Posted by : Sajith Sreedharan on June 18th, 2020 in Strategic Advise And Management Support
[The following questions raised by the dredging industry for clarification. The clarification of the author is based on his personal opinion and the same cannot be construed as legal or contractual reference. This series is meant only to share knowledge with the industry]
1. What is the effect of Covid-19 on the Dredging industry?
No sector or industry except essential services remains unaffected by Covid-19. Port dredging work remains largely unaffected, unlike inland waterways, river dredging and dredging of closed water bodies that are largely affected. At many ports across the globe, work is uninterrupted. They have adopted precautions issued by their flag state authorities. Dredging work could have halted if the port had experienced complete lockdown by closing its navigational channel. However, globally it was observed that port dredging work, both maintenance and capital, remained fairly unaffected. This was because the port management cannot afford formation of a plume in the navigational channel to sustain their operation.
2. Can a Contractor invoke the “Force Majeure” clause caused by Pandemic?
Yes, if the Contractor or the Employer or any party affected are entitled to invoke Force Majeure clause they can do so, subject to fulfilling the test of essentials to invoke such clause. Notwithstanding, the party affected will be subjected to strictly prove the effect of Pandemic and mitigation measures compelling the party for non-performance. Party affected should understand the contractual clauses as in most of the Indian commercial contracts usually do not make any reference to Pandemic or Epidemic under Force Majeure or defined Risk. Other clauses of the contract need an inspection before invoking Force Majeure or defined Risk clause. If such specific reference is not mentioned in Force Majeure or Defined Risk clause and if the contract is governed by Indian Law, “Frustration of Contract” shall apply.
3. The contractor failed to achieve an interim milestone due to poor performance prior to lockdown, can the Contractor take advantage of Pandemic for his non- performance by invoking the “Force Majeure” clause?
No, the Contractor is not entitled to take advantage of pandemic due to poor or non- performance prior pandemic, if deemed appropriate to invoke. Non-performance prior suspension of work, if any shall be governed by appropriate non-performance clause. The contractor shall not under the guise of pandemic seek shelter for his poor or non- performance. In case of stage or depth-based or firm achievement of milestones contract, penalty and liquidated damages for such non-performance shall apply. More so, a mere reference to the pandemic shall not automatically result in invoking Force Majeure or Defined Risk clause.
4. Can disputes arise due to non-performance during the pendency of Pandemic?
If it is established beyond any iota of doubt that due to Pandemic/lockdown the performance of work cannot be executed as per the schedule of work and further a sincere effort to mitigate the risk failed, the affected Party shall be relieved from its obligation of performance. It shall be prudent that the affected party shall follow the procedure to notify, submit revised methodology, scheduling of work/plan for determination, and getting approval of the Engineer. A dispute between parties arising out of non-performance due to pandemic cannot be ruled out.
5. Can the Contractor claim compensation or cost for a surge in market price due to Pandemic?
The surge of cost due to jeopardized supply chain management shall not automatically entitle the Contractor for compensation or for such additionally incurred cost, as a result of the pandemic effect. Such additional cost or compensation shall be deemed applicable for the determination of the Engineer subject to the Variation clause, Contractions risk and obligation clause.
6. If the Contractor continues to dredge during Pandemic and is unable to carry a survey as payment is linked to the interim survey, will the Contractor be paid for the dredged volume?
Yes, the Contractor shall be paid interim payment based on hopper volume or reported volume subject to adjustment of the same when the interim survey chart shall be made available. However, the quantum of a percentage of payment shall be determined by the Engineer/Employer to facilitate the cash flow of the Contractor as a win-win situation.
7. Dredging Contract is governed by “Laws of Republic India”, whereas arbitration is governed by other country arbitration rules. Can the Contractor be entitled to Pandemic relief?
Amendment in Arbitration and Conciliation Act by Government of India, facilitates Indian contracts to be governed by “Laws of the Republic of India”, while arbitration shall be based on the procedure and rules of certain other countries, SIAC, ICC, EMAC and etc. Notwithstanding the above, as pandemic is a global outbreak of disease and if the effect is established in the country where the contract is executed, the relief shall be available to the Contractor.
8. If the Contractor invokes arbitration, can the Contractor decide not to commence work after Pandemic suspension, until the dispute is resolved?
If the Contractor has invoked Force Majeure or Frustration of Contract, and if the time scale is completed, the option rests with the affected Party to either terminate or re-commence work. In case of incompletion of the mandatory duration of 86 days or 140 days, the Contractor shall not be entitled to termination and ought to re-commence the work within a reasonable time without any excuse.
9. Will the crew be governed by Government Order for payment during Pandemic?
Crew contracts and salaries are governed by articles approved by the respective flag state. Therefore, the crews on articles are out of the preview of government order for payment during a pandemic. Notwithstanding the above, the unorganized sector of inland dredging, river dredging, dam, and reservoir dredging and those employed on such dredgers are not on articles and for such employees, the government order shall apply and govern payment conditions during Pandemic.
10. After the pandemic, what is your forecast of the dredging industry?
There shall be a surge of port traffic due to ships calling on the Port after the mandatory quarantine period for the ships’ entry to the ports are relaxed. The declared draft or the depth of the navigational channel cannot be reduced due to siltation or plume formation owing to the stoppage or postponement of dredging activities. I do not foresee any slump or decrease in dredging activities and the maintenance market shall sustain at its volume without any impact. However, there could be a possible delay in capital projects in the wake of pandemic and its aftermath. Based on statistics, operational efficiency of dredgers, and availability of maintenance volume, the dredgers registered under the Indian Flag shall suffice for maintenance dredging works. So, I am confident that there will be no impact on maintenance dredging works and the Indian dredging industry shall sustain the pandemic aftermath.
11. What is your recommendation for Port Managers vis-à-vis dredging activities in Port due to Pandemic?
Pandemic and a temporary slowdown of port traffic due to mandatory quarantine for ships prior to entry into port comes as an opportunity to maintain the navigational channel and berth pockets. If mechanical dredgers are to be deployed that shall impede navigational channels, this is the best opportunity to plan for such works. Dredging costs shall surge immediately after Pandemic and Port managers should plan their works accordingly. However, if the fuel price shall be in accordance with international price, there is a possibility for dredging cost to fall flat, failing which the cost shall surge. Port managers need to rework and revise their budget proposals.
12. Do you think the dredging industry needs any stimulus or subsidy from the Government?
Dredging is a service industry, where the dredging cost is inbuilt and charged to port users i.e. for the port charges for the ships calling in the port including the tariff of cost. The cost chain indicates that the cost incurred [payment to the Contractor] to dredge and maintain the navigational channel [cost incurred by Port] is recovered from the port user in form of port charges, thereby maintaining the equilibrium Further, most of the dredgers under registered Indian tonnage were built-in international yards with very few mechanical dredgers built-in the Indian yards. Indian flag dredgers are entitled to “Right of First Refusal” and qualify under the Marine Tonnage Tax regime. Nation GDP shall substantially nose dive due to the effect of pandemic and its aftermath. Manufacturing industry; both small and medium scale are at doldrums, NPA assets are likely to linearly increase, Industrial houses shall struggle to repay the financial institution, common man and migrants are badly affected, agricultural crop yield could not be harvested which might spiral the cost of food grains. Lockdown effect shall be exhibited in the coming financial quarters in form of a reduced collection of taxes by Government, increase the burden on banks to issue loans, cost to bring back normalcy after the pandemic A sudden surge in transportation cost shall reduce passengers having the impact of all hospitality and travel industry and more in particular huge incentive and stimulus is required to bring back normalcy to the nation.
In my personal opinion, no stimulus or incentive is required for the dredging industry in the aftermath of the pandemic, as the equilibrium will be maintained.
Prof. Dr. George Yesu Vedha Victor,
International Arbitrator & Emergency Arbitrator Risk, Conflict and Contracts Management