Detouring From Contractual Contours – An Analysis Of Negative Change Of Scope Disputes In Ham Projects

Introduction

Change of Scope (hereinafter, COS) is a common term used in infrastructure contracts to refer to any modification or alteration made to the original scope of work defined in the contract. It occurs when the employer or the contractor proposes changes to the original project plan, such as additional work or revised specifications, that were not included in the original contract.

Change of Scope is a common occurrence in infrastructure contracts, as projects can be affected by external factors such as changes in regulations, design modifications, or unforeseen site conditions. However, it is important to manage COS in construction works carefully, as it has a significant impact on the project timeline, cost, and quality.

Managing COS is critical to ensuring the success of infrastructure projects. By following a structured change management process, clients and contractors can ensure that changes are carefully evaluated and managed and that the project remains on track to meet its objectives.

In this article, the authors will be reflecting on common disputes surrounding negative COS in the context of highway construction, operation, and maintenance under the Hybrid Annuity Project Model of the Government of India.

Provision of cos under the model concession agreement for hybrid annuity project

The Model Concession Agreement for Hybrid Annuity Model¹ typically stipulates provisions on COS under Article 16. COS is defined as the additional works and services which are not included in the scope of the project as contemplated in the Concession Agreement. It is pertinent to note that COS can be determined both by the National Highways Authority of India (hereinafter, Authority) and the Concessionaire; the costs incurred are initially borne by the Concessionaire and then reimbursed by the Authority.

Under the Model Concession Agreement, a formal process is outlined to reach an agreement to such Change as per the below-mentioned procedure,

1. Issuance of the COS Notice by the Authority to the Concessionaire.
2. After receipt of the COS Notice, the Concessionaire has to provide information as to the impact that such COS is likely to have on the Project Completion Schedule, the options for implementing the proposed COS, the cost and time thereof, a detailed breakdown of work classifications, material and labour costs as per the applicable Schedule of Rates (hereinafter, SOR).
3. The parties are to make good-faith negotiations to agree upon the time and costs of the implementation.
4. A Change of Scope Order is issued by the Authority requiring the Concessionaire to proceed with the performance².

Negative cos/reduction in scope of the project

The COS is termed as Negative COS where the employer chooses to reduce the original scope and as a consequence thereof, the value of the contract reduces as compared to the amount as agreed previously while execution of the contract³.

The Authority can determine the total cost of reduced scope in the event that the Concessionaire fails to complete any construction works on account of Force Majeure or reasons attributable to the Authority or when the Authority is unable to provide the remaining site of the project highway as per Clause 10.3.4 of the Model Concession Agreement for Hybrid Annuity Model i.e. Right of Way in respect to all land included in the Appendix. This cost of reduced scope is worked out by the Independent Engineer by first assessing the civil cost of the reduced scope as per the SOR applicable on Bid Due Date. In the next step, the civil cost would then be multiplied by 1.15 which is calculated as the estimated project cost divided by the civil construction cost by the Authority, to arrive at the estimated cost of reduced scope. This cost is then multiplied by the ratio of the Bid Project Cost to the Estimated Project Cost to arrive at the total cost of reduced scope.

DISPUTES

The common causation triggering disputes between parties is when in the next payment milestone, the Authority reduces the Bid Project Cost by the total cost of reduced scope and all the payments made to the Concessionaire are adjusted and recoveries are made from the payment to be released on that milestone following such a reduction in scope. The disputes generally pertain to the cost of a reduction in scope. It is also seen that on many occasions, the Authority deducts such reduction from the next due milestone payments of Concessionaires which tends to be the bone of contention between the parties.

It is an interesting legal question as to whether such a detour can be taken from contractual stipulations by the Authority and the jurisprudence on the issue of negative COS.

Judicial dicta

In Soma Isolux Kishangarh Beawar Tollway Pvt. Ltd. v. National Highways Authority of India⁴, it was contended by the Authority that the Petitioner had failed to fully utilize the money advanced to it and there was negative CoS to the extent of around Rs. 35 crores. The Authority sought a Bank Guarantee for the said sum to protect its interests.

The Delhi High Court Court in this case directed NHAI not to insist the Petitioner for signing the Supplementary Agreement or furnishing a Bank Guarantee for the negative COS as a pre-condition for issuance of the Provisional Completion Certificate or the Completion Certificate.

The Hon'ble Delhi High Court has settled down a very good position of law in this case with regard to cases wherein there is a 'Change of Scope' dispute between the parties. The Court has held that such disputes must be settled through the dispute resolution mechanism provided in the contract and that there cannot be any conditions that can be imposed by the Authority without such adjudication. This is also in line with the trite law that in case there is a disputed fact between the parties, only after adjudication of such dispute can the Authority impose damages on the Concessionaire. As such, in Negative scope disputes between the Concessionaire and the Authority, the Authority must not be allowed to take any adverse action or impose any additional condition until the final adjudication of disputes takes place between the parties by the dispute resolution mechanism provided in the Agreement.

Further substantiating this submission, the authors would also note the decision of the Hon'ble Supreme Court in State of Madhya Pradesh v. M/s Sew Construction Ltd. and Ors⁵ wherein it has been observed that a contractual right originates and subsists by virtue of the contract itself. As per the apex Court the Authority does not have any discretion to admit or deny any claim of escalation after the conditions specified in a contract are satisfied⁶.

The Hon'ble Apex Court has further observed that where a party to the contract is a governmental authority, there is no room for any element of discretion vested in the officers administering the contract.

In the words of the Apex Court, "Discretion, a principle within the province of administrative law, has no place in contractual matters unless, of course, the parties have expressly incorporated it as a part of the contract. It is the bounden duty of the court while interpreting the terms of the contracts, to reject the exercise of any such discretion that is entirely outside the realm of the contract⁷."

Therefore, the Authority being a government entity has no privilege in the matter of execution and enforcement of the contract and no fresh condition can be imposed on the Contractors/ Concessionaires during the course of the work at the site.

The aforesaid decisions duly highlight that the Authority cannot deviate from the contractual provisions as per its discretion.

Conclusion

Variation orders issued during various phases of construction projects negatively affect both the completion time and costs of projects. Variation does not only affect labour productivity but also leads to dispute, time, and cost overrun. Consequently, it affects the project's performance⁸.

The authors opine that in contractual disputes, the terms of the contract are supreme, and the parties shall adhere to the letter and spirit of the same.

The Authority, as a matter of right, cannot impose fresh conditions on Concessionaires during the course of the work at the site. A detour from contractual contours cannot take place as it is the terms and conditions of the contract which shall prevail.

The parties should aim at conclusive and expeditious decisions on COS claims as they lead to the escalation of project costs which not only adversely affects both parties but also opens floodgates for potential disputes. As such, it should be ensured that the contract between the parties stipulates an exhaustive and identifiable list of variations that could be encountered during the course of the project. The COS Notice and approval thereof should be made in a timely manner.

Footnotes

1. Model Concession Agreement, https://morth.nic.in/sites/default/files/HAM-MCA%20Document_0.pdf last visited 01.03.2023.

2. ibid, Clause 16.2.

3. Manoj Kumar Singh, Infrastructure Arbitration – a perspective (LexisNexis,2020).

4. Soma Isolux Kishangarh Beawar Tollway Pvt. Ltd. v. National Highways Authority of India 2015 SCC OnLine Del 7678.

5. State of Madhya Pradesh v. M/s Sew Construction Ltd. and Ors SLP (C) No. 907 of 2020.

6. ibid, para 22.

7. ibid, para 23.

8. Manoj Kumar Singh, Infrastructure Arbitration – a perspective (LexisNexis,2020).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.