The Contractor’s Claim Room: Decoding Disputes in Renewable Energy (Part-II)

Types of Claims

Once we have perused the causes of disputes in the contract(s) with respect to renewable energy contracts, it is of paramount importance that we also understand the aspect with regard to the types of claims governing the renewable energy contracts.

• Extension of time claims: These occur when the contractor asserts that the project was not completed by the contractual deadline because of the employer’s fault. Delay claims can be classified into three categories: excusable delays, compensable delays, and inexcusable delays. Excusable delays refer to unforeseeable circumstances that are outside the control of both the employer and the contractor, such as natural disasters. The occurrence of these delays grants the contractor the right to an extension of the project timeline, but does not automatically grant the contractor the right to costs. Force majeure claims is an excusable delay where the circumstances beyond the control of the involved parties that justify the non-fulfilment of obligations. Force majeure events encompass several occurrences, including but not limited to natural catastrophes, acts of war or terrorism. In the event of a force majeure, the party impacted by it may have the right to request an extension of the time allotted to fulfil its contractual responsibilities. Additionally, they may be exempted liability that would otherwise be applicable. Depending on the terms of the contract, the affected party may also have the right to receive additional compensation to cover the expenses incurred in dealing with the force majeure incident.

  Compensable delays refer to delays that are caused by the employer, such as changes made by the employer, flaws in the design, or the employer ‘s failure to grant access to the site. The delays grant the contractor the right to get both an extension of time and additional compensation for the costs and expenses incurred as a result of the delay. Differing site conditions is a compensable delay where claims may emerge when the factual conditions of the site deviate from the conditions that were described in the contract documents. This might manifest in several ways, including the unexpected discovery of subterranean conditions, hazardous materials, or archaeological and cultural riches.

  Inexcusable delays refer to delays that are created by the contractor due to factors such as insufficient planning, inadequate allocation of resources, or inability to adhere to the contractual obligations. The delays do not grant the contractor the right to receive any extension of time or additional costs.

  The aforesaid delay claims (excusable, as the case may be and compensable delays) typically entail recovery of prolongation costs by the contractor. Prolongation costs, which fall into two categories—direct and indirect claims. Direct expenses usually include personnel and equipment idle charges, site office overhead, storage costs, and commissioning fees for bank guarantees. Indirect expenses include legal fees, FX and hedging charges, loss of opportunity, and head office overheads.

• Acceleration Claims: Acceleration claims occur when the contractor asserts that the employer declined to extend the project schedule or the schedule needs to be accelerated at the request of the employer itself, hence compelling the contractor to expedite its work in order to meet the project timelines. The contractor subsequently requests costs for the supplementary labour, materials, and administrative expenses accrued as a result of the acceleration. Acceleration can manifest in several ways, such as mandating the contractor to engage in overtime work, implementing additional shifts or crews, or compelling the contractor to utilize more costly methods or materials. The contractor may also face supplementary expenses for expediting the procurement of materials or equipment, or for leasing additional equipment or facilities.




• Disruption claims: Disruption claims are made when the contractor’s work is disrupted, leading to inefficiencies and loss of productivity. These claims focus on the impact of disruptions on the normal progress of work. Disruption claims in construction projects can arise from various issues, including restricted or delayed site access, material shortages, equipment and labour shortages, adverse weather conditions, design changes and errors, interference by other contractors, utility interferences, regulatory and permitting delays, unexpected site conditions, administrative and logistical delays, and safety-related disruptions.




• Variation Claims: Variations claims may pertain to alterations in the extent of work and their influence on performance assurances and pricing. Variations can manifest in several ways, including the addition or removal of tasks, alterations to the design or specifications, or adjustments to the contractual timeline. If such a case, the contractor may have the right to receive extra payment for the costs and expenses incurred in carrying out the modified work.




• Payment Claims: Payment disputes may occur when the employer neglects to compensate the contractor as stipulated in the contractual terms. These claims may pertain to non-payment, delayed payment, or inappropriate retention of funds.




• Suspension claims: can arise from various scenarios: suspension by the contractor due to delays caused by the employer; non-payment by the employer; due to material breach by the employer and suspension by the employer for convenience. These may mostly result in prolongation costs as discussed above. In the event of a suspension claim, the contractor may have the right to seek compensation for additional costs and expenses incurred during the suspension period, as well as any financial losses caused by the suspension as per the contract. If the suspension impacts the critical path of the project schedule, the contractor may also be entitled to request an extension of time.




• Termination Claims: Termination claims arise when the contract is terminated by either the employer or the contractor, whether for convenience or default. The nature of payments due will vary slightly depending on the type of termination. For example, payments for termination by convenience, whether by the employer or the contractor, should generally include compensation for completed work, work in progress, costs for terminating subcontractor agreements, and overheads. Conversely, in cases of termination for default, the contractor is typically only entitled to payment for work already completed, with no additional claims allowed.




• Work in progress claims: Work in progress claims is vital for contractors to ensure cash flow and financial stability, especially in long-term projects or in cases were projects face delays or disruptions. These claims can be categorized into 3 types: claims for materials delivered to the site but not yet installed, materials in transit, and materials stored on site.




• Damage claims: Damages can arise from both breaches of contract and torts. The compensation available for a breach of obligation depends significantly on the nature of the obligation breached and the applicable law. The law determines whether compensation is a remedy for the breach and how it should be assessed. In some cases, compensation may not be available at all. For instance, in India, the Specific Relief Act provides for specific performance rather than compensatory damages as the default remedy for contract breaches.

  Further, claims for damages are governed by the Indian Contract Act, 1872, under Sections 73, 74, and 75. Section 73 deals with unliquidated damages, awarded for actual losses or damages resulting from a breach, provided they are not remote or indirect. Section 74 addresses liquidated damages, which are pre-determined sums stipulated in the contract as a genuine pre-estimate of loss. Courts have the discretion to award reasonable compensation not exceeding the specified amount. Section 75 covers compensation for any loss or damage caused to a party who rightfully rescinds the contract. Indian courts aim to ensure fair compensation, reflecting the principle of restitutio in integrum, which seeks to restore the injured party to their original position as if the breach had not occurred.

Claim avoidance:

Understanding the common causes of disputes and the types of claims that arise from them is crucial for evaluating and implementing measures to avoid such claims. While most claim issues emerge during the construction phase, the root cause of a typical claim can be traced back to any phase of the project life cycle. For instance, a claim issue arising during testing and commissioning may originate from discrepancies in project specifications during the early design or tender stages. Alternatively, a dispute during peak construction activity might stem from ambiguities in the contract drafted earlier.

Effective claim avoidance necessitates that participants in each project phase understand the interrelationships among various phases. With this understanding, they must appreciate how their actions can prevent claim situations not only during their specific phase but also in subsequent phases. Achieving this requires a general knowledge of the entire project life cycle and how its phases complement and relate to each other.

Best Practices for Claim Avoidance:

Here, we share some of the best practices for mitigating the risks of claims—essentially, best practices for claim avoidance.

In general, one of the most important components of claim management is the early identification and settlement of any problems that may arise. The contractors are responsible for keeping a close eye on the development of the project and identifying any occurrences or conditions that could potentially result in a claim as soon as possible. By maintaining consistent communication between the project owner and the subcontractors, it is possible to facilitate the identification of potential problems before they develop into full-blown disagreements. When contractors address issues at an early stage, they frequently have the ability to identify solutions that are mutually acceptable and eliminate the need for formal claims.

• Maintain Comprehensive Records: Keep detailed records of all project-related actions, including correspondence, meeting minutes, daily reports, and financial records. The minutes of meetings should be acknowledged in writing by both parties. Similarly, other correspondence should not be one-sided and should preferably be responded to or acknowledged by the other party. When the contractor believes that the employer may not agree with their position, it is still important for the contractor to document the situation both internally and externally to ensure a clear chain of events is recorded.




• Set Clear Project Objectives: Use SMART goals: a framework for setting clear and attainable objectives by ensuring they are Specific, Measurable, Achievable, Relevant, and Time-bound. This approach helps in defining precise goals, tracking progress, and staying motivated. For example, instead of setting a vague goal like “Improve sales,” a SMART goal would be “Increase sales by 10% over the next six months by launching a new marketing campaign and providing sales training.” This method ensures goals are realistic and aligned with broader objectives, with a clear timeline to prioritize tasks and achieve success.

  or

  Use PERT (Program Evaluation Review Technique): a project management tool that breaks down the project into tasks, estimates the minimum, most likely, and maximum time required for each task, and identifies the critical path. For example, developing a detailed PERT chart helps visualize and manage the project timeline and dependencies.

  or

  Use Gantt charts: a visual timeline for projects, displaying start and end dates for each task and their dependencies. For example, a Gantt chart can be used to outline the schedule for site preparation, equipment installation, testing, and commissioning.




• Draft Precise and Comprehensive Contracts: Ensure meticulous drafting and legal scrutiny of contracts and maintain open lines of communication throughout the project.




• Importance of Reviewing Contract Clauses: Careful review of contract clauses before executing the contract is crucial. For instance, especially in the context of India, employers often cut, copy, and paste clauses from previous contracts or standard FIDIC contracts without considering the specific scope of work for the project. Therefore, it is important to review the clauses in light of the project’s scope. For example, risk allocation should be in consonance with the scope of work, indemnity clauses should be directly related to the contractor’s scope of work, and blanket indemnities should be avoided. Additionally, indemnities from employers should cover their scope of work or actions arising from their negligence or the negligence of subcontractors engaged by the employer.




• Involve Stakeholders and Foster Collaboration: Prioritize stakeholder involvement, cultural knowledge, and collaboration to build trust and ensure shared goals.




• Define Roles and Responsibilities Clearly in writing: Provide precise descriptions of roles and responsibilities to avoid misinterpretations and delays. Use RACI Matrix (Responsible, Accountable, Consulted, Informed): this defines and documents roles and responsibilities for each task to ensure clarity and accountability. For example, creating a RACI matrix for key project activities helps clearly delineate who is responsible, accountable, consulted, and informed.




• Centralized Decision-Making and Reliable Communication: Uphold centralized decision-making authority to ensure consistency and prevent confusion. Establish reliable communication routes by promoting open communication, prompt decision-making, and issue resolution through frequent meetings and updates, ensuring specific points of contact within the employer’s organization rather than using multiple parallel channels.




• Prevent Scope Creep: Limit scope changes to avoid budget overruns, missed deadlines, and unfavourable client perceptions. Alternatively, ensure documentation and reasoning for the same that is acknowledged by both parties.




• Conduct Thorough Project Assessments: Customize contracts based on thorough project assessments, engage all stakeholders, and ensure legal review for compliance with local laws.




• Early intervention and support from the legal team: By involving legal advisors early, project teams can proactively address issues such as ambiguous contract terms, inadequate documentation, and non-compliance with statutory requirements. This proactive approach helps in preventing claims.




• Implement Proactive Supply Chain Strategies: Early planning and procurement, market research, and establishing contingency plans with alternative suppliers are essential. Use “price escalation” provisions to manage material cost fluctuations and ensure transparent communication with all parties.




• Include Flexible Force Majeure Clauses: Use broad terms like “including but not limited to” for force majeure events and tailor clauses to the project’s nature and location. Include epidemics and events affecting subcontractors as force majeure. Allow reasonable flexibility in the notice period for reporting such events.




• Optimize Payment Terms for Subcontractors: To mitigate cost fluctuations, base payments for materials procured from subcontractors on the delivery date to the site rather than the purchase order date.




• Adhering to Contractual Notice Timelines: Contractors must ensure that notices are served within the contractual timelines. Jurisprudence on this matter varies across jurisdictions. For instance, in India, enforcing strict time bars may be considered against public policy under the Indian Contract Act. However, in other jurisdictions, time bars are interpreted more stringently. Therefore, it is advisable and safer to adhere to the contractual timelines to avoid potential disputes.




• Timely delay analysis: Conducting thorough and timely delay analysis enables project managers to understand the root causes of delays, assess their impact on the project timeline, and implement corrective measures promptly. This process is essential for distinguishing between excusable and non-excusable delays.




• Recognizing concurrent delays: By systematically analysing and accurately identifying concurrent delays, where multiple delays overlap and affect the project schedule simultaneously along with their implications, project teams can maintain better control over project timelines, minimize disputes, and enhance transparency and accountability among stakeholders.

Authors:

Mehak Oberoi is the Legal Head (Hydro – APAC) at GE Vernova. Additionally, she also serves as a mediator and arbitrator; and Abeer Tiwari is a 5th-year B.A. LL.B student at Balaji Law College, Pune.

Disclaimer:

The views expressed by the authors are personal.

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