Legal issues affecting PPP projects after lockdown

By Soumya Kanti De Mallik and Prithviraj Chauhan, HSA Advocates
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Public private partnership (PPP) projects in the infrastructure sector have been among the worst affected during the covid-19 pandemic and the consequent lockdown, with construction activities coming to a complete standstill. Since the concessionaires typically operate on a leveraged basis, managing the significant working capital requirements along with the ongoing migrant labour crisis has proved challenging.

PPP Projects
Soumya Kanti De Mallik
Partner
HSA Advocates

As a general rule, the covid-19 pandemic will be covered in concession agreements as a non-political force majeure event. In addition, a Ministry of Finance memorandum dated 19 February 2020 clarified that the disruption of supply chains due to the spread of coronavirus in China or any other country will be covered by the force majeure clause as a natural calamity. Accordingly, force majeure provisions under concession agreements were triggered in many instances, in order to excuse the concessionaires from performing their obligations and extending the scheduled completion date or the concession period, as applicable.

As the economy begins to emerge from the lockdown, it is becoming more difficult for the central and state governments to implement cohesive and efficient exit strategies. Under an order from the central government dated 30 May 2020, states and union territories, based on their assessment of the situation may impose such restrictions as they deem necessary in order to contain the spread of the coronavirus. Even as work on PPP projects is being partially resumed, they now face a situation where one state eases restrictions while another imposes new limitations to battle the crisis. This will result in disruptions to supply chains of raw materials and project equipment. Another major concern is that workers may be prevented from returning to project sites. All these difficulties impact PPP projects on multiple levels.

PPP Projects
Prithviraj Chauhan
Associate
HSA Advocates

To deal effectively with such situations, contractual remedies under concession agreements will have to be examined, such as the force majeure provisions that excuse parties from the performance of their obligations. However, this will have to be evaluated separately for each factor or activity affected. In addition, even after the partial resumption of activity, progress will be more expensive and less efficient than before. This will lead to delays even after the force majeure event is over. Another provision that is likely to be triggered in concession agreements is that relating to relief for unforeseen events. Concessionaires will need to spend on safety measures such as the provision of masks, sanitization and so on, the costs of which will have been incurred wholly as the result of the outbreak. These measures will increase financial burdens as costs resulting from a non-political force majeure event are usually borne by the party that incurred them.

The interplay of force majeure provisions and those relating to increases in costs due to a change in the law is also challenging. In this situation, two issues are involved, firstly whether a government notification or order can be considered as a change in the law, and secondly whether the benefit of both force majeure and change in the law provisions can be claimed for the same event. While the former depends on the precise definition of a change in the law in a concession agreement, the latter is more a question of the interpretation of both fact and law. For instance, the Supreme Court has upheld the view that both force majeure and a change in the law can be argued for a compensatory tariff order as long as the party does not apply to be relieved of performance altogether. However, it appears that both provisions would operate independently of each other as the conditions for triggering them, and the relief consequently ordered, exist on different levels.

There are other issues that also need to be considered going forward. For instance, due to the current crisis the authority offering the concession may play a greater role in PPP projects by providing greater flexibility to their private sector partners in bearing the burden of increased costs due to changes in laws, and agreeing not to invoke termination or penal provisions in the concession agreement. This could rebalance the risk under existing models and the authorities offering the concessions should adopt a realistic and rational approach. The impact of the covid-19 pandemic will continue to be felt across PPP projects in the infrastructure sector at multiple levels long after the lockdown has been lifted. The parties involved in such projects should closely examine the issues involved and agree ahead of time on measures to deal with emerging risk areas and, at the same time, adapt to a post-covid-19 world.

Soumya Kanti De Mallik is a partner and Prithviraj Chauhan is an associate at HSA Advocates.

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