Corona-virus has brought unprecedented disruption in the economy. All the earning projections done by governments and corporations have gone haywire. Unfortunately, the Public Private Partnership is fundamentally based on such mathematical assumptions made by the government and the private entity about a particular sector like power, railways , road etc. This mismatch in projections has brought to forefront the implications of using ‘force majeure’ clause in PPP projects. The litigations have already started in PPP projects as the involved parties differ on the interpretation of force majeure. For example, Punjab power corporation has used force majeure to deny payment to Power Producers for assured load of 75 percent of installed capacity and the matter has already reached the court.
A PPP contract is fundamentally different from EPC (Engineering procurement and Construction) contract.The differentiating feature of PPP projects includes risk sharing by private sector, longer tenure of contract and the conditions like ‘Assured load or Off take’. These conditions are generally not there in EPC contracts in which risk is primarily borne by government and a force majeure will simply delay the completion of project.Since, force majeure does not allow levy of penalty or damages for delay happened during or due to force majeure period, the EPC projects remain relatively insulated from the impact of force majeure. On the other hand, PPP projects like power plants, BOOT laundry have ‘assured load’ models built into them and that is where the government and private entities are at tenterhooks.
But then is litigation is the only solution to resolve the PPP disputes? Litigation is not a very great idea when it comes to contract that involve economic complexities. It is important that the parties try to resolve the disputes using various mechanisms rather than doing a unilateral interpretation of force majeure. For example, it may be possible that due to coronavirus the power demand may have plummeted extraordinarily and the Power corporation may not be able to fulfill the assured load as promised to power producers. Similarly in railways, BOOT laundry have come to standstill as no linen is being used in trains and thus , it may not be able to fulfill assured off take obligations.The situation like these are likely to persist for few more months and after development of vaccine some normalcy may be expected.
The important point is that it is not only the lockdown period which has impacted PPP projects but the impact goes beyond that.Therefore, the solution lies in amicable, reasonable and holistic solution to such disputes. PPP is based on risk sharing model and thus, the economic impact of corona-virus need to be shared. A better way could be to revise contracts to accommodate new realities. For example, private parties can assess their financial loss due to corona-virus and the government may in return give equivalent extension to contract in terms of tenure.This will allow government to conserve money while giving relief to PPP players. Similarly , if the the government feels that it is better to give financial compensation while keeping the tenure of contract in tact then the same can be pursued.
Force Majeure is a rare event and it should be used with caution.The interpretation of force majeure varies from contract to contract and cannot be treated as one size fits all. PPP projects are very important for country like India and it is important that they are resolved in amicable manner. Kelkar committee’s recommendation of having PPP tribunal may have to be revisited and proper regulatory structures need to be created to ensure that congenial environment for PPP sustains in the country. In absence of such an approach, we may see a flurry of litigations which may hurt the very idea of having Public Private Partnership.
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