8 June 2020
Introduction
The Covid-19 pandemic has resulted in an unprecedent crisis throughout the world and has caused widespread disruptions in normal operations across industries and life in general. In India, the National Disaster Management Authority determined that India was threatened by the spread of Covid-19 pandemic and took steps to prevent the spread of the pandemic in the country under the Disaster Management Act, 2005. On March 24, 2020, the Ministry of Home Affairs declared a 21-day lockdown under the Disaster Management Act, 2005 with effect from March 25, 2020. Such lockdown has been subsequently extended three times by the Ministry of Home Affairs and now remains in force till May 31, 2020.
The Ministry of Home Affairs has been issuing guidelines to determine the operation of essential and non-essential services during the period of lockdown and has attempted to restrict movement of persons throughout the country. The guidelines have caused States to close their borders and even movement within a State has been prohibited, unless it is in relation to an essential service. At the time of the first order of lockdown, the Ministry of Home Affairs excluded the ‘operation of seaports for cargo movement, relief and evacuation and their related operational organisations’ from the ambit of the lockdown. However, due to the disruptions in the supply chain, the inter-state and intra-state movement restrictions and the spread of Covid-19 pandemic, there has been an impact on operational as well as under construction port projects.
The spread of the Covid-19 pandemic and the impact on the port industry has also caused the Ministry of Shipping to re-draft the blueprint for the maritime sector as the pandemic has resulted in the previously laid down assumptions and projections on trade, which formed the basis for Sagarmala programme, to be disrupted[1].
The Ministry of Shipping has attempted to mitigate such impact by issuing guidelines to Major Ports. The Ministry of Shipping has issued guidelines in relation to (i) force majeure and extension of timelines for public private participation (PPP) port projects; and (ii) charging of penalties by Major Ports.
Force Majeure and Extension of Time
Given the impact of the Covid-19 pandemic and the general obligations imposed on concessionaires, the Ministry of Finance by way of an order dated February 19, 2020, stated that the disruptions in supply chains caused by the Covid-19 pandemic would be covered in force majeure clauses and would be considered as a case of a natural calamity. It is noteworthy that the Government declared the impact of Covid-19 to be a natural calamity and therefore covered in force majeure even before the World Health Organization (WHO) declared Covid-19 as a pandemic on March 12, 2020.
The Ministry of Shipping, on the basis of such order from the Ministry of Finance, on March 20, 2020, stated that Major Port Trusts may also consider the Covid-19 pandemic as a ground for force majeure clauses and may consider extension of time, if requested by the concessionaire, for project completion and fulfilling other necessary project obligations in accordance with the provisions of the concession agreement. Such clarification was reiterated on March 24, 2020, wherein the Ministry of Shipping again stated that the pandemic was a valid ground for invoking the force majeure clause.
On March 31, 2020, the Ministry of Shipping issued further guidelines in relation to Force Majeure. The Ministry of Shipping further stated that while Covid-19 pandemic can be considered as a natural calamity, the orders issued by the Ministry of Shipping do not dilute the fact that Major Ports need to remain operational during the Covid-19 pandemic.
The directions provided that: (i) the period for completion of any project under implementation in PPP mode or otherwise can be extended by Ports; (ii) for existing and operational PPP projects, the Major Ports can permit waiver of all penal consequences on a case-to-case basis, along with deferment of performance obligations as per the provisions of the concession agreement; and (iii) the period of force majeure starts from the date of the order of the Ministry of Finance and will end when the competent authority so orders. The Ministry of Shipping has specifically provided the start date for the period of force majeure. This is departure from the corresponding notifications issued by the Ministry of New and Renewable Energy and the Ministry of Road Transport and Highways where the start date for the period of force majeure does not go back to the notification issued by the Ministry of Finance on February 19, 2020.
Upon the extension of the lockdown to May 03, 2020, the Ministry of Shipping issued further guidelines on April 21, 2020. In relation to force majeure, the guidelines issued on March 31, 2020, were replicated in the revised guidelines. However, the guidelines provided that the period for completion of any project under implementation in PPP mode or otherwise shall be extended by Major Ports. The guidelines seem to try and put an obligation on Major Ports to extend the timeline for completion by revising the direction to ‘shall’ instead of ‘can’.
The guidelines issued by the Ministry of Shipping are intended to provide relief to concessionaires from obligations binding on them under the terms of the concession agreement. Usually the terms of a concession agreement provide that a force majeure event can mean the occurrence of a non-political event or a political event. A non-political event would include any act of God, epidemic, natural disasters or any labour disruptions. A political event would include any change of law or any action taken by a Governmental Authority, which has a material adverse effect.
The Covid-19 pandemic would be considered as a non-political event under the definition of force majeure. The terms of a concession agreement would provide that upon the occurrence of a force majeure event, the affected party is required to provide a notice to the other party of the occurrence of a force majeure event. While the Ministry of Shipping has directed Major Ports to consider the Covid-19 pandemic as a force majeure event, concessionaires will be required to provide a notice of force majeure to Major Ports in accordance with the terms of their respective concession agreements.
The terms of the concession agreement may provide that the affected party (in this case, the concessionaire) shall be excused from performance of its obligations under the concession agreement for the duration of the force majeure. The agreement may also provide that the affected party shall be granted an extension of time for performance of its obligations, by such period not exceeding the period during which the relative performance was affected by the force majeure event. Accordingly, the concessionaire, in the notice provided to Major Ports, can potentially request for an extension of time for completion of the project. Concessionaires is also likely to consider obtaining a confirmation from the Major Port that the timeline for completion of the project has been extended and that the Major Port has recognised that a force majeure event has occurred under the terms of the concession agreement. Whether such confirmation will be forthcoming from the port authority, remains to be seen.
Exemptions or remissions on penalties
On March 31, 2020, the Ministry of Shipping issued guidelines in relation to remission or exemption on penalties. The Ministry of Shipping directed Major Ports that no penalties, demurrage, charges, fee or rentals are to be levied by Major Ports on any port use for any delay in berthing, loading/ unloading operations or evacuation/ arrival of cargo caused due to the lockdown measures from March 22, 2020 to April 14, 2020. Major Ports were directed to exempt or remit demurrage, ground rent over and above the free period, penal anchorage/ berth hire charges and any other performance related penalties that may be levied on port related activities, including minimum performance guarantee, wherever applicable.
In the guidelines issued on April 21, 2020, the Ministry of Shipping provided guidelines for remissions to be provided to PPP concessionaires. The guidelines directed Major Ports to (i) allow deferment of April, May and June months’ revenue, royalty and equipment hire charges without any interest, if requested by the concessionaire; (ii) allow waiver of lease rentals, license fees and similar charges for 3 months to the extent the volume of cargo dropped compared to the monthly average cargo volume of the last calendar year; (iii) the minimum guaranteed throughput obligations (wherever existent in concessionaire agreements) shall be computed for the respective year, without considering the lockdown period and cargo volume handled during said period; (iv) Major Ports shall not levy any penalty or charges for any shortfall in any performance standards such as gross berth output, transit storage dwell time, turnaround time for delivery store receipt operations, etc., for the lockdown period, plus 30 days recovery period; and (v) if requisite additional area is available within the port, Major Ports shall provide additional storage area to PPP concessionaires, on a temporary basis, without any charges, rentals, fees, etc., for up to June 30, 2020, on an ‘as is where is’ basis. Therefore, such remissions will grant concessionaires time in making due payments under the concession agreement and will grant them immediate relief from any payment obligations under the concession agreement.
While the guidelines issued by the Ministry of Shipping has been directed at Major Ports, there has been discussion on whether such remissions and deferments would also extend to minor ports or container freight stations. The Delhi High Court in the case of Polytech Trade Foundation v Union of India & Ors[2] held that the circulars issued by the Ministry of Shipping have been directed towards Major Ports and would not extend to the container freight stations or entities who are not availing any concession from port authorities and who have their containers located outside the port land. Such guidelines issued by the Ministry of Shipping cannot intervene or interfere in private contracts. Accordingly, entities who are not considered as a ‘Major Port’ would not be able to avail the benefits granted by the Ministry of Shipping by way of such remissions and deferments and such entities may have to meet their liabilities under their respective contracts.
The terms of the concession agreement would permit Major Ports to claim damages from the concessionaire for any delay in completing the project. In the event, Major Port has granted an extension of time to the concessionaire for completing the project, a confirmation that no damages or penalties will be payable by the concessionaire for the duration of the lockdown or any delay in completion of the project on account of the Covid-19 pandemic may be obtained by the concessionaire.
Project Cost
The Ministry of Shipping has issued guidelines on delayed PPP projects leading to increase in project cost. The impact of the Covid-19 pandemic on the economy and the related impact on foreign currency fluctuations may have an impact on the estimated project cost provided by the concession agreement. The guidelines issued by the Ministry of Shipping may help in streamlining the process for increase in project cost, which may have been caused by Covid-19.
Under the guidelines, the Ministry of Shipping has directed Major Port authorities that any request received from the concessionaire for increasing the project cost would be examined by the Major Port authority through a statutory auditor or independent engineer to ascertain the reasons for the cost escalation. The proposal for cost escalation will then be placed before the Board of the Major Port Trust for its recommendations. The recommendations of the Board will then be referred to the Ministry of Shipping for approval.
The guidelines further provide that if the cost is within 20% of the original approved cost of the project, before award of the concession or after completion of the project, the same can be considered and approved by the Ministry of Shipping at the competent level, based on the recommendations of the Board. Fresh appraisal by the Ministry of Shipping would not be required. In the event, the cost of the project is beyond 20% of the original approved cost, the same would need to be considered by the revised cost committee, chaired by a financial adviser and consisting of a Joint Secretary of the Programme Division and a representative of the Chief Advisor, as members to identify the specific reasons behind such an increase and such committee shall suggest remedial measures for the same. The recommendations of the committee will be placed for fresh appraisal and approval before the competent authority.
Hence, the guidelines provide concessionaires an avenue for obtaining approvals for increase in costs, which may not be provided for in the concession agreement. However, the concessionaire will need to follow the process provided for in the guidelines and obtain the requisite approvals from the Major Port authority for any increase in project cost. It may be noted that this will have to be balanced against the adverse financial implication that the port authority is likely to face, where such increased project cost is linked with termination payment payable by the port authority.
Atmanirbhar Bharat Scheme
The Finance Minister, on May 14, 2020, announced the first part of the Atmanirbhar Bharat scheme. Under the scheme, the Finance Ministry has announced that relief should be provided to contractors. A 6-month extension, without cost to the contractor, should be provided by all central agencies. Such an extension covers obligations like completion of work, intermediate milestones, etc., and extension of concession period in PPP contracts. Accordingly, the intention of the Government as well seems to be to prevent termination of concession agreements because of the Covid-19 pandemic. A notification from the Ministry of Shipping providing such relief to concessionaires is awaited.
For further information, please contact:
Subhojit Sadhu, Partner, Cyril Amarchand Mangaldas
subhojit.sadhu@cyrilshroff.com
[1] https://www.thehindubusinessline.com/economy/logistics/sagarmala-is-passe-government-
begins-work-on-new-maritime-vision/article31642280.ece
[2] C.M. No. 10546/2020 (for stay) in W.P.(C) 3029/2020
