Before finalizing the contract price for any given project, a contractor has to factor in a number of elements ranging from cost of materials to the cost of complying with the legal and regulatory framework. Yet, involvement in a long-term works contract inadvertently means that the contractor has to face unpredictability with regards to fluctuation in prices of goods/materials or the introduction of a new law or change in legal scenario, compliance with which can significantly increase costs. Higher pre-estimation of such costs while placing bids might place the contractor at a risk of losing the tender, and if he quotes his price without factoring in these economic dynamics, he might incur losses. To account for such contingencies, works contract often contain a Price Variation Clause and a Change in Law Clause to allow alteration of contract price. These clauses safeguard the interest of the contractor against the element of speculation.
Apart from the usual unanticipated rise in market price of materials/goods/components in any given economy by way of inflation or changes in market conditions such as high demand, labour shortages, profit margins, etc., such fluctuations may also be brought about by the government's effecting a change in legislation which may directly/indirectly mandate an increase/ decrease in price of a certain good. There have been many instances where under powers granted to it, the government has increased the price of materials crucial to operations by enacting laws to that effect. This has often left contractors fraught with the issue of whether to raise claim for the differential price escalation under the Price Variation Clause or Change in Law clause, with many leaning towards the latter.
In the case of
FUNDAMENTALS OF A PRICE VARIATION CLAUSE AND CHANGE IN LAW CLAUSE
A typical Price Variation clause may read like:
"The Contract Price shall be adjusted for increase or decrease in rates and price of labour, cement, steel, plant, machinery and spares, fuel and lubricants and other material inputs in accordance with the principles, procedures and formulae specified."
On the other hand, a Change in Law clause may read as:
"If, after the deadline set for Bid submission in the country where the Site is located, any law, regulation, ordinance, order or by-law having the force of law is enacted, promulgated, abrogated or changed (which shall be deemed to include any change in interpretation or application by the competent authorities) that subsequently affects the costs and expenses of the Contractor and/ or the Time for Completion, the Contract Price shall be correspondingly increased or decreased, and/ or the Time for Completion shall be reasonably adjusted to the extent that the Contractor has thereby been affected in the performance of any of its obligations under the Contract."
It is obvious that while the Price Variation clause is given to account for fluctuations in market prices of commodities determined by employing formulae such
as the Wholesale Price Index (WPI), the origin of Change in Law clause was to account for change in tax liabilities2 e.g., introduction of GST, implementation of safeguard/ anti-dumping duties, etc. However, the scope of the latter has been widened to include all laws in force3 and not be just industry or sector specific.
Yet, it has been seen that despite courts recognizing a change in law which can artificially inflate the prices of materials essential to operations, they have been wont to disentitle the aggrieved party, i.e. the contractor of the reimbursement it sought under this clause citing some other contractual detriment.
The
However, according to the Court, the Tribunal should have taken into consideration all the clauses of the Contract. After perusing all the materials on record, the Court came to the conclusion that the parties had not agreed to a broad interpretation of the Change in Law clause, and therefore the Tribunal should have harmoniously constructed the contract as a whole. The Court also observed that the contract had been awarded on the basis of
ANALYSIS OF THE
The entire purpose of the clause was to specifically entitle the contractor to an increased price claim, in case the event in question caused the overall cost of undertaking the works to inflate for the contractor. The adjudication should have been limited to whether the event causing the increase in cost was indeed a 'change in law' - something that the Tribunal constrained itself to. Even if the parties had intended for the contract to be a fixed price contract, the inclusion of Change in Law clause, which has become an industry standard at this point, should imply that parties do anticipate price escalation on a limited aspect. The
RECOURSE TO PRICE VARIATION CLAUSE
The case of
The presence and invocation of a Price Variation clause could have been beneficial in these cases. The
Even if the courts seem more inclined toward granting relief under an Price Escalation clause, it has to be borne in mind that an arbitrator must apply terms of contract for determining valuation of claim if it is a result of price variation of materials. In
Footnotes
1. Civil Appeal No. 673 of 2012 (decided on 11 May 2020).
2. M/s
3. Energy Watchdog v.
4. (AIR 2007 SC 829)
5. (AIR 2011 SC 2477)
6. ((2009) ILR Supp. 8 Del 52)
Originally published by INDIAN LEGAL IMPETUS® on
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.
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