Projects with a long gestation period require sustained and vast quantity of funding. Such financial resources are often secured through special project vehicles (SPV) like Project Finance, a long-term infrastructure, and an industrial project financing model. The cash inflow generated during the operational stage of the Project is then used to pay off the debt and equity generated to finance the Project. A few examples of projects typically funded through project finance include real estate and building construction, mining, oil and gas, and renewable energy, to name a few. These are all highly capital-intensive projects that stand to gain significantly through such arrangements.

A pertinent feature of every Project Finance is a finance model that predicts the approximate length of time that the project/SPV will take to become profitable and start paying off its debts. The Project’s success rate largely depends on the ability of the SPV/project to deliver on the projections proposed by the finance model.

However, as the reader knows, every long-term Project has its share of hiccups and hurdles. One cannot help but recall the recently repeated lockdowns in the wake of the COVID-19 pandemic, which weakened the economy and severely affected the projected execution timelines of every Project.

In case of unforeseeable/unavoidable delays, a liquidated damages clause in such Project Finance cannot be emphasized enough. The clause, which aims to address delays and ensure accountability of the SPV, also helps ensure that in the event of such a delay, the ability of the SPV to recoup its loss of income due to the delay is not adversely affected.

Project Finance Borrowing

Project finance is a specialized form of financing for large-scale infrastructure or development projects. This post gives you a brief purview of the risks involved in Project finance and borrowing. Further, we examine the concept of liquidated damages as a standalone concept and a tool to manage risks associated with project execution.

Project finance borrowing involves financing a project through a single-purpose company whose assets and business are dedicated to that Project. The borrowing should not be guaranteed by any group member unless specified. The lender may only have recourse to the Project’s cash flow or assets, limiting the risk exposure to the project sponsors. The borrower may be a joint venture, partnership, or special purpose vehicle (SPV).

Structuring the Project Vehicle

Choosing the proper structure for the project vehicle is crucial. Joint ventures, partnerships, and limited companies are common structures. Joint ventures are contractual arrangements, while partnerships have additional legal duties for partners. SPVs are often used to hold project assets and limit sponsors’ exposure to the Project. The choice depends on legal, tax, accounting, and regulatory factors in both the sponsors’ home and host countries.

Parties and Their Roles

Projects involve various parties with different interests, such as sponsors, lenders, contractors, operators, and local governments. The choice of project structure depends on factors like isolating the Project in an SPV, tax advantages, and host government requirements. Local involvement can provide a level of comfort and ensure fair treatment.

Lenders focus on parties’ creditworthiness, technical capabilities, relationships, independence, continuity, and proper authorization to enter contracts. The lenders seek guarantees or letters of credit if parties need more financial resources. Independence from local political influences is crucial. Legal opinions may be required for the validity and enforceability of obligations, especially for government entities.

Attractions of Project Finance

Project finance is attractive for sponsors because it can isolate risks, attract foreign investment, acquire foreign skills, and reduce public-sector borrowing. It allows the development of non-priority projects and provides education and training for the local workforce.

One commonly used structure is the Special Project Vehicle (SPV), a special purpose vehicle or entity (SPV/SPE). The SPV plays a pivotal role in isolating and managing the financial aspects of a project. An SPV is a distinct legal entity created solely to undertake a specific project. It can take various legal forms, such as a company, partnership, limited partnership, or joint venture. The critical characteristic of an SPV is its exclusivity to the Project at hand, preventing it from engaging in activities unrelated to the Project. Establishing an SPV allows sponsors to ring-fence the Project’s financial obligations and risks, providing a dedicated entity for managing project financing.

Advantages of Special Project Vehicle

    • Limited Recourse: The SPV offers a limited recourse structure, restricting lenders’ ability to seek repayment beyond the Project’s cash flow and assets. Sponsors are shielded from personal or corporate liabilities, minimizing the impact of project failures on their overall financial health.


    • Risk Mitigation: Sponsors benefit from risk mitigation as the SPV is dedicated solely to the Project. Any financial distress or default within the SPV is contained within the Project, preventing a domino effect on other projects or the sponsors’ broader business activities.


    • Financial Consolidation: For sponsors, especially those with diverse business interests, using an SPV allows them to avoid consolidating project debt into their balance sheets. This can be crucial for complying with corporate loan agreements and maintaining financial ratios.


  • Flexible Financing: The SPV structure facilitates different sponsors contributing to the Project in diverse ways, such as equity investment, subordinated debt, or other funding methods. This flexibility enables sponsors to tailor their financial contributions to suit their preferences and financial strategies.

Liquidated Damages, Project Finance and SPV

The construction contract plays a pivotal role in infrastructure projects, especially when project lenders assume construction or completion risks. Liquidated damages clauses are crucial components within these contracts, aiming to address delays and ensure accountability. The typical arrangement is a turnkey contract, wherein a general contractor assumes responsibility for design, construction, and on-time completion, backed by performance guarantees.

Purpose of Liquidated Damages:

Lenders seek assurance that any delays in project completion will not unduly impact their interests. Liquidated damages serve as predetermined compensation for delays, covering interest payments on project loans and operating costs during the delay period. Negotiations often revolve around establishing a fixed per diem amount with a capped liability for the contractor.

Legal Considerations in Liquidated Damages:

In project finance arrangements, particularly in construction contracts forming part of project-financed deals, liquidated damages (LADs) are crucial in managing risks and ensuring the financial success of the special purpose vehicle (SPV). The SPV is granted a concession to design, build, finance, and operate an asset for a specified period, typically 25 to 50 years from practical completion. The revenue generated during this concession period is vital for repaying the funder and generating profits.

The construction project’s completion date is paramount, as any delay could result in a shortfall in the financial model. In project-financed deals, the SPV is automatically incentivized to adhere to the completion date, and the project agreement between the SPV and the Authority usually lacks LAD provisions. However, the construction contract between the SPV and the contractor must include robust LAD provisions to safeguard the SPV’s financial interests in case of construction delays.

The financial success of the Project depends on the SPV’s ability to follow its financial model, and any delay in construction could lead to a reduction in the concession period, limiting the income-generating potential. LADs act as a mechanism to compensate the SPV for this reduced concession period, ensuring that the financial model remains intact. Unlike standard design and build contracts, project finance agreements limit the events that relieve the contractor from LADs, typically only allowing relief for SPV breaches or variations.

Extensions of time entitlements under the construction contract are closely aligned with the project agreement, and relief from LADs is usually granted only in specific circumstances. This contrasts with standard design and build contracts, where contractors have a broader range of potential reliefs, such as delays due to strikes or adverse weather conditions. Contractors operating in the project finance sector must secure proper insurance coverage against events traditionally providing relief from LADs in a standard design and build contract.

To de-risk the construction period and ensure the Project achieves its projected rate of return, special purpose vehicles and funders employ contractual terms that address potential delays and associated financial impacts.

Indian Contract Law On Liquidated Damages

In the realm of contract law, Sections 73 and 74 stand as crucial pillars, each addressing distinct facets of damages resulting from breaches. Section 73, exemplified in the case of Haley v. Baxendale, delves into the nuances of Expectation Damages. This involves quantifying damages based on the shortfall caused by a breach, considering both actual losses and foreseen profits. Additionally, Reliance Damages are explored concerning breaches of representation and warranties, emphasizing the need for concrete evidence rather than speculative projections. In such cases, the court meticulously assesses damages, scrutinizing various aspects to arrive at a fair compensation amount.

Section 74, focusing on Liquidated Damages, establishes a cap on the compensation amount, emphasizing reasonableness to benefit the non-breaching party. The case law landscape, illustrated by ONGC v. Saw Pipes, underlines the efficacy of liquidated damages in intricate projects. In this instance, Saw Pipes claimed force majeure due to strikes, triggering liquidated damages. The Supreme Court ruled that the burden of proof rested on Saw Pipes to demonstrate no loss, highlighting the distinction between readily ascertainable and requiring proof of actual losses and liquidated damages. This underscores the suitability of liquidated damages as a preferable option for the non-breaching party, providing a predetermined and enforceable compensation framework.

In a separate legal context, the case of Kailash Nath Associates v. DDA (2015 4 SCC 196) sheds light on the burden of proof in claims for damages due to breach. The court emphasized that the claimant, Kailash Nath Associates, must substantiate the loss suffered. The dispute arose from a project bid that Kailash Nath Associates withdrew before acceptance by the Delhi Development Authority (DDA). Despite acknowledging the concept of liquidated damages, the court stressed the need for a prima facie demonstration of loss by the claimant. This precedent cautioned against the casual use of liquidated damages clauses without clear proof of loss, particularly for suppliers. Another illustrative case, Bharathi Knitting VS. DHL Worldwide, underscored the importance of capping damages for the breaching party and necessitating the other party to establish and prove the specified cap on liquidated damages.

Drafting Suggestions for Clauses on Liquidated Damages:

A lawyer, while drafting a contract, must always bear in mind a crucial factor: the specific contract clauses that he/she is drafting will come into play only if the project execution goes into dispute. At that particular point, the intent and draft of the clause will assume utmost significance. Such clauses are meant to address issues that will come into play in the future, immediately or further into the future. Therefore, one must keep in mind the following while drafting a clause on liquidated damages:

    • Before drafting the liquidated damages clause, it is necessary to understand its purpose and scope. To begin with, it is necessary to identify the risks of the contract, such as potential delays, non-performance, or breach of confidentiality. It is essential to define the events that trigger the application of the liquidated damages clause.


    • LADs, being a pre-estimate of damages, are essential to state the fixed sum of money payable upon breach clearly. This amount should estimate the damages the aggrieved party is likely to suffer. It should not be punitive or excessive, as such provisions may be considered unenforceable penalties. Ensure the specified amount aligns with the potential harm caused by the breach.


    • It is desirable to justify the chosen amount or percentage. By way of example, LADs can be calculated per week of delay/breach, etc., subject to a higher limit. It is beneficial for the breaching party to set an upper limit to manage the damages payable. Parties to a contract may also prefer to include evidence supporting the estimation of damages. It helps to establish, for the purpose of judicial review, that the amount is not arbitrary but a transparent assessment of loss.


    • Parties may also consider the addition of a clause charging interest rate over delay in payment of damages, which is beneficial for the non-breaching party.


    • The contract may also provide a grace period to cure default to preserve commercial relations.


    • It would also be helpful if the parties could incorporate a payment method for the LADs. LADs may be set off by the non-breaching party against any payments that may become due and payable to the breaching party at a future date, or the non-breaching party raises an invoice/demand note for the breaching party for payment of the LAD.


    • Contracting parties must conduct due diligence of the applicable law to ensure the enforceability of LADs. In some jurisdictions, liquidated damages clauses may face judicial challenges or have specific statutory requirements for enforceability. Accordingly, to manage risk associated with high-value contracts. Alternatives, such as compensation based on actual damages, market rates, or industry standards, may mitigate this risk associated with invalidating a LAD clause. A severability clause in the contract will ensure that the remaining provisions remain enforceable if the LAD clause is judicially deemed partially or wholly unenforceable.


    • The LAD clause in a contract should seek to strike a balance between the obligations of the contracting parties. A non-breaching party can have the right to waive its right to claim liquidated damages in specific situations, or the contract may require the aggrieved party to take reasonable steps to minimize losses through mitigation efforts.


    • As the cardinal principle applies to drafting all contract clauses, the liquidated damages clause must be balanced and unambiguous. As mentioned above, it is essential to specify the triggering events, the timeframes within which damages will accrue, and any conditions precedent for applying the clause.



Project finance is a complex financial structure that carefully considers legal, financial, and regulatory factors. It provides a framework for large-scale projects, ensuring effective risk allocation and stakeholder collaboration. The choice of project structure, the roles of various parties, and the detailed documentation are critical elements in the success of project financing.

The strategic use of LADs is essential to keep the SPV financially whole and maintain the integrity of the financial model. As construction delays can have significant implications for project-financed deals, the careful inclusion of LAD provisions in construction contracts is a crucial element in safeguarding the success of these complex financial arrangements.

This article is part of a series exploring various contractual terms employed in project finance to manage construction risks and optimize the chances of meeting financial projections.

Authors and Designation:

  • Miss Rhea Panda
    Associate Legal Counsel (A.P. Moller- Larsen and Toubro- Defence)
  • Miss Mohita Agrawal
    In-House Legal Counsel (A.P. Moller- Larsen and Toubro- Defence)


The information provided by the authors is based strictly on their personal views, is provided in good faith, and is for general informational purposes only.


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