Dispute in EPC Contracts
Dispute in EPC Contracts
In older models, either designing of the project or procurement or maintenance work were the responsibilities
of the owner/employers. With the advancement of technology, there are huge demands for modern
constructions such as power plant, high-quality bridges, airports etc.
This modern construction comes with more complexities and too risky for the owner/employer. In such
situations, EPC module emerged as a best modern modality of contracting for the owners, since in EPC
module, the ouns of the project management is shifted from the owner/employer to the contractor.
The use of EPC module is not restricted only in infrastructure & construction industry but are used in many
other industries such as thermal power project, renewable energy, oil and gas, railways etc. In the EPC module,
a contractor is responsible for the design, procurement and construction of the project.
The contractor has to handover the project to the owner in running stage which means that the
owner/employer will come and directly turn the key and start using the project. Broadly, the EPC contract
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consists of three components i.e. detailed engineering design of the project (E), procurement of raw materials
(P), and construction of the project (C) as per the specifications.
The whole process of the EPC module can be summarized in different stages. After successfully bidding the
project, the contractor has to start with designing work and get it approved from the owner. Once the
contractor receives the approval from the owner, he as to initiate the procurement process of all required raw
materials either from his organization or through subcontractors.
Once the raw material is at the site, then he needs to start with the construction works as per the terms and
conditions mentioned in the contract. Lastly, he has to commission the project, i.e. he has to show the owner
the desired output as mentioned in the contract, once the commission stage is approved then the contractor is
said to have executed the project. The person who carries out the contract under EPC module is called as EPC
Contractor. In India, we have some major EPC contractor like L&T, Hindustan Construction Co.ltd, Punj Lloyd
Ltd etc.
ii. Milestones:
Since an EPC contract is an end to end contract arrangements, the works of EPC contractors will be
measured on the milestone basis. Total contract works will be distributed into the various sets of activity
and such activity will be linked to the particular milestone and such milestone will be linked to the major
contract work under an EPC contract. The EPC contractor will raise its bill once a particular milestone is
completed and it is approved by the employer.
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There can be disputes related to bank guarantees, the wrongful invocation of bank guarantees, fraud in
tenders etc. If such kind of dispute is raised then it means a non-defaulting party to the contract raises a claim
against the defaulting party. If you go through the definition of a claim it says a request, demand, or assertion
of rights by a seller against a buyer, or vice versa, for consideration, compensation, or payment under the
terms of a legally binding contract, such as for a disputed change1.
Time is the essence in every construction work, yet the most frequent disputes arise out of delays in
completion. A variation in the scope of work, materials, could result in additional costs, losses, delays or claims
for extension of time. While there are different type of disputes arising out of an EPC contract, in this article we
will focus on two major issues namely delays and variations and also its remedies available.
Below are the few types of claims raised in the EPC contracts:
1. Compensation for delay in work by the contractor.
Time Related 2. Delay in work due to details, approvals not timely provided.
3. Suspension of work by client.
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Most of the EPC contracts have either a penalty clause or liability clause which means that if there is a
delay in any activity due to reason attributable to the contractor then the contractor shall be liable to pay
the damage as defined in the contract. Any delay due to the default of the contractor, the employer can
claim the damage through the liquidated damage clause, which is pre-determined by both the parties
usually at the rate of 0.5 to 1% of each milestone.
Even after paying liquidated damages, the errant contractor keeps on defaulting then the employer has
no other choice but to terminate the contract. However, the contractor shall not be liable to pay for any
damages to the employer, if the delay is due to the reason attributable to the employer or due to any
reason beyond the control of the contractor. In such a case, the contractor has a right for extension of
time, claim costs if any incurred such as machinery costs, labour costs etc.
There are a plethora of cases decided by the Supreme court of India, where the employer was held
responsible for the delay and the contractor was granted reasonable costs. In General Manager,
Northern Railways v. Sarvesh Chopra, AIR 2002 SC 1272, the SC agreed that since the delay was due to
the reason attributable to the employer, the contractor would be entitled to claim of damages which
were provided at the time of acceptance of �extension of time' for the performance of the contract.
Now, it is important to know that a delay can arise in an EPC contract due to any factor, for example, a
delay could be due to breach of contract either due to the employer or due to the contractor or by its
subcontractor, it can also arise due to any unforeseen circumstances such as act of god, war, strikes etc.
There is one more type of delay known as a concurrent delay, which means that there can be two or
more events of delay occurring concurrently and in parallel during the lifecycle of the project, were one
event happened due to the default of the contractor and the other due to default of the employer. For
example, if there is a delay of 60 days at the start of the project because the employer did not provide
the site for the construction and during this 60 days, the contractor did not mobilize its resource.
Time may be specified by fixing a date or time or fixing a period for the performance. But if the
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intention of the parties reflects otherwise, then the contract is not voidable, however, the
promisee is entitled to the damages for loss caused to him by such failure.
According to section 46, if no time is specified then it has to follow the principle of �reasonable
time', which means that the contract should be completed within a reasonable time frame. And in
the subsequent sections 47-50 it deals with proper place and time of performance when it is no
explicitly mentioned in the contract.
It is usually invoked by the employer in almost every construction works depending upon the length,
nature and complexity of the project. But to invoke the variation clause it is important that such a clause
is expressly mentioned in the contract.
To protect the interest of the contractors, such variation clause usually accompany with compensation
provisions i.e. to adjust the contract price, the schedule of the payment etc. These provisions enable
parties to smoothly administer works and avoid disputes.
In some turnkey contracts, there is also a provision whereby, the contractor is required to
immediately highlight the impact of requested variation on the project cost. The contractor is also
required to inform the employer whether the timelines of the milestone will be affected severely
due to the variation request. This mechanism helps in cost impact analysis of the variation, allow
the employer to take an educated decision whether to withdraw, modify or cancel the variation
order.
Likewise, it is utmost important for the employer to identify whether the contractor's request for
extension of time and/ or whether the contractor's claim of additional cost for carrying out
additional work is at the applicable rates. In National Fertilizers vs Puran Chand Nangia on 17
October 2000, SC held that the employer's variation demand was way above the agreed +/- 25%
variation work. Hence, allowed the contractor to claim costs for additional work above agreed
percentage at market rate.
Remedies:
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Whereas, section 74 deals with liquidated damages which widely used and incorporated in most of the
EPC contracts. In liquidated damages, the parties have already estimated the costs which need to be
paid by the defaulting party to the non-defaulting party.
In ONGC v. Saw Pipes (2003) 5 SCC 705 it was clarified by the SC that it is pertinent to note that the
amount stipulated as liquidated amount or penalty is the upper limit beyond which the court cannot
grant reasonable compensation.
There are catena of cases where supreme court has concluded that even if there is pre-determined sum
agreed by both the parties as liquidated damages, courts will have to consider certain other factors such
as mitigation of losses, reasonability of the sum and other facts and circumstances of the case.
In SNL v. Reliance Communication Ltd. (2011) 1 SCC 394, SC has allowed that in the absence of such
proof (as mentioned in the above paragraph) or honest estimation by the claimant, the court shall award
damages which are below the stipulated liquidated damages. And while awarding damages, it should
take into consideration a reasonable assessment of the consequences of the breach of contract.
If the aggrieved party does not want the defaulting party to perform the contract, then it can opt for
substituted performance. A substituted performance is a new addition to the relief of the aggrieved
party, where he can ask any third party to execute the remaining work of the defaulting party and all the
costs and expenses will be borne by the defaulting party.
Under Section 20A of Specific Relief Act, that the act bars courts from granting an injunction in the
infrastructure contract like transport, energy, communication etc in case if an injunction is granted
would significantly delay the project and also impact the progress of the project.
Since the EPC contracts are dynamic by nature and involve many variable factors the parties prefer to
have multi-tier dispute mechanism. These mechanisms consist of Dispute Adjudication Boards (DAB),
Mediation and Arbitration. Once this multi-tier dispute mechanism fails to resolve the issue then and
then only the parties approach court for the resolution.
Conclusion
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Over the year, infrastructure industries have developed in an organic way where it learned from its own
mistake and adopted necessary changes. Fundamentally, every party to the contract will try to avoid any kind
of dispute arising between them. But through this article, we have seen that in a contract like EPC contract
which involves longer execution period, higher-level of complexity, a lot of variable factors and ever-changing
circumstances would always find a way to throw new issues.
Dispute minimization will always be an ongoing process since no matter how robust the contract is drafted.
Parties can avoid disputes if they have effective and reliable records, communication and awareness. If there is
any potential dispute arising between the parties then such disputes should be identified and resolved at the
earliest stages itself using effective dispute resolving mechanism such as Multi-tier dispute resolving
mechanism.
End-Notes:
1. https://dictionary.cambridge.org/dictionary/english/claim
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