High Cost of Construction - Indian Perspective
Rajeshkumar (immediate deployment) Rajendran LLM LLB BE MRICS MCIArb
A senior leader with an impressive background in Commercial, Contracts, & Claims Management, overseeing multimillion-dollar projects. With two decades of experience, the majority gained in Dubai, Qatar & Saudi Arabia.
The legal aspects of a construction contract becoming unduly expensive in India:
The following examples illustrate how the strategic use of industry-specific clauses and practices can help construction parties in India effectively manage the risks and challenges associated with an unduly expensive construction contract.
Price Variation Clauses:
In the construction of the Delhi-Mumbai Industrial Corridor (DMIC) project, the contracts included comprehensive price variation clauses that accounted for fluctuations in the prices of key materials like steel, cement, and fuel. This allowed the contractors to seek appropriate price adjustments as these input costs changed over the course of the project.
Force Majeure Clauses:
During the construction of the Chenab Bridge, a critical infrastructure project in Jammu and Kashmir, the contract included a robust force majeure clause. When the region experienced severe flooding and landslides in 2014, the contractor was able to invoke the force majeure clause and obtain relief from the contractual obligations, allowing them to focus on disaster recovery efforts.
Escalation Clauses:
The construction contracts for the Rohtang Tunnel project in Himachal Pradesh incorporated escalation clauses that provided for periodic adjustments to the contract price based on changes in the Wholesale Price Index (WPI). This mechanism helped the parties manage the impact of inflation on the overall project costs.
Indexation Mechanisms:
In the construction of the Sardar Sarovar Dam project, the contracts included indexation provisions that linked the material and labor costs to relevant commodity and labor indices. This allowed the contract price to be automatically revised in proportion to the changes in these underlying indices, ensuring a fair allocation of the cost risks.
Renegotiation Clauses:
During the construction of the Bandra-Worli Sea Link in Mumbai, the contract included a renegotiation clause that allowed the parties to revisit the terms of the agreement if there were significant changes in the project scope or macroeconomic conditions. This provision enabled the parties to collaborate and arrive at mutually agreeable solutions when the project encountered unexpected challenges.
Dispute Resolution Mechanisms:
The construction contract for the Sardar Sarovar Dam project had a comprehensive dispute resolution mechanism involving expert determination and arbitration. This framework helped the parties resolve disagreements over the application of the price variation and indexation clauses in an efficient and impartial manner.
Mere increase in cost or difficulty of performance:
As per the Supreme Court's ruling, a mere increase in the cost of performance or the contract becoming commercially onerous or unviable for the contractor does not absolve them from performing the contract. The contractor cannot be discharged from their obligations just because the contract has become unduly expensive to execute.
Impossibility or frustration of the contract:
The only grounds under which the contractor can be relieved from the contract are if the underlying act itself becomes impossible to perform, or if a supervening event beyond the control of the parties fundamentally alters the nature of the contract, leading to frustration of the contract under Section 56 of the Indian Contract Act.
Modification of consequences:
The parties can modify or even exclude the rules relating to the consequences of impossibility of performance through the terms of their agreement. This provides them some flexibility to address undue expense or difficulty in performance.
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Need to carefully draft the contract:
Given the limited grounds for discharge from the contract, it is crucial for the parties to carefully draft the construction contract terms to address potential cost escalations, force majeure events, and other unforeseen circumstances that could make the contract unduly expensive to perform.
Incorporating these industry-standard clauses and practices into the construction contract can help the parties anticipate and manage the risks associated with cost escalations, ultimately reducing the impact of an unduly expensive contract.
Price Variation Clauses:
Construction contracts often include price variation clauses that allow for adjustments in the contract price based on fluctuations in the prices of key materials, labor, or other inputs.
These clauses provide a mechanism to account for unpredictable cost increases and share the risk between the parties.
Force Majeure Clauses:
Construction contracts typically include force majeure clauses that excuse the parties from performing their obligations in the event of unforeseeable circumstances beyond their control.
These clauses can cover events like natural disasters, changes in laws, and other disruptions that fundamentally alter the feasibility of the project.
Escalation Clauses:
Escalation clauses allow for periodic adjustments to the contract price to account for inflation or other macroeconomic factors that impact the overall cost of the project.
These clauses provide a predetermined mechanism to revise the contract price over time.
Indexation Mechanisms:
Some construction contracts incorporate indexation mechanisms that link the contract price to relevant indices, such as commodity prices or labor cost indices.
This allows the contract price to automatically adjust in line with changes in these underlying indices.
Renegotiation Clauses:
Contracts may include provisions that allow the parties to renegotiate the terms, including the contract price, in the event of significant changes in circumstances.
This provides a framework for the parties to collaborate and find a mutually acceptable solution when the contract becomes unduly expensive.
Dispute Resolution Mechanisms:
Robust dispute resolution clauses, such as mediation, arbitration, or expert determination, can help the parties resolve disagreements over the impact of increased costs on the contract.
This can provide a structured process to address and potentially mitigate the effects of an unduly expensive construction contract.