Contractual Treatment of Unforeseen site conditions in EPC Projects

EPC agreements are now a crucial component of contracts in the power and energy sector. An EPC agreement places the burden of managing the design and construction of an entire facility on a single contractor. The EPC contractor frequently gives the developer a set of keys so they may start working right away.

What is an EPC project?

An “Engineering, Procurement and Construction” or short EPC-Project is a particular contracting arrangement used in some industries where the EPC-Contractor is made responsible for all activities from design, procurement, and construction, to commissioning and handover of the deliverables to the Owner or Operator. In addition to the delivery of the complete facility, the EPC contractor must deliver it within a guaranteed time and guaranteed price. The facility must perform at a specified efficiency level mentioned in the ‘performance specification’ section of the contract.

An EPC contract mentions a single point responsibility, fixed contract price, and completion date. The contract guarantees performance and caps on liability. It provides security. Moreover, the contract estimates intangible or hard-to-define losses to one of the parties. It is a highly effective turnkey solution to move products to market.

EPC-Projects are typically large and complex. They can be found in many industry segments, including but not limited to industrial plants, oil and gas, mining, power generation or large infrastructure.

Unforeseen Site Conditions

Unforeseen Site Conditions mean any natural or manmade subsurface condition, underground voids, caves or groundwater, Antiquities, flora or fauna protected by Law, or Hazardous Materials on the Site.

Unforeseen site conditions might be interpreted as the emergence of a condition that was unpredictable at the time the contract was executed. These are the conditions that the parties did not anticipate happening during the contract’s execution phase. In the end, the parties must agree among themselves who will be responsible for assuming the risk of unforeseen site conditions. They are free to determine the conditions under which they will be bound, and when deciding which conditions are crucial, they are to be regarded as the masters of their own contractual fate.

Every project is unique, of course; in certain places, unforeseen site conditions may provide a greater danger than in others. It is essential to conduct any required research in the most thorough way feasible, especially by the contractor prior to contract execution and, in some situations, before the tender bidding.

There are a number of uncertainties when the impact of unanticipated site conditions is left to the broad rules of the law that governs the contract. This may cause damages beyond the expectations and calculations of both the contractor and the employer. Therefore, drafting a definition for foreseeability and unforeseeable site conditions not only removes the uncertainties, but also reduces the risk of a dispute to a great extent, and even specifies the damages and risks of parties in case of a dispute.

Contractual Treatment

Disputes originating from an EPC contract are separate from those arising from other types of contracts. The nature of EPC contract disputes is highly technical and sophisticated. They require immediate action. Bank guarantees, incorrect invocation of bank guarantees, tender fraud, and other issues may give rise to litigation. If such a dispute arises, the parties may seek contractual treatment.

Indian Contract Act, 1872

This contract contains parts that deal with actual damages in the event of a breach of contract and the injury resulting from such breach that is not pre-determined in the contract. Furthermore, this act addresses liquidated damages. In liquidated damages, the parties have already determined the costs that the defaulting party must pay to the non-defaulting party.

Specific Relief Act,1963
The Specific Relief Act has been used as an optional remedy at the discretion of the party filing the claim. It has replaced the old common law concept of particular performance as a remedy at the discretion of the court where the injured party must prove that monetary damages would be insufficient.

The act prohibits courts from issuing injunctions in infrastructure contracts such as transportation, electricity, and communication if such an injunction will considerably delay the project and impact its progress.

Alternative Dispute Mechanism
Depending on the nature and type of the project, the parties in EPC contracts always choose an Alternative Dispute Resolution (ADR) mechanism. ADR is employed because its goal is to settle issues in the shortest amount of time and at the lowest possible expense.

Because EPC contracts are dynamic in nature and incorporate many changeable aspects, the parties prefer a multi-tiered dispute resolution method. Dispute Adjudication Boards (DAB), Mediation, and Arbitration are among these techniques. When this multi-tiered conflict resolution procedure fails to address the matter, the parties must go to court.