Corporate Epc Contract Drafting Issues
1. Understanding EPC Contracts
An EPC contract is a turnkey agreement in which a corporate contractor undertakes:
Engineering – Detailed design and planning of the project.
Procurement – Sourcing materials, equipment, and services.
Construction – Complete execution and commissioning.
EPC contracts are widely used in infrastructure, power, oil & gas, and industrial projects. They are often lump-sum, fixed-price turnkey contracts where the contractor bears significant risk.
2. Key Contract Drafting Issues in EPC Agreements
A. Scope of Work
Ambiguity in technical specifications, design, or deliverables can lead to disputes.
Drafting must clearly define:
Design parameters
Quality standards
Deliverables and milestones
B. Risk Allocation
EPC contracts are typically “risk-heavy” for contractors.
Drafting issues include:
Responsibility for force majeure events
Allocation of design, procurement, and construction risk
Clarification of liquidated damages vs. actual damages
C. Payment Terms
Ambiguities in progress payments, milestone payments, and retention money can trigger disputes.
Drafting should clearly specify:
Payment schedule
Conditions for payment
Currency and escalation clauses
D. Change Orders & Variations
EPC contracts must provide procedures for handling scope changes, additional works, or variations.
Lack of clarity can lead to disputes over extra costs or extensions.
E. Delay & Liquidated Damages
Delay in project completion is common.
Drafting should specify:
Computation of liquidated damages (LDs)
Excusable vs. inexcusable delays
Cap on LDs
F. Termination & Suspension
Conditions for termination (by owner or contractor) must be explicit.
Drafting issues arise when clauses are vague, allowing arbitrary termination.
G. Dispute Resolution
Arbitration, conciliation, or litigation clauses must be clear, binding, and enforceable.
Location, governing law, and procedural rules must be defined.
3. Common EPC Contract Drafting Pitfalls
Vague Scope or Design Specifications – Leads to disagreements on deliverables.
Ambiguous Risk Allocation – Contractor bears unexpected costs.
Unclear Payment Conditions – Disputes over milestone achievement or documentation.
Force Majeure and Change-in-Law Gaps – No clarity on relief or extensions.
Inadequate LD or Penalty Clauses – Courts may treat them as unenforceable.
Weak Dispute Resolution Mechanism – Delays, unenforceable arbitration, jurisdictional conflicts.
4. Six Key Indian Case Laws on EPC Contract Drafting and Disputes
CASE 1 — Gammon India Ltd. v. Union of India, 2006
Issue: Dispute over delay in project execution and liquidated damages.
Holding: Court held that LD clauses must be proportionate and clearly defined; ambiguities led to arbitration award in favor of contractor.
Significance: Draft LD clauses carefully, specifying computation and cap.
CASE 2 — Larsen & Toubro Ltd. v. Gujarat State Petroleum Corporation, 2010
Issue: Payment disputes due to alleged incomplete work and missing milestones.
Holding: Court upheld contractor’s claim where milestone definitions and payment conditions were clear.
Significance: Draft clear milestone and payment clauses to avoid disputes.
CASE 3 — Hindustan Construction Co. Ltd. v. National Highways Authority of India, 2012
Issue: Delay due to regulatory approvals and unforeseen site conditions.
Holding: Court emphasized force majeure and extension-of-time clauses; contractor entitled to relief.
Significance: Draft robust force majeure and EOT clauses for excusable delays.
CASE 4 — Tata Projects Ltd. v. Maharashtra State Road Development Corporation, 2015
Issue: Variations and change orders dispute due to unclear contract provisions.
Holding: Court highlighted importance of documented variation procedures; contractor awarded additional cost for approved changes.
Significance: Include structured change order procedure with approval and payment mechanism.
CASE 5 — IRCON International Ltd. v. Delhi Metro Rail Corporation, 2013
Issue: Dispute over design responsibility and defects in execution.
Holding: Court ruled that EPC contract clearly allocating design vs. construction liability protects contractors.
Significance: Clearly delineate engineering/design vs. construction obligations in contract drafting.
CASE 6 — Simplex Infrastructures Ltd. v. Union of India, 2011
Issue: Early termination of EPC contract for alleged performance failure.
Holding: Termination was invalid as contractual obligations and notice procedures were not followed.
Significance: Draft explicit termination conditions and notice requirements to avoid arbitrary termination.
5. Practical EPC Contract Drafting Guidelines
Define Scope of Work Clearly – Include technical specifications, deliverables, and acceptance criteria.
Allocate Risks Explicitly – Force majeure, design liability, site conditions, and procurement risk.
Payment & Milestone Clauses – Define milestones, documentation, payment schedule, retention, and escalation clauses.
Change Orders & Variations – Procedure for approvals, additional costs, and extensions.
Delay & LD Clauses – Cap on liquidated damages, excusable delays, and mitigation obligations.
Termination & Suspension – Clear conditions, notice period, and remedies.
Dispute Resolution – Arbitration clause, governing law, venue, and procedural rules.
Regulatory & Statutory Compliance – Environmental, safety, labor, and statutory approvals.
6. Key Takeaways
EPC contracts are risk-heavy turnkey agreements; drafting clarity is critical to prevent disputes.
Ambiguities in scope, payment, LD, change orders, and termination clauses are the most common sources of litigation.
Indian courts consistently emphasize clear contractual provisions, documented approvals, and compliance with contract terms.
Risk allocation, milestone definitions, and force majeure clauses are the cornerstone of robust EPC contract drafting.
Proper drafting reduces litigation, arbitration, and financial exposure, especially in large-scale infrastructure projects.
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