to
the outbreak of this pandemic and continued thereafter, then, no relief could
be granted in their favour(19). Delhi High Court gave certain reliefs to
a road concessionaire by applying the advisories of the Ministry of Road
Transport & Highways, although it did not effectively prevent the
invocation of bank guarantees(20). No injunction was granted to restrain payments
under letters of credit during Covid-19 pandemic(21). Thirdly, the State Governments who have also awarded several
contractors and concession agreements under PPP format have left the
contractors in the lurch without any written down policy and advisory
pronouncements on granting any relaxation, reliefs or extensions or waivers in
relation to contractual compliance, thus, exposing them to the vagaries of subjective
and unpredictable interpretation in matters relating to determination of force majeure protection for their
contractors.
It has been difficult times for the contractors,
developers and the concessionaires to navigate through the turbulent Covid-19
times and there has to be not only policy pronouncements by the Central
Government, but, the State Government should also emulate the same in relation
to the contracts in their realm. The
regulators and the judiciary have by and large appreciated the difficulties
faced by the contractors, but, have been generally averse to intervene in
matters of injuncting bank guarantees and letters of credit (possibly as these
are independent contracts between the banks and the beneficiaries) especially
when defaults have been committed by the contractors prior to the onset of the
Covid-19 pandemic. However, the
judiciary and the regulators have not fought shy to come to the rescue of the
contractors who had been diligent in their contractual performances, but, bonafide came to be affected by the
Covid-19 force majeure circumstances(22).
End
Notes:-
1.
Office Memorandum No.F.18/4/2020-PPD dated February 19, 2020 of the Ministry of
Finance, Government of India.
2.
For more details on this subject, see my earlier post dated June 6, 2020 titled
“RBI’s Covid-19 Loan
Moratorium & Judicial Responses” in this blog.
3.
For more details on this subject, see my earlier post dated June 13, 2020
titled “Covid-19 & Modi 2.0’s Relaxing the Rigours of the
Insolvency and Bankruptcy Code” in this blog.
4.
Office Memorandum No.F.18/4/2020-PPD dated May 13, 2020 of the Ministry of
Finance, Government of India.
5.
Office Memorandum No.F.18/4/2020-PPD
dated May 13, 2020 of the Ministry of Finance, Government of India.
6. Notification F.No.12/17/2019-PPD dated May 15, 2020 issued by the
Ministry of Finance, Government of India.
7. Press
Release dated June 12, 2010 by the Ministry of Defence, Government of India.
8. Notification
No.COVID-19/RoadMap/JS(H)/2020 dated June 3, 2020 issued by the Ministry of
Road Transport & Highways, Government of India.
9. Office
Memorandum No.O-17024/230/2018-Housing-UD/EFS-9056405 dated May 13, 2020 issued
by the Ministry of Housing & Urban Affairs, Government of India.
10. Memorandum
No.F.No.FU/21/2020-FSC dated April 28, 2020 issued by the Ministry of Power,
Government of India.
11. Office
Memorandum No.283/18/2020-GRID SOLAR dated March 20, 2020 issued by the
Ministry of New & Renewable Energy, Govt. of India.
12. Press
Release dated April 21, 2020 issued by the Ministry of New & Renewable
Energy, Govt. of India.
13. Office
Memorandum No.283/18/2020-GRID SOLAR dated April 1, 2020 issued by the Ministry
of New & Renewable Energy, Govt. of India.
14. Office
Memorandum No.283/18/2020-GRID SOLAR(ii) dated April 1, 2020 issued by the
Ministry of New & Renewable Energy, Govt. of India.
15. Press
Release dated March 30, 2020 issued by the Ministry of Commerce & Industry,
Government of India.
16. Notification
dated April 21, 2020 of the Ministry of Shipping, Government of India.
17. See https://www.thehindu.com/news/national/india-to-ban-chinese-companies-from-highway-projects-says-gadkari/article31961852.ece
as accessed on July 2, 2020.
18. Polytech Trade Foundation vs. Union of India
& Ors decided on May 22, 2020 by the Delhi High Court; Rashmi
Cements Ltd. vs. World Metals & Alloys (FZC) & Anr. decided on June 18, 2020 by the Delhi High Court.
19. Indirajith Power Private Limited vs. Union
of India & Ors. Decided on April 28, 2020 by the Delhi High Court; Halliburton Offshore Services Inc.
vs. Vedanta Limited & Anr. decided on 29.05.2020 by the Delhi High Court.
20. MEP Infrastructure Development Ltd. vs.
South Delhi Municipal Corporation & Ors. Decided on June 12, 2020 by
the Delhi High Court.
21. Standard Retail Pvt. Ltd. vs. GS Global
Corp. and Ors. Decided on April 8, 2020 by the Mumbai High Court.
22. Order dated 07.04.2020 in Commercial Suit
No.LD-VC-7 of 2020 alongwith IA No.LD-VC-7(IA) of 2020 and Transcon
Skycity Pvt. Ltd. And Ors vs. ICICI Bank and Ors. Order dated 11.04.2020
passed in W.P. Nos.LD-VC No.28 & 30 of 2020 by the Mumbai High Court.
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