[Sri Janani S. is a 3rd year B.A., LL.B. (Hons.) student at National Law University, Jodhpur]
In the recent years, public-private partnerships (“PPPs”) have been increasing manifold in India. The state is recognizing the private sector’s indispensable role in the infrastructure sector, urban water projects, healthcare and even in the development of electric vehicles. The Government is encouraging private investment by providing incentives, like the Viability Gap Fund and setting up of India Infrastructure Finance Company.
It is important to note that India has no specialized statute governing PPPs. The entire framework depends on existing legislation such as the Companies Act, Contract Act and other policies and guidelines laid down in specific sectors. Renegotiations in Indian PPP contracts generally take place in situations like change in law, force majeure events, material adverse government action or political force majeure. These would allow for a change in terms and conditions necessitated by external circumstances beyond the control of the concessionaire or contracting party.
In light of this, the concept of Material Adverse Government Action (“MAGA”) becomes pertinent. MAGA is also referred to as political force majeure, where one party to the contract is the government or any state instrumentality. According to a report published by the World Bank, such clauses aim to allocate particular types of political risk to the contracting authority.
Since there is the absence of any exhaustive legislation on this subject in India, this post seeks to examine the importance of MAGA clauses, how the courts have interpreted these clauses and how this vague interpretation and lack of PPP legislation in place can lead to serious concerns to such partnerships.
Importance of MAGA & Interpretation of MAGA Clauses by the Indian Courts
“Material Adverse Change” clauses are quite popular in mergers and acquisitions, where it aims to guard the acquirer against significant changes that makes the target company less attractive. In such PPP contracts, the risk of MAGA is allocated to the contracting party. The private party will then be able to claim compensation for the losses suffered due to the action/inaction of the government.
Risk allocation in a PPP contract is quite different from a conventional contract, proving to be much more complex. Both parties must understand and agree to the division/allocation of risks amongst themselves. It becomes even more critical, as PPP contracts are for a longer tenure than a conventional contract. Building trust and cordial relationships between both parties becomes extremely crucial during such a period.
In light of its importance, it would be essential to examine some cases involving MAGA or political force majeure clauses. In a Bombay High Court case of Sion Panvel Tollways Pvt. Ltd v. The State, Sion Panvel entered into a concession agreement with the Government after a competitive bidding process. They had stated that there was an unjustified delay in issuing toll notification, due to which they suffered losses. After it was issued late, the petitioners further contended that the Government did not comply with the requirements of the agreement.
According to a clause in the agreement, if the government, by an act of commission or omission, creates circumstances that have a material adverse effect on the performance of its obligations by the concessionaire and has failed to cure the same within 60 days of notice thereof, these shall constitute events of default. The concessionaire will have the right to terminate the agreement and be entitled to receive termination payment per the given condition. The Court directed the Government to pay compensation accordingly.
In a Supreme Court case of Unitech Ltd. v. Telangana State Industrial Infrastructure Corporation, the political force majeure event impacted the project as a material adverse effect. According to the terms, if this were the case for nine months, the developer is entitled to terminate the contract upon issuance of notice. These political force majeure events included litigation relating to the title of APIIC or the Government of Andhra Pradesh. In such situations, Unitech was entitled to compensatory payment from the Government. The Court held that the fundamental postulate on which the entire contract was founded stood nullified due to the failure of title. This entitles Unitech to claim a refund.
However, it is pertinent to look at the clause stipulating what happens in the event of political force majeure. A termination clause of this nature generally reads as follows:
“either party to this agreement may issue a notice of termination of this agreement if a non-political force majeure vent has resulted in material adverse effect on the project for more than nine months. On the other hand, the developer shall be solely entitled (but not obligated) to issue notice of termination of this agreement, if a political force majeure event has resulted in material adverse effect on the project for more than nine months.”
An exploration of this clause depicts that the private sector is not bound to issue a notice of termination in case of political force majeure events, putting the Government in a vulnerable position. These types of clauses seem problematic, as although MAGA safeguards the agreed returns of the private sector, the concern is whether it may be overextending such safeguards under the garb of “protecting” the investments made by the private sector.
In another Bombay High Court case of Maharashtra State Road Development Corporation Ltd. v. Plus Bksp Toll Ltd., the concession agreement was validly terminated under specific clauses. Political force majeure was defined under the agreement as “events by on or account of any governmental agency”. The termination by Plus was held to be valid due to a political force majeure event, such delays in land acquisition and approval from railways, non-payment of toll by government buses, and change in the law banning the entry of heavy vehicles. Although termination on certain clauses was held invalid, the Court held that it could terminate the contract on other clauses which were valid.
Therefore, most MAGA actions are incorporated and defined under the political force majeure events, like change in law, based on the parties’ discretion. However, the precise language of these MAGA clauses remains a disputable issue. For instance, the definition of what constitutes “change in law” may be limited or ambiguous in concession agreements. If we also look at how these material adverse effect clauses are used in areas of mergers and acquisitions, it demands more clarity due to the absence of any guideline or framework.
On the one hand, sellers, i.e., the government, may prefer very specific and definite clauses, with some exceptions related to general risks and macroeconomic events. On the other hand, the buyers, i.e., the private sector, may desire a broadly and vaguely-worded clause to cover any possible risk. For instance, in the case of Adani Power, the Supreme Court held that a change in law in Indonesia would not qualify as a “change in law” in India.
In the absence of a regulatory framework, a worrisome trend as that of some countries might start in India. For instance, in the Philippines, the clauses were worded very generally, where MAGA is sometimes considered a final, unappealable and executory decision, thereby circumventing the judicial power. Although the precedents set out under the Indian Contract Act do not allow for such clauses, the real question of drafting these terms becomes relevant. Countries like the UAE and the USA have laws and regulations for PPPs, and they have displayed positive signs of progress in such projects.
The Indian Government attempted to formulate a Draft National PPP Policy; however, it has not taken shape yet. Several international guidelines have been formulated in this regard, like the UNCITRAL Guidance on PPP/Concession Laws, 2000, but the application of such guidelines to Indian PPP contracts is questionable, as they are merely “guiding” in nature.
The trend in India shows that the courts have been quite liberal in interpreting these clauses and directing the government to compensate. While these clauses are essential to ensure the bankability of the contract, they can also lead to overprotecting the private sector and disincentivizing the government. Clauses relating to tackling of externalities is just one aspect. There are other stages in a PPP contract, like dispute settlement and dispute resolution, which can be further strengthened through a proper legal foundation. All of these reiterate the importance of having a solid framework in place to avoid boilerplate clauses or one-sided clauses and bringing in a system of consistency and certainty. A balance has to be struck to achieve “partnership” in its real sense.
– Sri Janani S.