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

by | Jul 11, 2024 | Practitioner | 0 comments

Best Practices for Recovery of Claims

Before, setting out the best practices, it is important to highlight the court’s stance on the subject of claim substantiation.

The Supreme Court has placed a strong emphasis on the significance of keeping contemporaneous documents in order to provide evidence for claims. In the case of Larsen & Toubro Ltd. v. National Highways Authority of India (2018), the Court arrived at the conclusion that the contractor’s failure to submit sufficient paperwork was a substantial element that led to the dismissal of its claim for delay. In the said case, the contractor was entitled to an extension of time as well as compensation for delays that were caused by the employer’s failure to acquire land and get the relevant clearances. When determining whether or not there was a causal connection between the activities of the employer and the delay, the court stressed the significance of the material provided by the contractor. This documentation included progress reports, correspondence, and expert investigation.

    • Cost Claims for Time Extensions: In general, in order to provide evidence in support of a claim for delay, the contractor must demonstrate that the delay was caused by the employer or other parties that were beyond the contractor’s control, that the delay had an influence on the critical path of the project schedule, and that the contractor took reasonable steps to alleviate the delay. At every stage of the project, detailed documentation must be meticulously maintained. Whenever there is a delay in the project schedule, the contractor should promptly inform the employer in writing, explaining the reasons for the delay. These delays should also be discussed during the monthly progress review meetings with the employer. The project schedule should be regularly updated to reflect any delays and shared with the employer. The contractor must also ensure that the updated schedule is acknowledged and agreed upon by the employer. Conducting a delay analysis is essential, particularly when dealing with concurrent delays involving the contractor, other contractors, and/or the employer.

      Damages for delay in granting site access are recognized in construction claims. As noted in Emden and Gill’s Building Contracts and Practice, 7th ed., p. 272, and Halsbury’s Laws of England, 4th ed., Vol. 4, para 1281, p. 653, common circumstances giving rise to such claims include delays in providing the contractor possession of the site, delays in supplying necessary drawings, or suspension of work due to acts or omissions by the employer. These delays often lead to increased expenses in completing the works. Importantly, contractors are entitled to recover damages for delays caused by the employer, even if an extension of time for completion has been granted. This principle was also endorsed by the Delhi High Court in the judgment of Rawla Construction Co. Petitioner v. Union of India, 1982 ILR DEL 144.

      In NTPC v. Patel Engineering, 2015 SCC OnLine Del 7512, the Delhi High Court addressed a challenge to an arbitral award, which included costs for the non-availability of power supply for construction and the non-rehabilitation of project-affected persons resulting in violent protests. The Court upheld the arbitral tribunal’s decision, noting that there was no contractual clause prohibiting compensation for stoppages and hindrances after the sites had been handed over.

      The AP High Court in T.A. Choudhary v. State of A.P., 2003 SCC OnLine AP 494 held:

      “57. ……, it is not possible for the Contractor to commence the work unless the site is handed over without any obstructions. The law does not compel a man to do that which he cannot possibly perform (Lex non cogit ad impossibilia). Thus, when the performance of the contract cannot be achieved by law, the same cannot be made possible through the contract itself. Applying this principle to the instant case, when the Contractor is not expected to commence work unless the site is handed over, it amounts to the promisor not performing his initial obligation. Therefore, it is incumbent on his part to compensate the other party for any loss sustained….”

      In cases such as Delhi Development Authority v. M/S. N.N Buildcon Pvt. Ltd., 2017 SCC Online Del 11494, T. A. Choudhary v. State of A.P., 2004 (3) ALD 357, General Manager Northern Railway v. Sarvesh Chopra, (2002) 4 SCC 45, and Assam State Electricity Board v. Buildworth Pvt Ltd., AIR 2017 SC 3336 , courts have granted reasonable damages even in the presence of exclusionary or prohibitory clauses in contracts when there has been extreme delay.

       

    • Idling Costs: The term “idling costs” refers to the expenses that are incurred by the contractor as a result of the suspension or delay of an activity. For the purpose of providing evidence that idling expenditures are justified, the contractor ought to keep meticulous records of the idle equipment, labour, and supplies, in addition to the length of time that the idling period lasted. Additionally, the contractor is obligated to provide evidence that the idling was brought on by the employer or other individuals or entities that were outside the contractor’s control. The contractor may be able to recover these costs with the assistance of careful documentation of idling charges, which may include invoices and information regarding payroll.

 

    • Site office overheads: To prove site office overheads as direct costs, include a detailed project budget with cost codes for specific allocations, provide direct invoices and receipts for expenses such as office rent and utilities, and show payroll records with timesheets for administrative staff. Prepare monthly expense reports reviewed by project management, maintain work schedules and site logs documenting daily activities and overhead costs, and include communication records discussing overhead approvals. Conduct internal audits and, if possible, obtain external audit reports to verify cost allocation. Additionally, provide detailed breakdowns of overhead costs and explain the allocation methods used, ensuring they are reasonable and industry-consistent.

 

    • Storage costs: To substantiate storage costs, provide inventory logs, photographic evidence, documentation of the receipt, storage, and handling of materials linked to project delays, contracts or agreements with storage facilities outlining terms, duration, and costs, and daily or weekly site logs documenting the status of materials and equipment and the reasons for storage.

 

    • Bank Guarantee Commissioning Charges: To recover the commission charged by the bank for maintaining the bank guarantee for a project, the contractor must ensure they have detailed bank statements showing the commission charges debited, official invoices or receipts from the bank detailing these charges, and records of payments made to the bank, including transaction details. Categorisation of this claim as a direct claim is disputable and many may attribute it as an indirect cost.

   

Indirect costs:

    • Head Office Overhead: There are various formulae to calculate head office overheads, providing a structured and generally accepted method for determining the allocation of overheads to a delayed project. However, these formulae do not eliminate the need for supporting documents. Typically, these formulae require information such as the project’s contract value, the company’s total revenue, contract duration, and company turnover. Thus, providing supporting documentation enhances the credibility of your claim by showing that calculations are based on actual financial data, not just theoretical estimates. This documentation ensures transparency in the calculation process, making it easier for the employer to understand and verify the claim.

      To establish an overheads claim in a construction project, contractors must provide detailed financial statements (profit and loss, balance sheets), invoices and receipts for overhead expenses (utilities, office supplies, equipment rental), payroll records for administrative and supervisory staff, expense reports detailing indirect costs (office rent, insurance), timesheets showing staff time on the project, updated project schedules, and correspondence (emails, letters) discussing overheads. Additionally, meeting minutes, a cost allocation plan with supporting calculations, and internal and external audit reports verifying the overhead costs and allocation methods are essential.

      In the case of State of Punjab Through Its Chief Engineer Punjab PWD B&R Branch, Patiala v. M/S. Larsen and Turbo Ltd., 2015 SCC OnLine P&H 15068, the Punjab and Haryana High Court upheld an arbitrator’s award granting overhead costs, personnel costs, and damages for loss of business opportunity. The court’s decision was significant because there were no negative prescriptions or prohibitions in the contract that prevented such awards. The arbitrator found that the contractor, M/S. Larsen and Turbo Ltd., incurred additional costs and suffered a loss of business opportunities due to delays and other factors attributable to the employer. The court affirmed the arbitrator’s findings and reasoning, emphasizing that in the absence of explicit prohibitive clauses in the contract, the contractor was entitled to reasonable compensation for the additional costs and losses suffered. This case highlights the importance of clear contract terms and supports the contractor’s right to claim compensation for overheads, personnel costs, and business losses when not expressly excluded by the contract.

 

    • Loss of Profit Claims: Contractor seeks compensation for the lost profit that would have been generated if the project had been finished on time and within the budget. It is necessary for the contractor to keep comprehensive records of its profit margins in order to provide evidence in support of these claims. Additionally, the contractor must establish how the claim event influenced these profits. The contractor may be able to recover these charges with the assistance of careful documentation of the contractor’s financial records and the impact of the claim event. To substantiate a loss of profit claim in a construction project, contractor may use past financial statements from similar projects, original bid documents with projected profit margins, detailed project budgets, and communication records (emails and letters) discussing delays and their impacts. Additionally, include meeting minutes, economic analysis reports, industry benchmarks, internal and external audit reports, formal claims and notices, legal opinions, detailed profit calculations, and comparative analysis of projected versus actual profits.

 

    • Loss of opportunity claims: To substantiate a loss of opportunity claim in a construction project, provide past financial statements from other projects, bid documents for unpursued projects, revenue projections for missed opportunities, communication with potential clients, internal memos discussing foregone projects, economic analysis from financial experts, industry benchmarks, internal and external audit reports verifying financial impacts, detailed opportunity cost calculations, and a comparison analysis of potential vs. actual profits.

 

    • Payment Claims: When an employer demands a ‘No Claim Certificate’ as a condition precedent for granting an extension of time or releasing payments, contractors should ideally not issue the same. However, if compelled due to cash constraints, contractor must document their protest and any coercive circumstances. Courts have, in some cases, not allowed such certificates to bar legitimate claims, recognizing the duress under which they were issued. Ensure all communications and objections are well-documented to support any future claims.

      In National Highways Authority of India v. Elsamex-TWS-SNC-JV, 2014 SCC OnLine Del 4475, the Division Bench of the Delhi High Court addressed a case where the tribunal had awarded compensation to the contractor despite the contractor having issued a ‘No Claim Certificate’ to the employer for an extension of time and release of payments. The Court upheld the tribunal’s decision, stating:

“The Learned Single Judge has also rightly held that the ‘No Claim Certificate’ given by the respondent to the appellant on 08.07.2005 was not under free consent as the appellant had withheld the payments till a ‘No Claim Certificate’ was given. Respondent did not have any option other than to comply with the direction of the Engineer of the appellant. Thus, this circumstance did not bar the respondent from raising legitimate claims on account of extension of time.”

In the Karnataka High Court judgment of Kapila Textile Mills Ltd., In re, 1963 SCC OnLine Kar 154, the court held that retention amounts in construction contracts serve a similar purpose to earnest money or security deposits, acting as security for the employer. Although these funds are held by the employer, they belong to the contractor, with the employer’s interest being in the nature of security. The employer can use these funds if the contractor fails to meet contractual obligations. If no such conditions arise and the contract period expires, the retention amount must be refunded to the contractor. The refund depends on whether the employer had to enforce their right to the security, either fully or partially.

    • Supply chain Claims: To effectively recover supply chain claims, ensure detailed documentation of all contracts, agreements, purchase orders, invoices, delivery receipts, and change orders. Maintain comprehensive communication records, including correspondence and timely notifications of delays. Provide proof of delays through detailed reports and impact analyses, and keep accurate financial records of all related costs. Record attempts to procure materials from alternative suppliers and document cost comparisons. Use photographic and video evidence to demonstrate the impact of disruptions. Keep both baseline and updated project schedules. Ensure all legal and regulatory documents are in order, including force majeure clauses, and review relevant insurance policies, keeping records of any claims filed and related correspondence.

      One common issue faced is that even if the contract with the employer does not require approval of the subcontractors engaged for the project, the employer is likely to question whether the invoices submitted for procurement of raw materials from subcontractors pertain specifically to the said project and not to any other projects. Therefore, it is crucial that the invoices explicitly mention the project to which the procurement is attributed.

    • Variation Claims: Whenever the contractor undertakes work outside the initial scope of the contract, it can lead to variation claims. To support such claims, it is important for the contractor to demonstrate that the work was directed in writing by the employer. The contractor must ensure that no work is carried out unless the variation order has been finalized and signed by the employer. Although this may seem like an obvious measure, contractors often begin work without a signed variation order to maintain the project schedule. Employers frequently compel contractors to start work while the variation order is still awaiting approval through the various hierarchical stages within the employer’s company.

      In the case of Gammon India Ltd. v. National Highways Authority of India (2017), he Supreme Court of India ruled that the contractor was entitled to remuneration for additional work undertaken at the employer’s order, even though it was not specified in the contract. The court noted that the owner’s lack of objection to the additional work was a key factor in determining the contractor’s entitlement to remuneration.

      Although this precedent favoured the contractor due to the implied conduct of the employer, as a precaution, contractors should always ensure that work commences only after the issuance of a formally signed variation order.

    • Claims Regarding Site Conditions: There is the potential for claims to be brought about by differing site conditions when the actual site conditions are significantly different from what was stated in the contract terms. The contractor must establish that the actual conditions could not have been reasonably anticipated based on the information that was provided, and that the contractor suffered additional costs as a result of the conditions in order to substantiate a claim that differs from the conditions of the site. For this purpose, it is pertinent to document pre-construction site visits, and compare geotechnical reports with actual conditions. Contractor should obtain expert assessments, reference industry standards, and provide comparative analysis with similar projects. Detailed site logs, incident reports, and correspondence with the employer should be maintained, alongside formal notifications of discrepancies.

      Based on the geotechnical information that was provided by the owner, the Supreme Court of India decided in the case of Hindustan Construction Company Ltd. v. National Highways Authority of India (2019) that the contractor was entitled to compensation for additional costs that were incurred as a result of the presence of hard rock at the site. These costs were not anticipated by the contractor. When it came to determining whether or not the claim was legitimate, the court stressed the significance of the evidence provided by the contractor, which included reports from experts and records of costs.

      It was determined by the Supreme Court of India in the case of Adani Power Ltd. v. Gujarat Electricity Regulatory Commission (2019) that the contractor was eligible for relief under the force majeure clause because the Indonesian government had cancelled coal supply agreements, which was an event that could not have been anticipated. It was observed by the court that the contractor’s timely warning of the force majeure occurrence and its efforts to lessen the impact were important elements in the finding that the court made.

    • Force Majeure Claims: It is necessary for the contractor to demonstrate that the occurrence was unanticipated, that it was beyond the control of the parties, and that it prohibited the contractor from completing its obligations as outlined in the contract in order to establish that the force majeure claim is valid.

      To prove a force majeure claim in a construction contract, collect evidence of the event, such as official reports, weather data, government notifications, and news articles. Show how the event directly affected the project with detailed records of delays, disruptions, and additional costs. Follow the contract’s requirements for notifying the employer, ensuring timely notice with all necessary details, and keep copies of related correspondence. Document efforts to mitigate the impact, including alternative solutions and rescheduling. Maintain detailed financial records of all additional costs, including labour, equipment rentals, and materials. Obtain expert reports, if necessary, to substantiate the claim with assessments from engineers, weather experts, or financial analysts.

      It was determined by the Supreme Court of India in the case of Adani Power Ltd. v. Gujarat Electricity Regulatory Commission (2019) that the contractor was eligible for relief under the force majeure clause because the Indonesian government had cancelled coal supply agreements, which was an event that could not have been anticipated. It was observed by the court that the contractor’s timely warning of the force majeure occurrence and its efforts to lessen the impact were important elements in the finding that the court made.

    • Subcontractor claims: Depending on the contract, subcontractors engaged by the contractor may or may not require the employer’s approval. If approval is required, it is crucial that no work commences and no materials are procured from the subcontractor until the approval is received. Without this approval, the employer has the right to reject the subcontractor’s claims. Additionally, materials procured by contractors for their subcontractors may be used across multiple projects and often purchased in bulk for cost efficiency. For such subcontracts, it is essential to specify the proportion of materials allocated to each project, ensuring clear documentation for claim recovery and easy explanation to the employer.

      In the event of termination and subsequent claims for settling contracts with the contractor’s subcontractors, the contractor must provide evidence of the settlements reached. This evidence should include copies of the claims made by the subcontractor, the settlement agreement, and proof of payment. Additionally, any underlying materials from the subcontractor agreement that are sold as scrap should be deducted from the settlement claims submitted to the employer, if they have not already been offset as part of the settlement agreement with the subcontractor.

    • Work in Progress Claims: In the context of work in progress claims, the contractor seeks compensation for work that has been performed but not yet completed. To support such claims, it is essential for the contractor to maintain comprehensive records of the completed work, including quantities, labour hours, and materials used. Additionally, the contractor must submit documents representing the value of the work, such as invoices or purchase orders. Demonstrating progress and associated costs can further bolster the claim for compensation. The employer should be regularly apprised of the progress during monthly meetings.

      Proof of materials delivered to the site should include signed delivery receipts, detailed supplier invoices, photos of the delivered materials, material inspection reports signed by the site supervisor, and entries in site stock registers documenting the arrival and storage of materials. For materials stored on site, proof should include storage receipts, photos of the stored materials, inspection reports by site supervisors or third-party inspectors, updated inventory lists, and detailed storage logs maintained by the site manager or warehouse supervisor.

Adopting Global Best Practices

Although issues in the construction industry are universal and all jurisdictions face similar challenges, India can particularly benefit from adopting best practices from construction payment legislations of other countries. By doing so, India can develop robust frameworks to ensure timely payments, thereby significantly mitigating the risk of contract margin depletion for Indian contractors. Additionally, this approach will provide a more efficient platform for addressing contractors’ grievances.

The below international examples provide valuable insights into creating fairer and more transparent payment practices that protect the interests of EPC contractors and promote a healthier construction industry.

United States of America:

A mechanic’s lien is a legal tool that can be used by various parties involved in a construction project, including EPC (Engineering, Procurement, and Construction) contractors, to secure payment for their labour, materials, or services. Since EPC contractors provide integral contributions to the completion of a construction project, they are eligible to file a mechanic’s lien. If the lien is not paid, the EPC contractor may need to file a lawsuit to enforce it, typically within a certain period after the lien is recorded.

Various payment acts and fairness in private and public construction acts set specific guidelines to ensure timely payments in the construction industry. These laws, such as the Prompt Payment Act for federal projects and state-specific prompt payment statutes, establish maximum time limits for the payment of invoices. They also grant contractors and subcontractors the right to claim interest on overdue payments and to suspend work if payments are delayed beyond the stipulated timeframes.

United Kingdom:

The Housing Grants, Construction and Regeneration Act (HGCRA) mandates that every construction contract includes clearly defined payment schedules. This law ensures that contractors have the right to suspend work and claim interest and additional costs if payments are delayed. Additionally, the HGCRA prohibits “pay if paid” and “pay when paid” clauses, which prevent contractors from being unfairly withheld payment due to payment issues further up the contractual chain.

Western Australia:

The Security of Payment Act 2021 in Western Australia applies to construction contracts exceeding $500,000. It includes provisions such as a ban on “pay if paid” and “pay when paid” clauses for payments to subcontractors, conditions under which notice-based time bar provisions may be declared unfair, the right to claim interest on delayed payments, specific time limits for payment claims, and the right to suspend work for non-payment or delayed payment.

New Zealand Construction Contracts Act 2002:

The New Zealand Construction Contracts Act 2002 provides robust protections for EPC contractors by ensuring timely payments and offering mechanisms to resolve payment disputes swiftly. The Act mandates that construction contracts include clear payment terms and allows contractors to issue payment claims. Additionally, the Act prohibits “pay when paid” clauses, ensuring that EPC contractors are not dependent on the client’s payment to the principal contractor to receive their dues. The right to suspend work for non-payment further strengthens contractors’ positions, providing a strong deterrent against delayed payments.

Ireland Construction Contracts Act 2013:

The Ireland Construction Contracts Act 2013 is designed to ensure fair and timely payment practices in construction contracts, protecting the interests of EPC contractors. The Act requires construction contracts to have defined payment schedules, with specific timelines for payment claims and responses. It disallows “pay when paid” clauses, ensuring that contractors receive payments regardless of whether the client has paid the principal contractor. Contractors can claim interest on late payments and, in cases of non-payment, have the right to suspend work until payment is received.

Singapore Building and Construction Industry Security of Payment Act 2004:

The Singapore Building and Construction Industry Security of Payment Act 2004 aims to ensure prompt payment to resolve payment disputes. EPC contractors benefit from the Act’s prohibition of “pay when paid” clauses, which ensures their payment is not contingent on the client’s payment to the principal contractor. The Act mandates timely progress payments and grants contractors the right to suspend work or reduce the rate of progress if payments are delayed.

Malaysia Construction Industry Payment and Adjudication Act 2014:

The Malaysia Construction Industry Payment and Adjudication Act 2014 (CIPAA) provides strong protections for EPC contractors by promoting timely payment and offering an expedited adjudication process for payment disputes. The Act requires clear payment terms in construction contracts and outlaws “pay when paid” clauses, ensuring that contractors are paid regardless of whether the employer has paid the principal contractor. CIPAA also allows contractors to claim interest on late payments and to suspend work or reduce their rate of progress if payments are delayed.

Conclusion:

The expanding renewable energy sector presents significant opportunities for contractors but also brings inherent challenges that can lead to claims and disputes.

Ultimately, proactive claim management and the adoption of proven international strategies can help contractors navigate the complexities of renewable energy projects. Efficient claims recovery is crucial for the viability of renewable energy projects. Contractors can enhance their likelihood of successful claims recovery and reduce the financial and reputational risks linked to unresolved disputes by implementing effective documentation practices, promptly identifying and resolving issues, complying with contractual provisions, and utilizing dispute resolution mechanisms. Nevertheless, it is crucial to acknowledge that the precise methods and approaches for recovering claims will vary based on the distinct conditions of each project and the particular sorts of claims involved.

By fostering clear communication, precise contracts, and effective dispute resolution mechanisms, contractors can better protect their interests, maintain positive stakeholder relationships, and contribute to the urgent transition to sustainable energy solutions.

Contractors must possess extensive knowledge of legal precedents and best practices in order to effectively support and recover these claims, hence reducing the financial and reputational risks that come with unresolved disputes.

Strict compliance with contractual obligations is crucial for the successful recovery of claims. Contractors must ensure they have a comprehensive understanding of and adhere to the standards for submitting and validating claims, which include providing timely notice, documentation, and certification. Noncompliance with these rules can endanger the contractor’s capacity to recoup expenses and losses.

An essential component of recovering claims is the efficient employment of dispute resolution systems. Renewable energy projects commonly have explicit mechanisms for resolving conflicts, such as negotiation, mediation, and arbitration. Recently, hybrid models such as med-arb or arb-med-arb clauses have attracted interest and the renewable industry is increasingly adopting this approach in order to streamline the resolution process, reduce costs, and achieve more efficient and satisfactory outcomes. Additionally, there is a growing emphasis on institutional arbitration in India to align with international ADR standards.

Contractors must be ready to efficiently employ these procedures to settle claims promptly and economically, thus avoiding the setbacks and costs linked to litigation.

References

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.

Editorial Team:

Managing Editor: Naman Anand
Editor in Chief: Abeer Tiwari and Harshita Tyagi
Senior Editor: Naman Anand
Associate Editor: Abeer Tiwari
Junior Editor: Sarthak Kumar Ambastha and Karnika Gaira

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