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Construction : Legal Zone | June 2016 | Source : CW-India

Tenders and Contracts in Construction Projects

RUPALI SHARMA and DIVYA MALCOLM discuss tenders and concessionaire agreements in construction projects.

Good roads, railways, ports and adequate power are prerequisites of sustainable development. With that in view, the Twelfth Five-Year Plan (2012-2017) aims to increase investment in infrastructure as a percentage of GDP to 9 per cent by 2017. A large chunk of this is slated for the transport sector, which is seen as a major stumbling block in India´s growth story. Needless to add, NITI (National Institution for Transforming India) Aayog, which replaced the Planning Commission last year, is committed to take forward this salutary mission.

Typically, tenders are invited by the government for any infrastructure or construction project. If bidders meet the technical and financial requirements, a letter of acceptance is issued to the selected bidder. Often, this is just the beginning of a headache. The awards are not only open to challenge from rejected bidders, but the general public, by way of public-interest litigations (PILs). Last-minute changes in specifications to enable only a specific bidder to match the criteria has been a common grievance and fertile ground for court proceedings. Such allegations were levied by Bharat Heavy Electrical Ltd (BHEL) when it lost the Kawas and Gandhar gas-based power project to ABB. The Reliance-ASA JV also accused the government of making changes in the published tender conditions, barely two hours before the opening of the bids in the Delhi-Mumbai Airport Privatisation Tender. A veritable Pandora´s box opens up in almost every other tender with parties, time and again, charging the government of malice and rushing to the courts. Finally, in Ratnagiri Gas & Power Pvt Ltd vs RDS Projects and Others (AIR 2013 SC 200), the Apex Court held: ´where malice is attributed to the State, it can never be a case of personal ill-will or spite on the part of the State´.

If all goes well, the letter of acceptance (LoA) is normally followed by a concessionaire agreement executed between the government and the winning bidder. For well over a decade, to popularise public-private participation (PPP), the government has successfully implemented measures to standardise concessionaire agreements in the infrastructure sector. This may have been a need of its times, as by the end of the Eleventh Five-Year Plan (2007-2012), the share of private investments of the total infrastructure investments in the economy was nearly 40 per cent, the rest being public investments.

The real test of the tenacity of any agreement is when it goes through the rigours of litigation. As all fights are always about money, case laws pertaining to liquidated damages and cost escalation are briefly discussed hereafter. In this regard, Oil & Natural Gas (ONGC) vs SAW Pipes Ltd (AIR 2003 SC 2629) comes to mind first. Here, the Apex Court examined the clauses relating to liquidated damages in the light of Section 73 (Compensation for Loss and Damage Caused by Breach of Contract) and Section 74 (Compensation of Breach of Contract where Penalty Stipulated For) of the Indian Contract Act, 1872. The impugned clause expressly recorded: ´the liquidated damages are not by way of penalty... (this is an agreed, genuine pre-estimate of damages duly agreed by the parties)´. The Supreme Court interpreted the contract and expressed its opinion in the following words: ´there was nothing on record that compensation contemplated by the parties was in any way unreasonable. It has been specifically mentioned that it was an agreed genuine pre-estimate of damages duly agreed by the parties. It was also mentioned that the liquidated damages are not by way of penalty.´ And, liquidated damages were thus awarded to the claimant. It may be worth noting the expression ´genuine pre-estimate of damages duly agreed by the parties´ has become a sine qua non of our standardised concessionaire agreements.

Price or cost escalation is not mentioned in many such agreements. These lacunae must be filled in at some stage.

A private source with rich experience in projects once boldly announced: ´what is not earned by way of fee is earned by way of cost escalation´. In numerous judgments, it has been held that escalation can be awarded only if stipulated in the contract or if the contract contains provisions for variations.

Given the fact that all concessionaire agreements have an arbitration clause and are governed by the Arbitration and Conciliation Act, 1996, the 2015 amendments to the Act are a welcome change.

Very often, after the painful process of arbitration, the losing party chooses to challenge the award under Section 34 (2) (b) (ii) of the Arbitration and Conciliation Act, 1996, on the grounds that it is ´in conflict with the public policy of India´. On the grounds of public policy, a public-sector undertaking (PSU) is known to have refused to pay interest on damages decreed in an international arbitration and sought to hold the award as void. Indeed, an eminent jurist has referred to ´public policy´ as ´a unruly horse, and when once you get astride it you never know where it will carry you´. To this quip, Lord Denning´s flamboyant response was: ´with a good man in the saddle, the unruly horse can be kept in control. It can jump over obstacles.´

There is always hope, especially now. And, thanks to the 2015 amendments, the meaning of ´conflict with public policy of India´ has been given a confined interpretation as ´contravention with the fundamental policy of India´. Nevertheless, it is hoped that the Public Contracts (Resolution of Disputes) Bill, 2015, under which a special tribunal to deal with disputes relating to public contracts exceeding Rs 5 crore shall be set up, will soon be enacted. This may prove to be an antidote against prolonged litigation.

About the authors:
Rupali Sharma, Senior Partner, Kochhar & Co, Mumbai, has over 19 years of experience; and Divya Malcolm is a senior associate at Kochhar & Co, Mumbai office.

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