Building & Engineering Contracts - B S Patil

Building and Engineering Contracts

Revised and Enlarged

FIFTH EDITION

BY

B. S. PATIL B.E. (Civil), LL.B., RLE., M.I .C.A.

Mrs. S. B. Patil Publication 2005 © : B.S.Fatil First Edition: Second Edition Third Edition Fourth Edition Fifth Edition

Published by:

1972 1974 1992 1994 2005

MRS. S. B. PATIL "Saish" 120, National Society Pune411007 (India)

Printed By: Maharashtra Sahakari Mudranalaya 915, Shvajinagar, Pune 411004.

ULC CC No. 75-902224

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II gives me greal pleasure to place this fifth edition in the hands of its readers. It is longer than the fourth edition by more than 220 pages, and increase of nearly 50%. This is despite the fact that the fourth edition itself had more or less standardized the 'design and contents' of the book. The main reasons are not many. Firstly, there was delay in updating the fourth edition. A few hundred cases, most of which were decided and reported in the decade 1994 to 2004 needed to be covered. Secondly, in the said period, judicial review of administrative actions has become expansive. It is becoming wider and wider day-by-day. State activity too is fast becoming pervasive. The policy decision by the Governments to get many public works executed on 'Build, Operate and Transfer' (BOT) basis necessitated inclusion of the said topic in the first chapter. The contents of the first chapter "The Tender' and the third chapter 'The Contracts by Government' are recast by bringing most of the cases of judicial intervention in the process of invitation, conditions of pre-qualifications, scrutiny and acceptance of

Preface to the Fifth Edition

tenders by Public Authorities in Chapter 3. For example, how a lapse in a tender notice may vitiate the entire process is illustrated with eight decided eases. The four categories of the cases of judicial intervention are further subdivided into ten categories including the doctrine of legitimate expectation and illustrated with nearly one hundred cases. This means the first three chapters are virtually a separate textbook on the law relating to 'tenders and award of contracts by public authorities'. It is hoped that this text will make all concerned aware of the pitfalls in the process of invitation and acceptance of tenders and help avoiding them. But this is not the whole explanation for the increase in the length of this book. In chapter 4 on Interpretation of Contract the illustrations based on the important cases decided since the publication of the last edition in 1994 are added. For example, the rule of contra-proferentem is illustrated with the decision of the Supreme Court reported in 2004. Similarly new illustrations have been added under exemption clauses, public policy, etc. Chapters 5 to 9 cover, by far the most important conditions of construction contracts, giving rise to disputes and litigation. FIDIC revised the Standard Form conditions and published the 1999 edition. Ministry of Statistics and-Progranime Implementation, Government of India published 'Standard Contract Clauses for Domestic Bidding Contracts' in 2001. Reference to these recent conditions has been made. The temptation to reproduce the conditions is avoided except where the interpretation made it necessary to reproduce the relevant parts. Where required,- illustrations have been added to incorporate the decided cases in the last decade. Additions have been made in the chapters on Breach of Contracts, Common Breaches of Contract and Remedies for Breach of Contracts. Subcontracts and Contract between Owner and Architect/Engineer are shifted to chapter' 13 and 14 respectively with additional illustrations. The form for assessing the damages in the cases involving delays; by the owner evolved by the author and therefore popularly known as the "Patil Form" has found wider use and acceptance and being more suitable than either the Hudson formula or the Eichleay Formula for the Indian conditions continues to hold the ground. Chapter 13 on Limitation, in the old edition, is shifted to chapter 15. Chapter 14 on Arbitration is virtually deleted and is substituted by a new chapter under the heading 'Claims, Disputes and their Resolution by DRE/DRB/Conciliation and/or Arbitration.' The present day conditions of the contracts require fulfillment of prerequisite steps prior to arbitration and the ADR techniques deserved to be given justice by treating it in a separate chapter. The Arbitration and Conciliation Act, 1996 replaced the old 1940 Act, lock, stock and barrel. Word by word commentary of the said 1996 Act written by me is in its fourth edition with updated case law up to 2003. The reader will not feel the lack of the text on the law of arbitration, as two books are offered together as companion volumes. Reference deserves to be made to a few cases of far reaching implications. Some decisions, intended to change the otherwise well established law, are potentially disastrous to the underlying commercial realities of all building and engineering contracts while some, on the other hand, show remarkable understanding of the commercial realities. The first is the decision in the case of National Highways

Preface to the Fifth Edition

Authority of India v. M/s Ganga Enterprises. The said decision upholds the statutory right of a tenderer to revoke his tender before acceptance, but with forfeiture of earnest money by public authority. That the autority is as liberty to rejcel all tenders without giving any reasons and without making itself liable to tenderers yearly indicates non existence of mutual rights and liabilities prior to acceptance of tenders. This is exprecessly provided in the Indian Contract Act. As such the earnest money cannot be forfeited without a distinct and separate consideration for the tenderer to keep the offer valid for a definite period of time is the well-established position of the law prior to this decision and the issue deserves to be reconsidered at the earliest occasion. This case is dealt with in Art. 12.20.1. In a number of deserving cases, provisions of the contracts, which clearly amounted to exemption clauses, were made the basis for denying compensation. The law that an exemption clause will not be attracted, if the beneficiary party is guilty of breach of essential conditions of contract deserves to hold the field in the interest of justice. Of course, lack of proper pleadings by the parties concerned and reasoning by the tribunals, did contribute to the said cases being decided denying the relief. These cases are discussed in Art. 12.8.1. Most construction contract conditions provide for possible extension of time but without specifying or limiting the duration of extension. The fourth edition contained the suggestion that in such cases, by operation of the provisions of Section 46, the extension should be limited to a reasonable time say 10% to 20% of the originally stipulated time limit, and the exemption clauses be held valid for such reasonable duration only. This reasonable interpretation stands negated in D.S.A. Engineers v. Housing and Urban Dev. Corporation reported in 2004 (2) Arb. LR 33 (Delhi). It is not uncommon in India that construction Preface to the Fifth Edition

Vll

projects linger for more lhtm double the originally stipulated time limit for their completion and to hold that the quoted rates and exemption clauses remain valid till completion of the project, irrespective of the duration of extension, is to completely ignore the basic commercial reality that in the engineering field, the prices/rates have a definite relationship with the time limit for completion and there are no realistic formulae available to assess full impact of escalation in the cost. It is heartening to note that in a few cases the right to get compensated has been upheld in the event of breaches of contract by the employer but not a claim for escalation/revision of rates if prohibited by the terms of the contract. One such case: Bengal Traders v. West Bengal State Electricity Board, 2001 (Suppl.) Arb. LR 7 (SC).) is discussed in Art. 12.12. It is felt that but for the cases involving exemption clauses, the law entitling the contractor to claim revision of rates for the work done during the extended period, for which extension he is not to blame, is well settled in view of a large number of earlier judicial pronouncements dealt with in Art. 12.12. Basic-commercial considerations in the engineering field found mention in the judgement delivered on public policy, delay due to breaches of contract by employer and relief sought by the contractor, in Municipal Corporation of Greater Mumbai v. Jyoti Construction Co., 2003 (3) Ar, LR 489. Other noteworthy decisions that need to be mentioned include N.T.RC. Ltd. vs. Reshmi Constructions, AIR 2004 SC 1330 and Bharat Coking coal; Ltd. v. Annapurna Cosntruction, 2003(3) Arb. LR 119 SC, in which the right to refer claims to arbitration in spite of having signed 'no claim certificate to receive the

final bill, strongly urged in the fourth edition, stands restored, by distinguishing the earlier decisions, if it is validly contended that the said certificate was given under financial coercion. Recent decisions in respect of 'excepted matters' and also in respect of treating the decision making authority named in the contract conditions as an Arbitrator are also included in appropriate places. I cannot end this preface without reiterating the need for adoption of one uniform standard form of contract for public works by the authorities responsible for various government and semi-governments departments of the States and the Central Government, Municipal Corporations and other Public Sector Undertakings, in India. The Government of India Form 2001, is stated to be the result of the analysis and monitoring of a few thousand infrastructure and industrial projects of the Central Sector by the Ministry of Statistics and Programme Implementation in the previous 14 years. The Ministry drewit up after wide consultations with the experts in the construction industry and by and large, conforms to the international practices followed by the World Bank, the UN Agencies as well as the FIDIC and as such there is no reason as to why the said conditions should not be adopted for all public works. I acknowledge with gratitude the encouraging feedback by numerous readers of the fourth edition and suggestions to update the book. Thanks are also due to Mrs. Prachi Dhavalikar for search of the caselaw, Mr. RamPrasadfromHyderabadandMr. Sanjay Kulkarniof theM.S.M. for typesetting, Mrs. Saikia for proof reading and editorial help and Mr. Satpute and his dedicated team at the Maharashtra Sahakari Mudranalaya for patience shown in printing this book and above all to my wife, the publisher for help on all fronts. Pune: October 2005

12,

B.S.PATB L

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This fourth edition has been brought out as a result of the continued demand for this book and the warm reception accorded to its earlier editions by the Members of the Bench, Bar, contractors, engineers, project officers, businessmen and others interested in the knowledge of the law in relation to Building and Engineering contracts.

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I had assured my esteemed readers, when the 1992 supplement to the third edition was published, to place this book in their hands in the format of a standard treatise on the subject as a companion volume to "B. S. Patil on the Law of Arbitration." In the process this edition bids a goodbye to the earlier popular handy, he who runs may read, edition. However, the basic structure, the number of chapters, and their order, which withstood the test of time, have been maintained. But the chapter contents have been thoroughly revised, (> li

rewritten and where necessary shifted to more appropriate places. Case references are given in the footnote for convenience of ready reference. Immediately after the introduction of each chapter, mention is made of the provisions of the law and also the General Conditions of the Standard form contracts, which are directly, or implicitly discussed in the chapter. Besides the P. W. D., C. P. W. D., Railway and M. E. S. Departments, references are also made to the

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Preface to the Fourth Edition

provisions of the FIDIC Conditions of Con tract for Works of Civil Engineering Constructions. Clause numbers of other standard form contracts have been taken from Sanjiva Row's 'Contract Act and law relating to tenders, etc', 8th edition. With a view to enhancing the utility of the back to international contracts and readers, new case law has been selected, referred to and given in the illustrations. Cases have been selected from the Courts in India, Australia, New Zealand, Canada, South Africa, U. K. and the United States of America. The important decisions of the various High Courts and the Supreme Court of India since the publication of the third edition have been incorporated. As a result the number of cases referred to has risen to over 600 from 400 in the third edition. Consequently the contents have been increased by nearly one half. Partly, this is due to a sizable number of cases added in chapters 1 and 3 decided under Writ Jurisdiction of the Supreme Court of India and other High Courts under Arts. 32 and, 226 of the Constitution of India, respectively. Reference is made to the C. P. W. D. Manual and the rules and regulations under which Government engineers act. Engineering aspects of how tenders are prepared and submitted are also dealt with. As a consequence, the words 'Legal Aspects of have been deleted from the title. In fact, chapters I and 3 have been thoroughly revised and updated to make this book indispensable to every engineer associated with invitation, scrutiny, and acceptance of tenders for public works. The doctrine of legitimate expectation and the decision of the Supreme 1. Revised and enlarged 2nd edition by Ms. Sarita Patil. 2. Part I, General Conditions, 4th edition 1987, Reprint 1992 with amendments. Preface to the Fourth Edition

Court of India on cartel formation are noteworthy additions. The other new material added includes : Chapter 2 : Void and voidable contracts, contract of Indemnities and guarantees, Chapters 8 & 15 ; Nominated Sub-contractors. Chapter 9 : Claims made after the final bill, the latest case law . Chapter 10: Obstructions by third person at the site of work, Indemnities and insurances. Chapter 11: Vexed questions relating to payment of escalation when there is delay in completion. Chapter 12: Lien and vesting clauses. Chapter 13: Date on which cause of action accrues. Chapter 14: Excepted matters and arbitration. Chapter 15: When third party can sue on contracts illustrated with the case decided by the Court of Appeal in U. K. and reported in "The Independent" on 29lh June 1994. Common breaches of contracts and remedies for breach of contracts dealt with in chapters 11 and 12 respectively have been treated with illustrations so that a practitioner may not have to search for authorities elsewheie. 1 have not hesitated to indicate decisions which seem wrong in principle or "out of line" of practicalities of the parties' situation; for example, Vishwanath Sood v. Union of India. I am equally alarmed by the decisions of the Supreme Court of India in M/S P.K. Ramaiah &Co. v. Chairman & M D, N.T.P.C. followed by The State of Maharashtra v. M/S Nava Bharat Builders which may change the well established position in the law that "when one party says that there was full and final settlement and the opposite party says that it was not voluntary but under compelling

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circumstances and he has got claims, that is also a matter thai could be decided only by the arbitrator". While the first of the above two cases seems to be distinguishable on the strong facts of it, the Supreme Court applied it to the second of the above cases. While so doing the Supreme Court ignored the finding of the fact by the trial Court that the alleged settlement was not voluntary, and confirmation of the said judgement by the High Court of Bombay relying on the decisions of the Supreme Court itself in earlier cases. One cannot overlook the fact that parties might have acted under advice based on the position of the law then and the drastic change of such a position by the Supreme Court could cause injustice and irreparable damage. I have not forgotten the fact that the book is intended not solely for members of the Bench and the Bar - indeed the majority of its readers are involved in the construction industry itself. Consequently, the style and manner of presentation of the contents as also constructive suggestions are maintained in this edition. Crossreferences are given whenever necessary. However, the reader is advised to refer to the contents and index. For that purpose, exhaustive contents have been given to identify topics of relevance to a given situation. At the same time engineering aspects are elucidated keeping in view the interests of the legal fraternity. 3. AIR 1989, SC 952 4. 1994(1)SCAL 1. 5. The State of Mahrashtra v. M/s Nav Bharat Builders.; CA. NO. 859 of 1994 S.L.P.(C) NO. 5628 of 1993 dated 4.2.1994. I cannot end this preface without mentioning the need for unified Standard form contract and the need to find ways and means of dealing with inflation in the costs in addition to relief available under the prevailing escalation provisions. It is suggested that parties should incorporate provision in their contracts to revise the agreed rates/cost each year to overcome the shortcomings of the escalation clauses. The conditions of contract for public works in India deserve to be modified on the lines of I.C.E. & FIDIC conditions, which are adopted in India for big projects financed by the World Bank. I am indebted to my daughter, Mrs. Sarita Patil Woolhouse, Bar-ai-Law, who read the contents and also prepared the index, during her brief stay in India, in September 1994. My thanks trt also due to Mrs. Korobi Saikia for the task of editing and correcting the proofs, and also my young friends Mr. Amit Sagdeo and Mr. Sharad Karve for typesetting and printing this book. Last but not least to my wife and my other daughters for their tolerance and patience during the months while this revision was in progress.

Pune October 13,1994

B. Patil

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Preface to the First Edition

r v ______________ # ... t ..... „ ...... r .................... _____________ , ___________ The construction industry is the second largest industry in the world, being next to agriculture. Roughly 40 per cent to 50 per cent of the Five Year Plan expenditure in India falls within the purview of construction activity, carried out mainly by private agencies. Those who carry out this colossal work of nation building are mainly engineers, architects and contractors. Experienced professionals in each of these fields know that some basic understanding of various legal provisions is essential to them. From the standpoint of practicing engineers, architects and contractors, the law of contract is perhaps the most important one. Throughout the progress of each project, from preparation of technical documents to its execution and in the determination of disputes between the owner and the contractor, the engineer or architect cannot afford to remain ignorant of the law in general and the law of contract in particular. He is not the beneficiary of a formal legal training. For obvious reasons he cannot procure legal advice in his day-to-day routine. The best thing for him to do is to be conversant with the basic legal principles and, insofar as possible, with legal pitfalls, which have entrapped other members of his profession. The author - a civil engineer and a law graduate - has attempted in this book to provide, in a compact and handy form, a practical guide, to engineers, architects and contractors. But this book is fully written also for the owner of construction work, who rarely possesses technical or legal know-how. He, perhaps more than anyone else, needs to know what he can rightfully expect from other parties to the contract he has entered into. Case references will extend the utility of the book to advocates as well. The author feels a careful study of the book by all those who are interested in construction contracts, will help either avoiding disputes or amicably settling them. The text of the book is so arranged that any doubt, which arises, will be found dealt with in its appropriate place and that place can easily be found. Almost all points are explained with illustrations gathered from decided Court cases. Although care is taken to include all points on which disputes normally arise, it is not possible, in a book of this size, to deal with every possible situation.

Aurangabad Chaitra 1,1894.

B.S.Pati l

Dedicated to my Wife Suman

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Contents

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PREFACE TO FIFTH EDITION ............................................................................................. v PREFACE TO FOURTH EDITION .................................................................................... viii PREFACE TO FIRST EDITION ............................................................................................ xi TABLE OF CASES INTRODUCTION 0.1 The Nature of the Law of Contract ..........................................................................1 0.1.1 Freedom of Contract .............................................................................2 0.1.2 Contract of Adhesion ............................................................................. 2 0.1.3 Exclusion or Exception Clauses ......................................................... 3 0.1.4 Sanctity Of Contract ............................................................................. 3 0.2 CLASSIFICATION OF CONTRACTS .................................................................................. 3 0.2.1 Formal and Informal Contracts ........................................................... 3 0.2.2 Express and Implied Contracts............................................................ 3 0.2.3 Unilateral and Bilateral Contracts ................................................... -4 0.3 BUILDING AND ENGINEERING CONTRACTS ..................................................................4 0.3.1 Owner, Engineer/Architect, Contractor ............................................. 5 0..3.2 Development of a Project..................................................................... 5 0..3.3 Standard Forms ...................................................................................... 6 0..3.4 Need for Unified Standard Form as also Change ............................. 6 in types of Contract CHAPTER 1 : THE TENDER 1.0 INTRODUCTION .......................................................................................... 8 1.1 PROVISIONS OF THE ACT ............................................................................................ 8 1.2 TENDER - PROPOSAL - DEFINED................................................................................ 8 1.2.1 Requisites of a Valid Tender .............................................................. 9 1.3 INVITATION TO TENDER ............................................................................................. 9 1.3.1 Revocation of Tender Notification ................................................ 11 1.3.2 Requirements to be fulfilled before inviting tenders .................. 12 TYPES OF TENDER DOCUMENTS ................................................................................. 14 1.4 1.5 MODES OF INVITING TENDERS ................................................................................. 22 1.5.1 Negotiated Tenders .......................................................................... 23 1.5.2 Limited Competition ........................................................................ 23 1.5.3 Open Competition ............................................................................ 24 1.5.4 Mode of publication of tender notice ............................................ 24 1.6 PRE-QUALIFIC ATION OF TENDERERS ..: ................................................................... 26 1.7 REQUIREMENTS OF NOTICE INVITING TENDERS ..................................................... .28 1.8 PREPARATION AND SUBMISSION or TENDER ................................................................3 2 1 .9 IRREGULARITY IN SUBMISSION OF TENDERS................................................................. 3 3 1.10 CONDITIONS OFFERED HY THE CONTRACTOR IN HIS* TENDER ....................................36 1. 11 WITHDRAWAL OF TENDER ...........................................................................................37

1.11.1 Withdrawal or Revocation How made ........................................... 3 8 1.11.2 Conditions in NIT-Tender shall not be withdrawn ..................... 44 1.11.3 Consequences of Revocation of Tenders ...................................... 44 1.11.4 Effect of acceptance beyond the validity period: Section ... 45 1.11.5 Failure to fulfil condition precedent .............................................. 49 1.11.6 Death or insanity of tenderer .......................................................... 50 1.12 CONSIDERATION AND SCRUTINY OF TENDERS BEFORE ACCEPTANCE ..................... 50 1.13 DECISION TO ACCEPT A TENDER ............................................................................... 53 1.13.1 Acceptance when only one Tender is received ................................. 54 1.14 ACCEPTANCE OF TENDER .............................................................................................54 1.14.1 Section 3 of the Act ........................................................................... 54 1.14.2 Implied Acceptance ........................................................................... 56 1.14.3 Conduct may be Proof of Acceptance ............................................ 56 1.14.4 When acceptance cannot be implied ...... ...................................... 57 1.14.5 When acceptance can be Implied? .................................................. 58 1.14.6 Acceptance to be in Reasonable Time ........................................... 6 1 1.14.7 Acceptance must be absolute ........................................................... 6 1 1.15 CORRESPONDENCE BETWEEN ACCEPTANCE AND OFFER...........................................65 1.15.1 Letter of Intent ....................................................................................... 67 1.16 MODE OF COMMUNICATION OF ACCEPTANCE ........................................................... 68 1.16.1 Communication when complete ...................................................... 69 1.16.2 ACCEPTANCE BY TELEGRAM/TELEX.................................................... 7 0 1.16.3 A CCEPTANCE IN TELEPHONIC CONVERSATION ................................... 70 1.17 REVOCATION OF ACCEPTANCE .................................................................................. 72 1.1.8 REJECTION OF TENDER ................................................................................................. 72 1.18.1 Rejection of all tenders .................................................................... 73 1.18.2 Cartel - "Ring" - formation - An unfair trade Practice? ...73 1.18.3 Conditional Acceptance/Rejection of Tender - Effect ................ 75 1.18.4 Rejecting the lowest Tender - Grounds ......................................... 76 1.18.5 The Doctrine of Legitimate Expectation ....................................... 77 1.20 COST OF TENDERING .................................................................................................. 77 1.21 MISREPRESENTATION AND FRAUD ............................................................................ 78 1.22 BRIBERY AND SECRET COMMISSION ......................................................................... 79 1.23 INTERFERENCE BY HIGH COURT ................................................................................ 79 1.24 READVERTISEMENT ................................................................................................... 79 CHAPTER2 : THE CONTRACT 2.0 INTRODUCTION ......................................................................................... 80 2.1 PROVISIONS OF THE ACT.................................................. .* ...................................... 80 2.2 ESSENTIALS OF A VALID CONTRACT.......................................................................... 31 2.2.1 Non-statutory and Statutory contracts ...................................................... 82 2.3 PROPOSAL AND ACCEPTANCE OK MEETING OF MINDS .............................................. 8 3 2.4 2.5

Wiio ARE COMPETENT TO ENTER INTO A CONTRACT................................................. 84

FREE CONSENT ..:..................................................................................... 8 6 2.5.1 Coercion .......................................................................................... 87 2.5.2 Undue Influence ................................................................................8 8 2.5.3 Fraud .................................................................................................. 91 2.5.4 Misrepresentation ............................................................................. 92 2.5.5 Mistake ...............................................................................................98 2.5.6 Effect of Mistake ..............................................................................98

2.6 2.7

2.8

2.9 2.10 2.11 2.12 2.13 2.14 2.15 2.16 2.17

2.5.7 Mistake By Tenderer In His Tender ............................................ 100 CONSIDERATION..................................................................................................... 100 2.6.1 Distinction Between Executed And Executory ............................... 103 SUBJECT MATTER .......................................................................................104 2.7.1 Subject matter must be Lawful ....................................................105 2.7.2 An agreement between Intending Tenderers that one should... keep off from tendering is not unlawful ..................................... 105 2.7.3 An agreement to execute work in the land not acquired, if and when invalid .......................................................................... 107. VOID AND VOIDABLE CONTRACTS ......................................................................... 108 2.8.1 Difference between Contract void and illegal ............................ Ill 2.8.2 Mode of Communicating or revoking rescission ....................... 112 2.8.3 Consequences of rescission of Voidable Contract ................... 112 2.8.4 Consequences of void Agreement ................................................ 112 CONTINGENT CONTRACT ........................................................................................ 113 COLLATERAL CONTRACTS ...................................................................................... 116 IMPLIED CONTRACT ................................................................................................ 117 QUASI-CONTRACTS - WITHOUT CONTRACT ............................................................ 117 CONTRACT OF GUARANTEE AND INDEMNITY ......................................................... 120 CONTRACTS, WHICH NEED NOT BE PERFORMED ..................................................... 121 CONTRACT TO BE IN WRITING ................................................................................ 122 CONTRACT DOCUMENTS ......................................................................................... 122 TYPES OF CONTRACT .............................................................................................. 122 2.17.1 Lump Sum Contracts ...................................................................... 123 2.17.2 Measurement Contracts ................................................................. 125 2.17.3 Cost-plus Contracts ....................................................................... .126

CHAPTER 3 : CONTRACTS BY GOVERNMENT 3.0 INTRODUCTION ....................................................................................... 128 3.1 PROVISIONS OF THE LAW ........................................................................................ 128 3.2 PROVISION MADE IN THE INDIAN CONSTITUTION .................................................. 128 3.2.1 THE PROVISIONS OF ART. 299 ARE MANDATORY ................................... 129 3.3 FORMALITY OF CONTRACTS ON BEHALF OF THE GOVERNMENT............................... 130 3.3.1 Formal Written Contract ................................................................130 3.3.2 The Contract must be expressed to be made by the President or Governor ...........................................................................................131

3.4 3.5 3.6 3.7

3.8 3.9

3.3.3 Acceptance By Telegram ............................................................... 132 3.3.4 Deed must be Executed by Authorized Person .......................... 132 No IMPLIED CONTRACT UNDER ART. 299 ............................................................ 134 CONTRACT BY CORRESPONDENCE MAY BE VALID.................................................. 135 EXECUTION oF FORMAL CONTRACT: A CONDITION PRECEDENT .......................... 133 3.6.1 Provision in agreement contrary to directions by the Governor 138 EFFECT OE NON-COMPLIANCE; WITH REQUIREMENTS OF ART.299(1) ................. 139 3.7.1 Applicability Of Section 70 Of The Indian Contract Act.... 139 3.7.2 Section 70: When Not Applicable ................................................ 140 3.7.3 Absence of Alternative case not Fatal to the Suit ..................... 141 3.7.4 Agreed Rales may be Reasonable Compensation ...................... 141 3.7.5 Section 65: When Applicable ....................................................... 143 PERSONAL LIABILITY OF GOVERNMENT OFFICER EXECUTING THE CONTRACT .... 143 CONSTITUTIONAL RIGHTS AND OBLIGATIONS OF PARTIES .................................... 146

3.10 15 5

3.9.1 Doctrine of legitimate expectation .............................................. 148 3.9.2 Types of Cases under Art. 226 .....................................................152 3.9.3 Procedure to be followed for inviting and accepting ................153 ACCEPTANCE/REJECTION OF TENDER -INTERFERENCE BYCOURT -WHEN JUSTIFIED 3.10.1 3.10.2

3.11 17 3 3.12 3.13 3.14

Malice in fact and in law- meaning of ........................................ 161 A Person not submitting tender may have a locus standi to maintain a Writ Petition ............................................ ..... 162 3.10.3 Conditions of Eligibility ................................................................ 163 3.10.4 Modification of Eligibility conditions ......................................... 169 3.10.5 Experience of partners if can be considered as that of the firm? ....................................................................................... 170 Experience of Collaborator, if to be considered ........................ 172 3.10.6 ELIGIBILITY CONDITION BY REGISTRATION -CLASSIFICATION - RECLASSIFICATION ...

PRE-QUALIFICATION OF TENDERER ......................................................................... 174 MODIFICATION OF TENDER REQUIREMENTS PRIOR TO SUBMISSION OF BIDS ........... 177 OPENING OF TENDERS ......................................................................................... 178 3.14.1 Tender submitted after the time fixed ............................................. 179 3.15 FULFILLMENT OF REQUISITE CONDITIONS OF TENDER NOTICE ..................................180 3.15.1 Qualification certificate issued by authority not being a Government officer or authority - Care to be takenl81 3.15.2 Refer to Tender Schedule for terms & conditions ..................... 182 3.15.3 Payment of earnest Money/ Security Deposit ............................ 182 3.16 NEGOTIATIONS PRIOR TO ACCEPTANCE ....................................................................... 184 3.16.1 Circular issued by Central Vigilance Commission .................... 186 3.16.2 Rules of the CPWD Manual regarding Negotiations ................ 187 3.17 ACCEPTANCE / REJECTION OF TENDERS ...................................................................... 189 3.17.1 Conditional Tenders ........................................................................... 191 317.2 Accepting tender other than the lowest ........................................... 193 3.17.3 Arithmetic errors in tender - Can Court direct to permit their corrections? ................................................................ 193 Splitting of work between two tenderers .................................... 195 3.17.4 3.18

3.19 3.20 3.21 3.22

LOWEST TENDER REJECTED - WHEN ILLEGAL -ILLUSTRATIONS .......................... 195 3.18.1 Rejection of" the lowest tender -When not arbitrary ............... 197 3.18.2 Lowest Tenderer - Not Entitled To Hearing? .............................199 REJECTING ALL TENDERS .......................................................................................202 NOMINATION/PREFERENCE TO A CLASS OF TENDERERS ........................................202 BLACKLISTING OR DISQUALIFICATION OF TENDERERS .......................................... 207 3.21.1 Reasons for blacklisting need to be recorded .................................. 216 BREACH OF CONTRACT - WRIT PETITION NOT MAINTAINABLE ................................ 216

CHAPTER 4 : INTERPRECATION OF CONTRACT 4.0 INTRODUCTION ...................................................................................... 219 4.1 PROVISIONS OF THE LAW ....................................................................................... 219 4.2 WHAT IS INTERPRETATION? ................................................................................... 219 4.3 DISTINCTION BETWEEN INTERPRETATION AND CONSTRUCTION............................ 220 4.4 KINDS OF INTERPRETATION .................................................................................... 221 4.5 AUTHORITY WITH WHOM INTERPRETATION RESTS ............................................... 222 4.6 NATURE OF RULES OF 1 NTERPRETATION ............................................................... 222

4.7 4.8

4.9 4.10 4.11 4.12 4.13 4.14 4.14 4.15 4.16 4.17 4.18 4.19 4.20

4.21

RULES OF INTERPRETATION .................................................................................... 222 THE CHOICE BETWEEN 'STRICT CONSTRUCTION V. LIBERAL ....................................... CONSTRUCTION' AND 'LITERAL CONSTRUCTION V. LOGICAL ...................................... CONSTRUCTION ' ..................................................................................................... 229 4.8.1 Force majeure" Clause ................................................................... 233 4.8.2 Procedure For Reference Of Disputes To Arbitration .............. 233 4.8.3 Distinction between assignment and sub-contracting ............... 236 4.8.4 Fluctuation in the rate of dollar - If amounts to Escalation in cost tendered? ............................................................................. 238 DOCTRINES OF INTERPRETATIONS .............................................................................. 238 CONTRA PROFERENTUM RULE.................................................................................... 240 4.10.1 Clause 59 in M.D.S.S. or A.P.D.S standard form contract. ...241 UNFAIR AND UNREASONABLE CONTRACT OR INTERPRETATION OF ............................ EXEMPTION CLAUSES .............................................................................................248 WHAT IS AN UNCONSCIONABLE CONTRACT? ........................................................ 252 FUNDAMENTAL BREACH OF CONTRACT ................................................................. 253 FUNDAMENTAL BREACH OF CONTRACT ............................................... 253 THE DOCTRINE OF IMPLIED TERMS ........................................................................ 256 THE DOCTRINE OF "PRESUMED INTENT" ................................................................ 256 EJUSDEM GENERIS RULE ........................................................................................ 259 DOCTRINE OF ESTOPPEL ......................................................................................... 261 THE DOCTRINE OF PROMISSORY ESTOPPEL ............................................................ 262 THE DOCTRINE OF PUBLIC POLICY .......................................................................... 264 ORAL EVIDENCE RULE ............................................................................................ 267 4.20.1 • Oral Evidence When Admissible ................................................... 270 4.20.2 Interpretation Of Documents By Oral Evidence ........................ 271 CONFLICT OF LAWS / THE DOCTRINE OF PROPER LAW ............................................. 273 4.21.1 4.21.2 4.21.3

Express Choice By The Parlies .................................................... 273 Inferred Choice Of The Proper Law ............................................ 274 Neither Express Nor Inferred Choice Of Proper Law ............... 275

CHAPTER 5 : VARIATIONS AND DEVIATIONS 5.0 INTRODUCTION ....................................................................................... 276 5.1 PROVISIONS MADE IN STANDARD FORMS ............................................................... 276 5.2 EXTRA WORK AND ADDITIONAL WORK DISTINGUISHED ...................................... 277 5.3 PROVISIONS IN STANDARD FORM CONTRACT OF CENTRAL ........................................... AND STATE PUBLIC WORKS, RAILWAYS & OTHER DEPARTMENTS ........................ 278 5.4 RIGHT TO CHANGE IS LIMITED ................................................................................ 279 5.4.1 Limit on Variation in Quantities .................................................. 281 5.4.2 Clause 12 of theC.P.W.D. Form .................................................... 282 5.4.3 Work Executed By The Contractor After Submitting Rates, The Engineer Does Not Cancel The Order Under CI. 12 A-Effect? ................................................................... 293 FIDICFORM .................................................................................. 294 5.5 5.5.1 FIDIC 1999 Edition .................................................................................299 5.6 OMISSION IN SCOPE OF WORK .................................................................................... 301 5.6.1 Clause 12.4 of FIDIC .......................................................................301 5.6.2 Clause 13 of CP. W.D. From ..........................................................302 DECISION REGARDING RATE - WHEN NOT OPEN TO 5.7 ARBITRATION? ...................................................................................... 306

5.8

CHANGE ORDERS MUST BE WRITTEN ..................................................................... 306 5.8.1 Absence of Written Variation Order: Contractor When not Bound to Execute the Extra Work .............................. 307 5.8.2 Contractor need not execute the work unless and until the rates are finalized? .......................................................... 311 5.8.3 Interpretation of "During Actual Execution of the Work" ..315

5.9

RECOVERY IN THE ABSENCE OF WRITTEN ORDER - WHEN POSSIBLE? ................... 317

5.10

INSTRUCTION TO ASSIST CONTRACTORS IN DIFFICULTY........................................ 319

5.11

EXTRAS CAUSED BY MISREPRESENTATION ............................................................. 319

5.12

EXTRAS CAUSED BY LEGAL PROVISIONS ................................................................ 320

5.13

EXTRAS: WHEN CONTRACT BASED ON 'APPROXIMATE ESTIMATE' ........................ 320

5.14

EXTRA CLAIMS BEYOND THE SCOPE OF AGREEMENT............................................. 321 5.14.1 No estoppel on account of Payment already made ........................... 325 5.15 OWNER'S LIABILITY TO PAY FOR CHANGES MADE .................................................. 328 5.16 BASIS OF COMPENSATION FOR EXTRA WORK ....................................................... ..328 5.17 ABSENCE OF MEASUREMENT - RECORD MAINTAINED BY THE CONTRACTOR MAY BE RELIED UPON ....................................................................... 330 5.18 COMMON GROUNDS ON WHICH EXTRAS ARE CLAIMED ILLUSTRATIVE CASES .............................................................................................. 331 5.18.1 Extra Work in Foundation Excavation ......................................... 331 5.18.2 Changes in design, drawings and Specifications......................... 335 CHAPTER 6 : TIME FOR COMPLETION, DELAY IN COMPLETION 6.0 INTRODUCTION ........................................................................................................ 343 6.1 ■ PROVISIONS OF THE LAW ................................................................. .' .................. 344 6.1.1 Provisions of Standard Form Contracts ............................................ 344 6.2 MODE OF SPECIFYING TIME LIMIT ...........................................................................344 6.3 CAN ADEQUACY OF TIME LIMIT BE QUESTIONED? .................................................. 346 6.4 MEANING OF "WORKINGDAYS" ............................................................................... 346 6.5 MEANING OF "TIME SHALL BE DEEMED TO BE THE ESSENCE ........................................ THE CONTRACT" ............................................................................................... 347 6.6 WHEN IS TIME OF THE ESSENCE OF THE CONTRACT? ........... , ................................. 354 6.7 WHEN TIME CEASES TO B.E OF THE: ESSENCE OF THE CONTRACT .......................... 358 6.8 EXTENSION OF TIME FOR DELAY ............................................................................. 369 6.8.1 "Force Majeure" and "Vis Major" ............................................... 370 6.8.2 Bad Weather, Strikes, etc .............................................................. 373 6.9 WRITTEN REQUEST BY A CONTRACTOR - A CONDITION PRECEDENT ..................... 373 6.10 CONDITIONS UNDER WH:.CH TIME SHOULD BE EXTENDED .................................... 374 6.11 WHO SHOULD GRANT EXTENSION OF TIME? ........................................................... 374 6.12 CAN EXTENSION OF TIME BE GRANTED WITH RETROSPECTIVE EFFECT? ................ 374 6.13 CONDITIONAL EXTENSION OF TIME ......................................................................... 376 6.14 IF EXTENSION OF TIME NOT GRANTED, EVEN FOR JUST REASONS .......................... 378 6.15 EXTENSION OF TIME - EFFECT ON COMPENSATION FOR DELAY .............................. 378 6.16 Procedure of Terminating the contract after expiry of time limit ............... 382 6.17 WHEN NO TIME LIMIT IS SPECIFIED FOR PERFORMANCE OR SPECIFIED TIME INAPPLICABLE......................................................................... 384 6.17.1 When time limit is not specified - Oral Evidence whether admissible? ...................................................................... 385 TIME AND PLACE OF PERFORMANCE ...................................................................... 385 6.18

or-

CHAPTER 7 : PENALITY/LIQUIDATED DAMAGES 7.0 INTRODUCTION ...................................................................................... 387 7.1 PROVISIONS OF THE INDIAN CONTRACT ACT ........................................................ 387 7.1.1 Provisions in the Standard Form Contracts ...................................... 387 7.2 PURPOSE OF LIQUIDATED DAMAGES ..................................................................... 387 7.3 PENALTY AND LIQUIDATED DAMAGES DISTINGUISHED ........................................ 388 7.4 STIPULATIONS MADE IN CONSTRUCTION CONTRACTS .......................................... 392 7.5 WHY STIPULATE FIXED SUM ?................................................................................ 394 7.6 ALTERNATIVE METHOD SUGGESTED...................................................................... 395 7.7 CLAUSE RELATING TO LIQUIDATED DAMAGES - WHEN CAN IT BE EVOKED? ..396 7.8 EXTENSION OF TIME AND PENALTY FOR DELAY ................................................ ...397 7.9 LIQUIDATED DAMAGES PROVISION- A MERE RIGHT TO SUE ................................ 401 7.9.1 Vishwanath Sood v. Union of India, AIR 1989 SC 952 ....................... 402 7.10 RELEASE OF LIQUIDATED DAMAGES ...................................................................... 403 7.10.1 Effect of Payment without deduction .............................................. ..404 7.10.2 Owner's Obligations ............................................................................. 404 7.11 LIQUIDATED DAMAGES- EXCLUDES RIGHT TO UNLIQUIDATED DAMAGES .............. 405 7.12 EFFECT OF TERMINATION / FORFEITURE ................................................................... 405 7.13 BONUS PROVISIONS ...................................................................................... 406 CHAPTERS : QUALITY OF WORK, DEFECTS AND MAINTENANCE 8.0 8.1

8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9 8.10

INTRODUCTION ........................................................................................................ 407 CONDITIONS IN THE STANDARD FORM CONTRACTS ............................................... 407 8.1.1 MoS&PI, GOI Clauses: 33 to 36 ........................................................... 407 8.1.2 FIDIC Form 1999 Ed. Clauses:7.1 to7.8, 9 to 11 ............................... 408 CONTRACTOR'S IMPLIED OBLIGATIONS ...................................................................410 When Contract Is Silent ....................................................................................... 411 Nominated Supplier / Sub Contractor ................................................................ 412 Guarantee By Contractor ..................................................................................... 414 INTERPRETATION OF SPECIFICATIONS ..................................................................... 414 DESIGN FAILURE ...................................................................................................... 416 REMOVAL OF IMPROPER WORK ............................................................................... 417 DEFECTS AND MAINTENANCE CLAUSE .................................................................... 417 COST INCURRED IN PROVIDING REMEDIAL MEASURES........................................... 419 TAKING POSSESSION IS NO BAR TO CLAIM DAMAGES............................................. 420 8.9.1 Contractor may not be Liable for Patent Defects .......................... 420 ENGINEER'S /ARCHITECT'S DECISION FINAL ............................................................ 420 8.10.1 Engineer/ Architect, must act Judicially ..................................... 421 8.10.2 Court can Examine the Matter ....................................................... 421 8.10.3 Whether the Owner is Bound by Certificate, Approval ............ 422 8.10.4 Distinction between Engineer (Certifier) and Arbitrator ....426

9

CHAPTER : MEASUREMENT, VALUATION AND PAYMENT 9.0 INTRODUCTION ...................................................................................... 9.1 PROVISIONS OF THE INDIAN CONTRACT ACT .......................................................... 427 9.1.1 Provisions of the Law/Standard Form Contracts ...........................430 9.2 INTERIM PAYMENT CERTIFICATE (IPC) .................................................................. 427 9.3 WHERE A CONTRACT IS SILENT ON INTERIM PAYMENTS ......................................... 428 9.4 ROLE OF AN ENGINEER OR ARCHITECT IN GRANTING CERTIFICATES ..................... 428

9.4.1 9.4.2 9.4.3 9.4.4 9.4.5

9.5 9.6 9.7 9.8

9.9

9.10 9.11 9.12 9.13

Certificates must be given by the Engineer ................................. 429 Independent exercise of Judgment ................................................ 429 Certificate in respect of quality or quantity, or both....430 Rules of Natural Justice: if and when to be followed ................ 430 Decision on Claims 430 9.4.6 Engineer/Architect: When may become functus Officio ........... 432 ISSUE OF INTERIM CERTIFICATE - DOES NOT AMOUNT TO ACCEPTANCE.................. 432 CERTIFICATES AS CONDITION PRECEDENT TO PAYMENT ........................................ 433 WHEN CONTRACTOR CAN RECOVER PAYMENT IN THE ABSENCE OF CERTIFICATES ...................................................................................................... 433 FAILURE TO MAKE INTERIM PAYMENTS CONSTITUTES BREACH OF CONTRACT.... 434 9.8.1 Writ Petition if Maintainable to enforce obligation of State to pay? ................................................................................... 436 PAYMENT MADE UNDER MISTAKE ........................................................................ 441 Mistake Defined .................................................................................................. 442 English Law Not Applicable ............................................................................. 445 OVERPAYMENTS AND UNDERPAYMENTS ...............................................................445 Conditions under which a legal set-off may be allowed by a Court ...........448 FINAL CERTIFICATES ......................................................................................... 449 HOW FINAL ARE FLNAL CERTIFICATES .................................................................... 450 CLAIMS MADE AFTER PAYMENT OF FINAL BILL-IF AND WHEN MAINTAINABLE? ... 452 Accord And Satisfaction ....................................................................................

CHAPTER 10 : BREACH OF CONTRACT 10.0 INTRODUCTION ...................................................................................... 456 10.1 PROVISIONS OF THE LAW AND STANDARD FORM CONTRACTS ............................. 457 Provisions of the Standard form contracts ...................................................... 457 10.2 REFUSAL TO PERFORM CONTRACT .........................................................................459 10.2.1 Disability to Perform ..................................................................... 459 10.2.2 Doctrine Of Anticipatory Breach................................................. 459 10.3 BREACH BY THE CONTRACTOR ...............................................................................460 10.4 BREACH BY THE OWNER ......................................................................................... 463 10.4.1 When Owner Cancels a Contract Before Work Begins ..................463 10.5 DEFAULTS BY OWNER AND/OR CONTRACTOR ........................................................ 464 10.5.1 Reciprocal Promises ............................................................................. 464 Order, which the nature of the transaction requires ....................................... 469 10.6 EXCUSES FOR NON-PERFORMANCE ........................................................................ 467 10.6.1 Novation ........................................................................................... 468 10.6.2 Rescission......................................................................................... 469 10.6.3 Alteration ........................................................................................ 470 10.6.4 Non-Performance not Excused Because of Unexpected ................. Unexpected difficulties ..................................................................................... 470 DOCTRINE OF FRUSTRATION ............................................................................... ....472 10.7 10.7.1 Essential Conditions for Applicability of Section 56 .............. 473 10.7.2 Meaning of Impossible ................................................................. 474 10.8 EFFECT OF FRUSTRATION ........................................................................................ 477 10.8.1 Frustration and Terms of Contracts ............................................. 479 10.8.2 Death or illness of Party ................................................................ 480 10.8.3 Bankruptcy of contractor... ........................................................... 480

10.9

10.8.4 Bankruptcy of Owner ..................................................................... 480 CONSEQUENCES OF BREACH OF CONTRACT........................................................ 480 10.9.1 Waiver of Breach... ........................................................................ 480 10.9.2 Accord and Satisfaction ................................................................. 481 10.9.3 Termination of Contract Through Breach ................................. 484 10.9.4 Doctrine of Specific Performance not Applicable ................... 488 10.9.5 10.9.6 10.9.7 10.9.8

The Doctrine of Substantial Performance ................................... 489 Consequences of Common forms of breach and Remedies for breach of contract ..................................................................... 490 Effect on Arbitration Clause ......................................................... 490 Termination of Contract- Reference to arbitration .................... 491

CHAPTER 11: COMMON BREACHES OF CONTRACT 11.0 INTRODUCTION ....................................................................................... 492 11.1 PROVISIONS OF THE STANDARD FORM CONTRACTS ............................................... 492 11.2 BREACHES BY THE OWNER/EMPLOYER .................................................................. 492 11.3 BREACHES BY CONTRACTOR .................................................................................. 493 11.4 BREACHES BY EMPLOYER ....................................................................................... 493 11.4.1 Failure to hand over Possession of Site ............................................ 493 11.4.1.1 Obstructions By Third Person ....................................................... 496 11.4.1.2 Information About Site ................................................................... 497 11.4.1.3 Condition Of Site ............................................................................. 498 11.5 DELAY IN SUPPLYING WORKING DRAWINGS, DESIGNS, DECISIONS ...................... 500 11.5.1 Tender Drawings ........................................................................... ...500 11.5.2 Working Drawings........................................................................... 501 11.5.3 Record Drawings ............................................................................. 501 11.6 NORMAL PROVISIONS IN CONSTRUCTION CONTRACTS ........................................... 501 11.6.1 Delay in Ordering Variations ........................................................ 503 11.6.2 Earlier Completion, if planned by the Contractor ...................... 503 11.7 DELAY IN CARRYING OUT WORK OR SUPPLYING MATERIALS ................................ 503 11.8 DELAY BY OTHER AGENCIES ................................................................................... 505 11.9 STOPPAGE OR SUSPENSION OF WORK ...................................................................... 505 11.9.1 Provisions In Standard Form Contracts ............................................. 506 11.10 FAILURE TO PAY AS PER AGREEMENT...................................................................... 506 11.11 BREACH OF CONTRACT BY CONTRACTOR................................................................ 509 11.11.1 Abandonment or Total Failure to Perform .................................. 509 11.11.2 Delay in Completion ........................................................................510 11.11.3 Defective Design, Materials and / or Workmanship 511 11.11.4 Indemnities And Insurance .............................................................511 11.12 FORMS OF DISCHARGE BY BREACH .......................................................................... 514 11.12.1 Fundamental Breach ........................................................................514 11.12.2 Anticipatory Breach .................................................................... ....515 CHAPTER 12 : REMEDIES FOR BREACH OF CONTRACT 12.0 INTRODUCTION .........................................................................................................516 12.1 PROVISIONS OF THE LAW / CONTRACTS .................................................................. 516 12.1.1 PROVISIONS OF THE STANDARD FORM CONTRACTS ................................... 516 12.2 DAMAGES .................................................................................................................517 12.3 SECTION 73 ...............................................................................................................517 12.4 ESSENTIAL CONDITIONS...TO BE ENTITLED TO DAMAGES ....................................... 520

12.5 12.6

12.7 12.8 12.9 12.10

12.11

12.12 12.13 12.14

12.15 12.16 12.17 12.18 12.19 12.20

12.21

12.22

DISTINCTION BETWEEN'COMPENSATION' AND 'DAMAGES' ..................................... 521 KINDS (»•• DAMAGES ......................................................................................... 522 12.6.1 General or Ordinary Damages ..................................................... 522 12.6.2 Special Damages ............................................................................ 522 12.6.3 Nominal Damages ............ . .............................................................522 12.6.4 Exemplary or Vindictive Damages ..............................................522 GENERAL PRINCIPLES OF ASSESSMENT OF DAMAGES ............................................ 522 ASSESSMENT OF DAMAGES IN CONSTRUCTION CONTRACTS .................................. 523 12.8.1 Exclusion of Right to Damages by Express Provisions ................. 524 DELAY IN COMPLETION OR TERMINATION OF CONTRACTBY THEOWNER .............. 531 THE ASSESSMENT OF DAMAGES PAYABLE TO THE CONTRACTOR .......................... 532 12.10.1 Loss of Overheads and Profit ....................................................... 534 12.10.2 "The Hudson Formula" Critically Examined and Explained..535 12.10.3 Suggested Basis : "Patil Form" .................................................... 537 12.10.4 Eichleay Formula............................................................................ 539 12.10.5 Loss of Profit .................................................................................. 539 12.10.6 Loss due to Idle Labour/Machinery ............................................ 542 FACTS AND CIRCUMSTANCES JUSTIFYING PAYMENT AT THE ........................................ ORIGINALLY AGREED RATES DURING THE EXTENDED PERIOD ............................ 545 12.11.1 Escalation and delay in Completion ................................................ 546 CLAIM FOR REVISION OF RATES - WHEN TENABLE? ................................................ 550 12.12.1 The Quantum of Increase .................................................................. 558 ALTERNATIVE REMEDY TO DAMAGES - QUANTUM MERUIT ...................................558 BREACH OFCONTRACT BY THE CONTRACTOR ..........................................................559 12.14.1 Abandonment or Total Failure to Complete ............................... 559 12.14.2 Defective Work............................................................................... 559 12.14.3 Delay in Completion .......................................................................560 DAMAGES DIFFICULT TO ESTIMATE - NO GROUND TO AWARD NOMINAL DAMAGES ............................................................................................... 561 SPECIFIC PERFORMANCE/INJUNCTION TO RESTRAIN BREACH ................................. 561 LIEN/VESTING CLAUSES .......................................................................................... 561 FORFEITURE ...................................................................................... 565 APPLICABILITY OF SECTION 74 TO SECURITY DEPOSIT AND OTHER PENAL STIPULATION ............................................................................................... 565 PROVISIONS MADE IN CONSTRUCTION CONTRACTS FORFEITURE OF EARNEST MONEY/SECURITY DEPOSIT............................................................... 566 12.20.1 Distinction between Earnest Money and Security Deposit.567 12.20.2 To justify forfeiture the terms-of contract should be sufficiently explicit .............................................................................................. 571 12.20.3 Writ for refund of Earnest Money may be maintainable ........... 572 FORFEITURE OF SECURITY DEPOSIT— Loss MUST BE PROVED............................... 572 12.21.1 Forfeiture of Security Deposit in Addition to Recovery of Excess Cost - Illegal............................................... 574 12.21.2 Events Justifying Forfeiture .......................................................... 575 12.21.3 Waiver And Estoppel ..................................................................... 575 12.21.4 Forfeiture of any Money due to the Contractor ......................... 575 12.21.5 Right to Recover sum from Other Contracts .......................... ...575

WRONGFUL FORFEITURE ....................................................................................... 576 12.22.1 Silence for long time amounts to refusal to pay back security ....................................................................... 577 12.23 ENFORCEMENT OF BANK GUARANTEE.......................................................................577 12.23.1 Liability Under Bank Guarantee Whether Absolute .................. 578

12.23.2 12.23.3 12.23.4

Exceptions to the General Rule .................................................... 581 Suspension of Main Contract by Statute - Bank Guarantee Not Suspended? .......................................................................................584 Bank Guarantee not enforceable after its validity period ...585

CHAPTER 13:SUBCONTACTS 13.0 INTRODUCTION .........................................................................................................586 13.1 PROVISIONS OF THE STANDARD FORM CONTRACTS ................................................586 13.2 WRITTEN PERMISSION TO SUBLET OR ASSIGN WHEN NECESSARY ..........................586 13.2.1 Prior Approval when necessary - An Illustration ....................... 587 13.2.2 When Third Party can Sue on Contract ....................................... 588 13.3 AGREEMENT TO SUBCONTRACT .............................................................................. 590 13.4 PROVISIONS OF GENERAL CONTRACT HOW FAR APPLICABLE TO SUBCONTRACT .. 591 13.5 ITEMOFWORKNOTINSUB-CNTRACT .......................................................................... 592 13.6 RELATIONSHIP BETWEEN OWNER AND SUBCONTRACTOR ...................................... 593 13.6.1 No Privity of Contract .......................................................................... 594 13.7 NOMINATED SUBCONTRACTORS .............................................................................. 595 13.7.1 Provisional andP.C Sum items ...................................................... 595 13.7.2 Responsibility of Main Contractor for Nominated Subcontractor's Work ..................................................................... 596 13.7.3 Consequences of Repudiation by Subcontractor ........................ 597 13.7.4 Delay Caused by Nominated Subcontractor 597 13.7.5 Defective Work by Nominated Subcontractor .............................598 13.8 LIABILITY OF SUBCONTRACTOR UNDER INDEMNITY CLAUSE................................. 598 13.9 RIGHTS OF MATERIALS SUPPLIERS .......................................................................... 599 CHAPTER 14 : CONTRACT BETWEEN OWNER AND ARCHITECT / ENGINEER 14.0 INTRODUCTION ....................................................................................... 600 14.1 PROVISIONS OF THE INDIAN CONTRACT ACT........................................................... 601 14.1.1 Provisions of the Standard Form Contracts ....................................... 601 14.2 CONTRACT TO BE IN WRITING .................................................................................. 601 14.3 CONDITIONS OF APPOINTMENT ................................................................................ 602 14.4 THE SCOPE AND EXTENT OF ENGINEER'SAND ARCHITECT'S AUTHORITY ............... 603 14.4.1 Implied, or Ostensible Authority .............................................. ,606 14.4.2 Ratification by Owner / Employer ............................................ 607 14.4.3 Revocation of Authority ............................................................... 608 14.5 REMUNERATION OF THE ENGINEER AND ARCHITECT .............................................. 610

14.6

14.7 14.8

14.5.1 Implied Promise of Remuneration .............................................. 610 14.5.2 Measure of Amount of Remuneration .........................................610 WHEN REMUNERATION MAY NOT BE PAYABLE ....................................................... 6 1 1 14.6.1 Absence of Required license .........................................................611 14.6.2 When plans are not used ................................................................ 611 16.6.1 When construction cost is limited ................................................ 612 14.6.1 Competition Work .......................................................................... 612 14.6.2 Incomplete Services ....................................................................... 612 MANNER OF PAYMENT OF REMUNERATION ............................................................ 613 OWNERSHIP OF PLANS AND COPYRIGHT .................................................................. 613

Content*

: xxv

14.9

POSITION OF THE ENGINEER AND ARCHITECT......................................................... 613 14.9.1 The Engineer Architect as a Quasi Arbitrator ........................... 613 14.9.2 Decisions of the Engineer or Architect are final ............................. in the Absence of Fraud................................................................. 614 14.10 LIABILITIES OF ENGINEERS AND ARCHITECTS .........................................................614 .14.10.1 Degree of Care and skill required .................................................. 614 14.10.2 Duty in Respect of Design ............................................................. 615 14.10.3 Examination and Sub-soil Investigations .................................... 615 14.10.4 Cost of Construction-Excess over estimate ................................ 615 14.10.5 Delay in Supplying Plans............................................................... 616 14.10.6 Supervision ...................................................................................... 617 14.10.7 Negligence ........................................................................................ 617 14.10.8 Issue of Certificates ........................................................................ 617 14.10.9 Liability to third parties ................................................................. 620 14.10.10 Architect Liable for Structural Engineer's Fault ........................ 621 CHAPTER 15 : LIMITATION 15.0 INTRODUCTION ........................................................................................................623 15.1 PROVISIONS OF THE LAW.........................................................................................623 15.2 CAUSES OF ACTION IN BUILDING AND ENGINEERING CONTRACTS ........................623 15.3 RELEVANT PROVISIONS OF THE INDIAN LIMITATION ACT 1963 ............................ 624 15.4 DATE ON WHICH CAUSE OF ACTION ACCRUED - ILLUSTRATIONS ......................... 625 15.4.1 Recovery of cost of Materials to be used in works - ................ 626 15.4.2 Recovery of Cost of Work done ....................................................627 15.4.3 Deductions Made in R.A.Bills - Limitation ................................627 15.4.4 Recovery of Cost of Extra Work ...................................................628 15.4.5. Claim for Enhanced Rate .................................................................628 15.4.6 Final Bill - Limitation When begins? .......................................... '629 15.4.7 Suit for Compensation for breach of contract ............................ 630 15.4.8 Claim for Refund of Security Deposit ......................................... 631 15.4.9 Limitation For Demand For Arbitration ...................................... 632 15.4.10 Limitation for filing applications under Arbitration Act, 1996 ......................................................................................... 632 15.5 SECTION 28 OF THE INDIAN CONTRACT ACT .......................................................... 634 CHAPTER K> : CLAIMS, DISPUTES AND THEIR RESOLUTION BY DRE/DRB/CONCTIJATION AND/OR ARBITRATION 16.0 INTRODUCTION -"DISPUTES ARISING OUT OF CONTRACT" ...................................... 636 1 6.1 PROVISIONS MADE IN STANDARD FORM CONTRACTS ............................................. 636 16.2 FIDIC FORM 1999 EDITION: CLAUSE 20 ............................................................... 637 16.2.1 Clause 20.1 Contractor's Claims ................................................... 637 16.2.2 The stipulation as to time limit in Clause 20.1 - if valid? 638 16.2.3 Reference of Dispute to Engineer in the first instance ............. 639 16.2.4 Appointment of DRE/DRB/DAB .................................................. 640 16.2.5 Amicable Settlement ....................................................................... 641 16.3 CONCILIATION ...................................................................................... 642 16.3.1 Commencement of Conciliation ..................................................... 643 16.4 ARBITRATION .......................................................................................................... 645 16.4.1 Decision of Engineer to be final and binding on parties to the contract - If amounts to arbitration agreement? ............. 647 EXCEPTED MATTERS ..........................................................................................652 16.5

Content*

J 6.6 16.7

: xxv

No CLAIM CERTIFICATE GIVEN- CAN CLAIMS BE REFERRED ..................................658 EXTRA/ADDITIONAL WORK ORDERED WHETHER GOVERNED BY ARBITRATION CLAUSE IN ORIGINAL CONTRACT .............................................. 662 16.8 Two CONTRACTS-ONE AWARD-IF VALID? .............................................................663 16.9 ARBITRATION CLAUSE SURVIVES TERMINATION ................................................... 663 16.10 TRANSFER OF APPOINTED ARBITRATOR - CONTINUATION OF PROCEEDINGS - IF VALID? ................................................................................. 665 16.11 CONDITION PRECEDENT TO INVOCATION OF ARBITRATION .......................................... CLAUSE - MANDATORY 666 16.12 THE LAW OF ARBITRATION......................................................................................667 16.12.1 Arbitration Agreement ................................................................... 668 16.12.2 Date of Commencement of Arbitration Proceedings ................. 668 16.12.3 Appointment of Arbitrator ............................................................. 668 16.12.4 Challenge to Arbitrators ................................................................ 669 16.12.5 Jurisdiction of Arbitral Tribunal .................................................. 669 16.12.6 Interim Measures ordered by Arbitral Tribunal ......................... 669 16.12.7 Conduct of Arbitration Proceedings ............................................ 669 16.12.8 Making and Publication of Arbitral Award ................................ 669 16.12.9 Recourse against Arbitral award and its Enforcement .............. 670 16.12.10 Miscellaneous Provisions .............................................................. 671 16.12.11 Part II of the Act ............................................................................. 671 16.12.12 Part III of the Act ............................................................................ 671 16.12.13 Part IV of the Act .......................................................................... ..671 ■ 16.12.14 Part III of the Act ............................................................................ 671

Table of Cases

A.C. Roy v. Union of India. 149

v. Casson Beckman Rutley 428 Aristocraft International

A.K.Constructions v. State of Jharkhand 198

Pvt. Ltd. v. Union of

A. K. N. Vidyadharan v. State 127 A.Murali and Co., v. State Trading Corporation of

India 191 Aroma Enterprise v. Murshidabad Zilla

India Ltd. 568 A. P. v. P. V. Subba Naidu 242

Parishad 202 Arosan Enterprises Ltd.. v. Union of India,

A.P. State Elect. Board v. Patel & Patel 384

366

A.T. Brij Paul Singh & Bros. v. State of Gujarat 539, 542

Arphi Electonics Pvt. Ltd v. Union of India; 25 Arrow

ARC Ltd. v. Waltham Holy Cross V.D.C. 376

Steel Metal Works v. Bryant &

ABL International Ltd. v. Export Credit Guarantee Corpn. of India Ltd. 160 Abdul Aziz Sheikh v. State of J. & K.130

Detwiler, 592 Arun Kumar v. Chief Engineer P.W.D. 165 Arun Prakash v. Tilsi Charan 348, 355 Arvind Coal & Construction Co. v. Damodar

Abdul Gani & Co. v. Trustees of the Port of Bombay 565

Valley Corpn. 463 Arwish Marak v. State of

Abdulla Ahmed v. Animendra Kissen 227. 228. 232

Meghalaya 193 Ashwell and Nesbit Ltd. v. Allen & Co. 328

Abercrombe and Williams v. Vandiver 310 Acrow

Asif Enterprises v. O.N.G.C. Ltd., 212 Asia Foundations

(Antomation) Ltd v. Rex Chainbelt. Inc 273

and Cnstructions Ltd. v.

Adhir Ghosh v. State of West Bengal 161.197 Aditya Mass Communicated Pvt. Ltd. v. A.P.S.R.T.C.. Hyderabad 49. 569. 572 Adilaxmi

State 176 Asian Techs Ltd. v. State of Kerala 191 Asif Enterprises v. O.N.G.C. Ltd. 212 Asst. Collector of Central Excise, West

Constructions v. C E (R&B), Buildings, Hyderabad 167 Ahmed Khan v. Jahan

Bengal v. Dunlop India Ltd. 155 Association of UPS&PCSM v. Society of AMIE

Begum 477 Air India Ltd. v. Cochin International Airport Ltd. 169, 198 Airogo Travel & Cargo Pvt.

& R (Sameer) 27 Associated Engineering Co.v. Govt, of Antlhra

Ltd. v. Union of India, 197 Alexander v. Hammarberg. 619 Ali v. Union od India 179 Alkaram, Petitioner Delhi

Pradesh, 321, 323, 526, 557. Austin-Griffith Inc. v. Goldberg et al. 373 Avula Constructions Pvt. Ltd v. Sr. Divn.

Development Authority 551 All India Radio v. Unibros & Anr. 536

Electrical Engineer, T.D, 171 Ayissabi v. Gopala Konar, 488

Allied Resins & Chemicals Ltd. v Mineral & Metal Trading Corpn. of India Ltd. 581 Alok Enterprises v. Rajasthan Financial Corporation 12 Alopi Parshad v. Union of India 470 Alpha Engineer v. State of Rajasthan 29 Amarchand Shanna v. Union of India 211 Aniar Singji v. State of Raj.

B B.D. A. v. Ajai Pal Singh, 572 B.D.Yadav & N.R.Meshram v. Administrator of City Nagpur 183 B. G. Ahuja V. State of

259

Maharashtra 174 B.K.Mondal and Sons v. State of

Anand Construction Works v. State of Bihar

W.Bengal,! 19,

377, 389, ,397 Anadi Mukta Sadguru Shree Muktajee

130

Vandasji Swami Suvarna Jayanti

B.O.I. Finance Ltd. v. The Custodian, 111 B. Shukla v.

Mahotsav Smarak Trust v. V. R. Rudani

Chairman, S.A.D.A Singrauli Distt. Sindhi 192

437

Babu Ram Gupta v. Mahanagar Telephone

Anal Roy Choudhary v. State of Tripura 167 Anas Abdul

Nigam Ltd. 204 Bacha F. Guzdar v. Commissioner of

Khader v. Abdul Nasar 633 Anns v. London Borough of

I.T. 170 Bache & Co. v. Banque Vernes. 581 Badri Prasad

Merton 626 Ansal Properties& Investments Ltd.v.

v. State of M. P., 11 Balaji Coal Linkers, U.P. v. Bharat

H.P.S.B. 322 Antex Printers v. Ram Manohar Lohia Avadh University; 184 APNPD Shilpa Engineering Contractors And Suppliers v. APNPDCL 177 Appeal of Federal Const

Sanchar Nigam Ltd.. 582 . 194 Baldev Steel Ltd. v. Empire Dyeing and Manufacturing Co. Ltd. 568 Balkshandeh v. American Cynamid Co. 226 Banerjee & Banerjee 583

Co. A.S.B.C.A. 420 Apple by v. Myres (1867). L. r. 2 CP.

Bank of Rajasthan Ltd. v, Sh Palaram Gupta 103 Bar

613 Appukutm Panickcr v. Anantha Chettiar 468 Arenson

Council of India v. M. V. Dhabolkar &

Others 229 Bareilly Development Authority v. Vrinda Gujarati, 62 Baroda Oil Cakes Traders v. Purushottam Narayandas Baghulia 43 Bascal Construction (Midlands) Ltd. v.

Co. 294,298,303, 311, 337 Boomer v. Abbet 280 Boothalinga Agencies v. V. T. C. Poriaswami Nadar 473 Bostel Brothers Ltd v. Hurlock 473 Bottoms v. Lord Mayor of York 499, Botton v. Mahadeva 489, Bramall & Ogden Ltd. v. Sheffield City Council 400

Northhampton Development Corporation

Bristol Corp. -v. John/Arid & Co. 421

500

British lilcctrical Associated Industries Ltd.. v. Palley

Bashishtha Narain Pandey v. Commissioner, Basti Divn. 165, 198 BDA Limited v. State of Uttar

Pressings 371 British South Africa Co. v. De Beers Consolidated

Pradesh 83 Bellgrove v. Eldridge 559 Bellizi v. Huntley Estates 560 Bengal Trading Syndicate, v. Union of India

Mines Ltd 275 British Steel Corporation v. Cleveland Bridge &

529, 543 Bengal Traders v. West Bengal State Electricity Board 529

Engineering Co, Ltd. 57 Brunswick Construction Ltd v. Nowlan, Supreme Court of

Berlingshot v. Lincoln County 613 Bhagwan Singh v. Teja Singh 355, 364 Bhagat Sing Negi v. H.P. Housing Board

Canada 411 BSBK (P). Ltd.v.Delhi State Industrial Development

152 Bhagwandas v. Giridharilal & Co. 55,70 Bhagwant v.

Corporation Ltd. 208

Gangabishan, 265

Business Link v. A.S. Advertising Co. and Ors. 26

Bhanwarlas v. Babulal, 571

By waters v. Camick 406

Bharat Bhushan Bansal v. U. P. Small Industries Corporation Ltd., Kanpur 650 Bharat Consruction Co. v.State of Rajasthan. 154, 175 Bharati Shipyard Pvt. Ltd. v. Paradecep Port Trust 164 Bharat Coking coal Ltd., .v. Annapurna Cosntruction 454, 659 Bhartiy Construction Co.v. D.D.A. 655 Bhawani Shankar v. State 630 Bhikraj Jaipuria v. Union of India 129, 130, 136 Bhim sain v. Union of India 213 Bhoruka Power Corpn. Ltd. v. State of Haryana 204 Bhowandas Sadhwani v. State Government of M.P.& Ors., 539 Bhupendra Engg. & Const. Pvt. .Ltd. v. State ofJharkhand 178 Bhurg & Sons v. Hindustan Paper Corpn. Ltd. 213 Bibhu Bhushan Choudhary v. Unoin of India 184 Bigla Kachhap v. State ofJharkhand 31 Bihar State Mineral Development Corporation and Anr. vs. Encon Builders (1) (P) Ltd, 649 Bijon Kumar das v. State of Assam 154 Bijulibari Multipurpose Development Society v. State of Assam 161, 181, 194 Billyack v. Leyland 606 Bikash Bora v. state of Assam 180 Birendra Prasad Singh v. State of West Bengal 172 Bishal Enterprises v. State of Orissa 199 Bishambhar Nath Agrawal v. Kishan Chand 465 Bishop & Baxter Ltd. v. Anglo-Eastern Trading and Industrial Co. Ltd. 370 Bismi Abdullah & Sons v. Regional Manager, F.C.I., Traivandrum 66 Board of Trustees of the Cochin Port Trust v. Ashok Leyland Ltd 443 Bodh Raj Daulat Ram v. Food Corpn. of India 663 Bolivinter Oil SA v. Chase Manhattan Bank 578 Bombay Housing Boad v. Karbhase, Naik &

c C. Bryant & Sons Ltd. v. Birmingham Hospital Saturday Fund 499 C. J. Was warn v. State of W.B. 222 C. K. Achutam v. State of Kerela 200, 216, 217 C. M. Phillings & Co. Ltd. v. Kents Investment Ltd Court, of Appeal 508 C. R. Reddy v. Superintending Engineer, Nizamabad 588 C. Srmivasa Rao v. P. Ramankutty 543 C. T.Xavier and others, Appellants v. P. V. Joseph and another 477, 532, 535 Cable (1956) Ltd. v. Hutcherson Brothers 416 Calcutta Corporation v..Hindustan Construction Co. Ltd. 442 Carr v. J.A.Berriman 305, 329 Cambatta Aviation Ltd. v. Cochin International Airport Ltd. 198 Ceean International Private Limited v. Ashok Surana 355 Centax (India) Ltd. v. Vinmar Impex Ltd. 581 Central Bank of India v. M/s Grains and Gunny agencies 260 Central Bank of India v.V.G.Naidu & Sons 483 Central Bank of India v.Tarseema Compress Mfg. Co. 101 Central Group v. C.M.D 262 Central Inland Water Transport Corp Ltd v. Brojo Nath 249, 264, 266, 436 Centre of Indian Trade Unions v. Union of India 22 Ceurim Stone co. v. RJ. Carlin Construction Co. 434 Ch. Ramalinga Reddy v. Supdt. Engineer, 351, 352 Chabbel Dass & Co. v. State of U. P. 648 Chambers v. Gold Thorpe, Restell v. Nye 450 Chairman, Visakhapatnam Port Trust v. Gurucharan Singh 634 Chand Rani v. Kamal Rani. 354, 356 Chandradhan v. State of Bihar 133 Channeller Bros Ltd. V. Boswel 592 Chapel v. Clark, 602 Chalurbhuj Vithaldas v. Morcshwar Parshram 19, 135, 144 Chief Engineer, Panchayat Raj Department v. B.Balaiah 350 Chinnamman & Co. Kadamparai v. T.N.E.Board

Madras 158 Chiranji v. Union of India 132 Chiranjit

v. Sudhir Brothers 653 D.D. Sharma v.'Union of India 494,

Singh v. Harswarup 567 Chhotey Lai v. Union of India 65

531 D.F.O. South Kheri v. Ram Sanehi Singh 196 D.

Chowdhri Murtaza Hossin v. Mussumat Bibi

Govindram v. M/s Shamji K. & Co. 370 D.S.A. Engineers

Bachunnissa 666 Chunilal V. Mehta & Sons Ltd. v.

v. Housing and Urban Dev.

C.S. and M.Co. Ltd 407 City of Westmin ster v. J. Jarvis &

Corporation 307, 526. 546 D.W. Roberts v. Shaikh Hydcr 367 D.Wren International Ltd. v. Engineers India

Sons Ltd and Peter Lind Ltd., House of Lords,597 Clinchfield

Ltd. 70, 149 Daewoo Motors India Ltd., Appellant v. Union

Stone Co. v. Stone 471 Clough v. Gardiner, 267 Coast Lines Ltd. Hudig and Veder Charterung

of India and others, 581 Damodar Vally Corporation, v. K.K. Kar 452,

274, 275 Coath and Goss Inc. v. Unites States 616 Cochin Refineries

484, 490 514. 664 Dandakaranya Project v. P.C. Corporation

Ltd. v. C. S. Company,

222,306,421,614 Dandapani Roula v. State 207 Danya

Engineering Contractors, Kottayam

Electric Company v. State 204 Darlington Bourough

452, 490

Council v. Wiltshier

Codelfa Construction Propriatary Ltd. v. Steel Rail Authority of New South Wales. 479 Colapatri v.

Northrn Ltd. 590 Darnley v. London, Chatham and Dover Rly.

Colapatri 265 Collector of Central Excise,W.B. v. Dunlop India Ltd. 159 Compagnie d' Annenment Maritime S. A. v. Compagnie Tunisienne de Navigation S. A.274 Commell Laird & Co. Ltd. v. Manganese Bronze & Brass Co. Ltd. 429 Commissioner for main Roads Y. Reed & Stuart Pyt. Ltd. High Court of Australia 305 Concrete Constructions Co. Ltd v. Keidon & Co. Ltd 594 Continental and Eastern Agencies, Plaintiff v. M/s. Coal India Limited and others, 589 Continental Construction Company v. State of Madhya Pradesh 246, 557 Continental Construction Company v. Tehri Hydro D.C. Ltd. 154 Continental Construction Ltd. v. Food Corpn.of India 635 Continental Copper and Steel Industries v. Bloom 127 Continental Pumps and Motors Ltd. v. State, of Bihar 164, 173 Cook v. Saltzer 117 Cooke v. Rowe 560 Cooper v. Uttoxler Burial Board 450 Council & Wigley Foz Partnership 463 ('ouiily Council , K. IJ. Division 400 ('mill of Appeal 4 1 2 C'oulney & l-'airbairn Ltd. v. V. Tolani Bros. (Hotels) Ltd. 104 Craine v. Colonial Mutual Fue Insurance Co. Ltd 481 Cranleigh Precision engineering Ltd v. Brugant 65 Crushaw v. Prilchard and Ken wick 34 CiinlilTie v. Hampton Wick L.L. 418 Curtis Mfg. & Asbestos Co. v. W. B. Bates Construction Co. Inc. 599

D D.C. Bhura and Sons v. Hindustan Paper

Co. . 484 Davis Contractors LTd. v. Fareham 37, 472 Davis v. Sweet 65 Dawber Williamson Roofing Ltd. v. Humbeiside County Council 565 Debendranath Balabantaray v. Commr.-cum-Secretary Govt, of Orissa 160, 161, 196 De Laureal and Moses v. Pensacola Hotel Co 611 Delhi Development Authority, v. Grihsthapana Cooperative Group Housing Society

Authority v. M/s Alkaram 561 Delhi Development Authority v. Polo Singh & Co. 535 Delhi Development Authority v. IJ. Kashyap 528 Dclvin v. Mayor of the City of New York 464 Dcvender Singh v. State 523 Dewan and Co. v. Municipal Corporation of Delhi 28 Dh'ar Cement Ltd v. State of M. P. 27 Dhanpal Prasad v. State of Bihar 165 Dhapai v. Dalla 631 Dhurandar Prasad Singh v. Jai Prakash University 109 Dipak Kumar Sarkar v.. State of W.B. 202 Dip Gogoi v. Numoligarh Refinery Ltd. 190 Directorate ol'Edu. v. Educomp Dalamalics Ltd. 169 Disl. Magistrate v. G. J. Jothisankar 70 Dodd v. Churlon 379 Doshi Ion Exchange & Chemical Inds. Ltd. v. Union of India 31, 154 Doughtly v. Irdale. 127 Dredge & Dive v. State of Jharkhand 160 168 Dunlop & Ranken Ltd. v. Hendall Steel Structures Ltd 433 Dutta Associates Pvt. Ltd. v. lndo Merchantiles Pvt. Ltd. 153 Dutta Seethamahalakshmamma v. Yanamadala Balaramaiah, 356 Dwarikesh Sugar Industries"Ltd., Appellant v. Prem Heavy Engineering Works (P) Ltd., and another 578 Dwarka Das v. State of M. P. 548 Dwarkadas Marfatia and sons v. Bombay Port

Corpn.Ltd. 213 D.C.Elite Engg. Co.v. Bihar sale Elect. Board 213 DD Authority v. M/s. UEE Electricals Engg (?) Ltd. 210 DD. A. v. Foundengers P. Ltd. 655 D.D.A. v. Hindustan Construction Corporation 529 D.D.A.

48, 571 Delhi Development

Authority v. K.C.Goyal & Co. 528 Delhi Development

Trust 436

E E. Bhagwan Das and others, v. Dilip Kumar

and another 568 E. E. & C. Ltd. v. State of W.B 208 E. Venkatkrishna v. Indian Oil Corporation Ltd

and Chemicals, Travancore Ltd. 471 Elite Engineering Co. v. Bihar State

Bombay 216 Eacom's Controls (India) Ltd., Petitioner v. Bailey Controls Co. 477 Eaglesham v. Mc Master 169 Neale

Electricity Board 213 Electronic Industries v. David Jones 385 Elur v. Matsar 580 EMCO Ltd. v. Grid Crpn. of Orissa Ltd. 178 English

v. Richardson, 428 East Ham. B. C. v. Sunley 417 East

Industrial Estates Corporation v. George Wimpay & Co.

Ham Borough Council v. Bernard Sunley l-s

win)|]|

StlC'll n

not render a con trad voidable.

Illustrations ( a l A i n t e n d i n g t o d e c e i v e I ) , f a l s e l y r ep r e se n t s t ha t fi ve h u nd r ed ma u nd s o fi nd i go a r e m a d e ann ua ll y a l A ' s fac to r y, a nd t her eb y ind u ce s B to b u y t he f acto r y. T h e

co n tr a ct i s vo id ab le a l the o p tio n o f B . ( b j A , b y < t mi sr ep r es e nt at io n, lead s B er r o ne o u sl y to b e li e ve t hai 5 0 0 ma u nd s o f ind i go ar e ma d e a n n ua l l y a t A's fa cto r y. B e x a mi ne s t h e acco u n ts o f the Fac to r y, wh ic h s ho w t ha t o n l y 4 0 0 ma u nd s o f i nd i go ha ve b e e n mad e . Aft er t h i s B b u ys t h e fa cto r y. T he co ntr act i s no t vo id ab le o n ac co u nt o f A's mi s r ep r e se n ta tio n . ( c) A fr a ud ule n tl y i n fo r ms B tha t A's e st ate i s fr e e fr o m e n c u mb r a nc e. B t h er e up o n b u ys t he e sta te. T he e s ta te i s s ub j ect to a mo r t g a ge. B ma y ei t her a vo id i he co n tr ac t, o r ma y i n s is t o n it s b ei n g c ar r i ed o ut a nd t he mo r t ga ge -d eb t r ed ee med . ( d ) B , ha vi n g d i s co ver ed a ve i n o f o r e o n t he e st at e o f A, ad o p t s mea n s to c o nc eal , and d o e s co n cea l, t he ex i ste n ce o f t h e o r e fr o m A. T hr o u g h A's i g no r a n ce B i s en ab led to b u y t he e st at e a t a n u nd er - v al u e. T h e co ntr ac t i s vo id ab le a t t he o p t io n o f A. ( e) A is e n ti tl ed to s uc cee d to an e sta te a t t he d eat h o f B ; B d ies ; C , ha v i n g r ece i ved i n tel li g e nce o f B 's d ea t h, p r e ve n ts t h e in te ll i ge nc e r eac h i n g A, a nd t h u s ind u ce s A to s el l hi m h i s i n ter e s t i n t he e st ate . T he s ale i s vo id ab le a t t he o p tio n o f A/ ' T he r i g h t to r e s ci nd t he co ntr act fo r fr a ud , mi s r ep r e se nt at io n or co er c i o n i s lo s t, i f th e p er so n ha v i n g t h e r ig h t to r e sci nd a f fir ms th e co n tr ac t. U n ti l t h e co n tr a ct i s avo id ed , il i s va lid . 4 5 T he e xp la na tio n e nac t s th at a fr a ud o r mi sr ep r e se n tat io n d o e s no t r e nd er a co n tr a ct vo i d ab l e, i f i t d o e s no t ca us e t he co n se n t to a co n tr a ct o f t he p ar t y o n who m s uc h mi s r ep r e se n ta tio n wa s mad e. O ne c a n no t co m p lai n o f ha v i n g b ee n mi s led b y a r ep r e se nt at io n, wh ic h d i d no t l ead h i m a t a ll. Ex cep t io n la ys down t ha t the co n tr ac t is not voidable, if the party whose consent wa s caused b y misrepresentation or b y silence (fraudulent within the meaning of sec tio n 17), had the means of discovering the truth with ordinary diligence. The exception does not apply to cases wherein there is a positive case of an active fraudulent

misrepresentation, which formed the basis for the contract between the parties. 46 respect of building or-engineering contracts, as already observed the misrepresentation, either fraudulent or innocent is likely to be discovered after some progress is achieved in execution the work. Besides, (the effect may be on execution

In

45 46

Dhurandar Prasad Singh v. Jai Prakash University, AIR 2001 SC 2552 AIR, 1973, Guj 34.

of one or the other item w h i c h m a y n u l j u s t i f y t h e c o n t r a c t o r t o c l a i m r c ; a i . - . > i < T ■. ■■; { \ w

c-:r>irari a . a whwU-In such a case, it is submitted thai S

19 enables a

contractor u> carry out the work and claim damages. Care may have to he taken to l ' i v l - n o t i c e o f t h e i n t e n t i o n u > c l a i m d a m a g e s s o o n a f t e r t h e m i s r e p r e s e n t a t i o n 01

Iraud i> discovered so that it cannot he said that the right is waived and the contract affirmed.

I LLU ST R AT I O N T wo ye ar s a f ter t he co nt r ac to r s co mp le ted t he co ntr act fo r a b r a n c h r ail wa y, t he y cla i med r e sci s s io n o f t h e co n tr ac t o n t he gr o u nd o f i n no ce n t mi sr ep r e se nt at io n ma d e b y t h e e n gi ne er o f t he R ail wa y Co mp a n y a s to t h e na t ur e o f str ata t hr o u g h wh i c h t h e r ail wa y a li g n me n t p a s s ed . I t wa s he ld t ha t t he co n tr a cto r s b y co m p let i n g t he co n tr a ct wi t h f ul l k no wl ed g e o f t h e f ac ts h ad r end er ed r e st it u tio in i nte gr u m i mp o s s ib le . T he cl ai m o f t he co ntr a cto r fai led . 4 7

The effect on validity of an agreement induced by undue influence is dealt with in S. 19 (A) of the Act. That Section provides: SECTION 19(A) Power to set aside contract induced by undue influence -"When consent to an agreement is caused by undue influence, the agreement is a contract voidable at the option of the party whose consent was so caused. Any such contract may be set aside either absolutely or, if the party who was entitled to avoid it has received any benefit there under, upon such terms and conditions as to the Court may seem just. Illustrations (a) A's son has forged B's name to a promissory note. B, under threat of prosecuting A's son, obtains a bond from A, for the amount of the forged note. If B sues on this bond, the Court may set the bond aside. (b) A, money-lender, advances Rs. 100 to B, an agriculturist, and, by undue influence, induces B to execute a bond for Rs. 200 with interest at 6 per cent per month. The Court may set the bond aside, ordering B to repay the Rs. 100 with such interest as may seem just." An agreement may be a valid contract when it was made but may become legally nonenforceable subsequently due to change in governing circumstances. In such a case the contract attracts the provision of Section 2, clause (j) that reads: Section 2 Clause (j) 'Void Contract' 'A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable.' An example of such contract is a contract with an alien friend, which was valid when it was made, but ceases to be enforceable by law when the alien friend becomes alien enemy.48 47 48

Glasgow and South Western Rly v. Boyd (1915) AC 526. Mahanth Singh v. U. Ba Yi, AIR 1939 PC 110.

^'••"ic bank entered j ill t • t"))l )';:■.; i.-' wilii different l>s

.>1; CI ' N i ; a t h e

purchase and sale -.>i certain securities, which were mil listed in any stuck e x c h a n g e , c a l l e d r e a d y f o r w a r d o r b u y-b a c k t r a n s a c t i o n s . S u c h t r a n s a c t i o n s h a v e ( w o i n t e r c o n n e c t e d l e g s , na me l y d i e l i i s t a n d r e a d y l e g c o n s i s t i n g o f p u r c h a s e o r s a l e o f s e c u r i t i e s d ul y c o mp let ed h y p a y me n t o f t r a n s f e r o f s e c u r i t i e s a n d t h e s e c o n d l e g c o n s i s t i n g o f s a l e o r p ur c ha se a t a l a t e r d a t e a t a p r i c e d e t e r m i n e d a t t h e f i r s t d a t e . B efo r e t h e fo r war d l e g tr a ns ac tio n s c o u l d b e co mp l ete d , A S p e c i a l

Co ur t Or d i na nc e wa s i s s ued o n 6 .6 .1 9 9 2 a nd s ub seq ue n tl y r ep l aced b y th e Ac t b an n i n g t h e seco nd l e g tr an s act io n s. U nd er t he s aid Act, ap p l ic at io ns we r e fi led

b efo r e t h e Sp ec ia l Co ur t fo r d ec lar a tio n t ha t t he ab o v e said co ntr ac ts b e d ecla r ed vo i d . T he b a n k s co n te nd ed t ha t t h e t r a n sac tio n s we r e no t il le ga l a nd no t p r o h ib i ted b y t he B a n k i n g Re g u la ti o n Ac l o r t h e Sec ur it ie s Co nt r ac t Re g u lat io n Act . T he Sp ec ia l Co ur t h eld t he c o nt r ac ts to b e vo id . I n a n a p p ea l b e fo r e t h e S up r e me Co ur t , it wa s co n te nd ed t ha t t h e co ntr ac ts wer e co mp o s ite a nd u n se ver ab l e; t he ill e ga li t y att ac hed to t he fo r war d ele me n t r e nd er ed t he co nt r ac t wh o ll y v o id . T h e S up r e me Co ur t ne ga ti v ated t he ab o ve co nt e nt io n a nd h eld th at S. 5 7 o f t h e Co ntr ac t Act wo u ld b e at tr a ct ed a nd t he f ir st s et o f p r o mi se s wo u ld co ns ti t ut e a b i nd i n g co ntr a ct b ut t he s eco nd le g wo ul d b e vo id . E ve n i f it b e he ld t h at t he a gr e e me nt we r e no t se ve r ab l e, t h e r e ad y l e g ha v i n g b e e n p er fo r med , th e i ll e ga li t y o f t h e a gr e e me nt s ca n no t a f fec t t he tr a n s fe r s wh ic h had a lr e ad y t a k en p la ce. 4 9

Material Alterations in the Agreement renders it void Mat er ia l a lter at io n s i n an a g r ee me n t s ub s eq ue n t to its e x ec u tio n r e nd e r it vo id . A ma ter ia l al ter at io n i s o n e, wh i c h var ie s t h e r i g h l s, l iab il it ie s or t he le ga l position of th e p ar t ie s as a sc er t ai n ed b y t he d eed i n it s o r i gi na l s tat e, or otherwise varies t h e le ga l e f f ec ts o f t he i n str u me nt s o r i gi n al l y e x p r es sed r ed uc ed to ce r tai n t y so me p r o v is io n wh i c h wa s o r i gi na ll y u n a sc er ta i ne d a nd as s u c h vo id o r otherwise p r ej ud i ce t he p ar t y b o u nd b y t he d eed as o r i g i n all y e xe c uted . An al ter a tio n ma d e in a Deed , a ft er i t s e xec u ti o n in so me p ar tic u lar , whi c h is no t ma ter i al, d o e s no t in a n y wa y a f fe ct t h e v al id i t y of the d eed . 5 0 Ne it her p ar t y to a vo id co ntr ac t c an c la i m a n y r eli e f i n a Co u r t o f la w. 5 1

2.8.1 Difference between Contract void and illegal The distinction between void and jllegal contracts may be very thin but it is there. Under Section 23, contracts opposed to public policy and immoral are void. A void contract is one that has no legal effect. Illegality of a contract arises as a result of infraction, contravention or breach of any express or implied provisions of law 49 B.O.I. Finance Ltd. v. The Custodian, AIR 1997 SC 1952. 50 Halsbury's Law of England Vol. II 3rd edition at pp. 368 and 370-371; Kalianna Gounder v. Palani Gounder, AIR 1970 SC 1942; Sardar v. Ram Khilauna, AIR 1997 A11.268. 5 lKhaja Moinuddin Khan v. S.P. Ranga Rao, AIR 2000 A.P. 344; R.G. Jogdand v. K.J. Naikwade, AIR 2002 Bom. 149 ; Parakkate Shankaran Keshavan v. T.A. Sukumaran, AIR 1998 SC 1400.

Ill

lUuUinv,: /■

] m i ] ier l y s o c a l l e d I h a l it i s a c o n - ; i

11uInanaiI y

mill

\ ■ a 1 id e n a c t i n c u t n ,

ale iinni -

ia ; o r h y s ub o r d i na te l e g is la tio n i .e. r u l e s , h y c l a w s . r e g u l a t i o n s 0 1 n ; a g t . - - . a n - ! c;.i s ' : u havi n g t he fo r c e o f la w. An i ll e gal co n tr a ct t ho u g h r e se mb li n g t h e v o i d c o n i r u c t i n th at i t also ha s no le ga l e f f ect a s b e t we e n t he i m med ia te p a r t ie s ha s t hi s f ur t her ef f ec t t h at e v e n tr a ns ac tio n s co lla ter al to i t b e co me t ai n ted wi t h i lle g ali t y a n d ar e. th er e fo r e, i n c er t ai n c ir cu ms t a nc es no t e n fo r c e ab le. A co l la ter a l co ntr act to a v o i d co n tr a ct, o n t he o t he r h and , ma y b e e n fo r ceab l e. Fo r e xa mp le, r e fe r t o ill u str at io n u nd er S .2 ( j ) and Fo o t N o te 49. I LLU ST R AT I O N P etit io ner s i n a c as e h ad o p en ed acco u n t s i n P o st O f f ice u nd er Mo nt h l y I nco me Sc he me . U nd er t h e sa id Sc he me t h er e wa s a li mi t o f t he ma x i mu m b al an ce o v er a nd ab o v e wh i c h no i n ter e st wo uld b e p a yab le. T he p et it io ner s we n t o n d ep o s it i n g

a mo u n t i n e xce s s o f t h e s aid l i mi t a nd a l so r e ce iv ed i nt er e st t h er e o n . S ub seq ue n tl y, th e Dep ar t me n t so u g ht r ef u nd o f i n ter es t p aid i n e xc es s. Re l yi n g o n t h e ab o v e ea se d ecid ed b y t he S up r e m e Co ur t, t h e Or is s a Hi g h Co ur t h eld t hat Se ct i o n 2 3 o f th e I nd ia n Co n tr a ct Ac t d id no t co v er t he ca se a nd t her e fo r e t h e d ir ec tio n fo r r eco v er y i s no t s u s ta i nab l e. 5 2

2.8.2

Mode of Communicating or revoking rescission of voidable contract

Sec tio n 66 o f t h e I nd i a n Co n tr ac t Act p r o vid e s a s u nd er .

53

" T he r es ci s sio n o f a vo i d ab le co ntr act ma y b e c o mmu n i ca ted o r r e vo ke d i n t h e sa me manner, and s ub j ec t to th e r u le s as ap p l y to t h e co m mu n i c atio n o r r e v o cat io n o f a p r o p o sa l."

2.8.3

Consequences of rescission of Voidable Contract

Sec tio n 64 o f t h e I nd i a n Co n tr ac t Act p r o vid e s a s u nd er . 5 4 "64. Conseseqentces of rcscision of voidable Contrac - W h e n a p er so n at who se option a contract is voidable rescinds it, the o t h er p ar t y t her eto need no t p er fo r m an y promise therein contained in which he is promisor. The party rescinding a voidable contract shall, if he has received an y benefit ther e under from another p ar t y to such contract, restore such benefit, so far as ma y b e , to t he person from whom i t was received."

2.8.4

Consequences of void Agreement

Section 65 of the Indian Contract Act provides for obligations of the parties to void agreement or contracts in these words : II

52 Rajat Kumar Rath v. Government of India, AIR 2000 Ori.32. 53 For full discussion see Ch. 1 Art. 1.11 and 1.11.1. 54 For full discussion see Ch. 1 Art. 1.11 and 1.11.1. ('

2

'iia/urr

I'I If nil,')'! l i" u „ a n yt h i n g W lhi en fo r ced b y la w wh e n t h e ti me T" * ""^^^ o r b e fo r e t he ti me fi x ed ha s e x n1 d ' ^ S'U°'h eVe"1 haS "°l happe"ed' U 11 ' b eco me s cer tai n t ha t s u c h e ve n t wi l l hap p e n no t

fiZlT

I ll u str at io ns ( a) A promises to pay B a sum of mnnm, i t

ZlZxl

contract may be enforced if ship is burnt within the year. (b) A promises to- pay B a sum of mrm«, ; r year. The contract may be enfold isburnt within the year."

the year

ITl^Within

>

*

^

^

and beCO meS V id if lhe

°

•

D I \™T S W p ^ ^ ^ ^ ina Ship does not return withm a

y ear '

V ld ag ^eem^s'o 00^^^^" imP°SSib,e ° ' " Contingenl m Mt event ha whether the impossibility of the event if ll» ^ PPens' are VOld' r n0t t0 the arlies 1 0 l h e a r e e m e m at the time when it is made *° P S Illustrations

(a) A agrees to pay B 1,000 runees This agreement is void.

it i«,n

f

• , ,

traight lines should enclose a s ace

'

P '

(b) A agrees to pay B 1,000 rupees if R «,ni time of the agreement. The

2.10

VZm^ A'S

^ at

COLLATERAL CONTRACTS

Collateral means "side by side; parallel" Or .11 . 'additional but supportive'. Collateral contra contract entered into by the parties eith P . contract. For example, there may be a !c t

main

J

USed HS an ad

m

col !V°

an

ecllve means

additionaI

but

supportive

°r 8ide by Side

making of some other contract. An mttmZX consideration for main contractor md a sub contractor for executing a part of a work ™S1 " S ubmission of tender contractor for the work is an example of cX , ^ the main r «i i-unaceral contract.

°f

which

the

is

the

Where a formal contract is a result of a series nf. , distinct and separate, earlier or contemporaneol ° r Paftly WnUen ° f parUy ° ral all the terms a reements of the final formal contract S > it is possible that not collateral document. However, if the final? necessarily be found in one agreement is not signed it may still benn??01 iS n0t reached and f°rmal agreements between the parties from the l dedUCC an a reement or ° S evidence rule will not be attracted in the Ih? collateral

IT*

LrT ?

contracts The oral

-

Where, however, a formal written contract is evf?^ & f°rmal WTiUtn C°m&CL 11S ex ecuted and its terms are inconsistent I

< 'luiplrr-

lit' I OlUKl!

2

will) I he collateral conlracls, the collateral contracts may e dcpmol o| ai; , t

due lo oral evidence rule.

2. 1 1

I-

m c

w

IMPLIED CONTRACT

An e xp r e s s co n tr ac t i s o ne wh o se t er ms ar e d e clar ed b y p ar t ie s i n so ma n y w o r d s , eit h er o r al l y o r i n wr it i n g, at t h e ti me t he co nt r act i s e nt er ed i n t o . As a ga i ns t ti n s in a n i mp l ied co ntr act , th e la w i mp li es o n e o r th e o t her ter m f r o m t h e co nd uct o f th e p ar t ie s. S ho r tl y s ta ted a n i mp l ied co ntr ac t is a n ac t ua l 'co nt r ac t, cir c u ms t a nt ia ll y p r o ved . ' I n a s ui t on an express contract for wo r k a nd l a b o ur , wh er e t he wo r k ha s b ee n f u ll y p er fo r med and only payment pending, r e co ve r y ma y b e had a s o n a n i mp li ed co n tr a ct o n q ua n t u m meruit (fair and reasonable va l ue) , i f t he evidence f ail s to s ho w th e e xp r es s contract but does sustain an i mp l ied co n tr a ct. 5 8

2.12

QUASI-CONTRACTS

Occasionally, it so happens that a co ntr ac to r e xe cu te s t he wo r k wi t ho u t t her e b ei n g a wr i tte n or oral contract. The question in s uc h c ase s ar i se s as to wh a t r eli e f, i f a n y, th e contractor is entitled to in the ab se nce o f a n exp r e ss agreement. Sections 6 8 to 7 0 of the Indian Contract Act ma ke provisions to govern s uc h situations. T he sa id Sections are self-explanatory and read: "SECTION 68 : Claim for necessaries supplied to person incapable of contracting, or on his account.- I f a person, incapable o f entering i nto a co n tr a ct, or a n y o n e wh o m he is legally b o u nd to s up p o r t i s supplied b y a n o th er p er so n wi t h necessaries suited to his condition in life, th e p er so n wh o ha s furnished suc h s up p li es i s entitled to be reimbursed from the p r o p er t y o f s uc h incapable person. Illustrations (a) A supplies B, a lunatic with necessaries suitable to his condition in life. A is entitled to be reimbursed from B's property. (b) A supplies the wife and children of B, a lunatic, with necessaries suitable to their conditions in life. A is entitled to be reimbursed from B's property."

140:

"SECTION 69: Reimbursement of person paying money due by another, in payment of which he is interested.- A person who is interested in the payment of money which another is bound by law to pay, and who therefore pays it, is entitled to be reimbursed by the other.

—\ ----------------57 For oral evidence rule see Art. 4.20. 58 Cook v. Saltzer, 257, P 2d, 228, Supreme Court of Idaho, 1953. I I H . ■

Ihiildinji and higiivcriiix Conn acts

iiM u s lr a lio n B ho ld s la nd i n B e n gal , o n a l ea se gr a n ted b y A, th e za mi n d ar . T he r e ve n ue p a ya b l e b y A to t h e Go ver n me nt b e i n g i n ar r ear , h i s la nd i s ad v er t is ed fo r sa le b y t h e Go ver n me n t. U nd er t h e r e ve n ue l a w t he co n s eq u e nce s o f s uc h sa le wi l l b e t he an n u l me n t o f B 's le as e. B, to p r e ve n t t he s ale a nd t he co n seq ue n t a n n ul me n t o f hi s o wn l ea se, p a ys to t he G o ver n me nt the s u m d ue f r o m A. A is b o u nd to m ak e go o d to B t he a mo u nt so p a id ."

"SECTION 70: Obligation of person enjoying benefit of non-gratuitous act.W her e a person lawfully does anything for another person, or delivers anything to hi m no t intending to do so gratuitously, and such other person enjoys the b en e fi t th er eo f, the latter is bound to make compensation to the former in respect of, o r to r es to r e, t he thing so done or delivered. Illustrations (a)

A, a tradesman, leaves goods at B's house by mistake. B treats the goods as his own. He is bound to pay A for them.

(b)

A saves B's property from a fire. A is not entitled for compensation from B, i f the circumstances show that he intended to act gratuitously.

Section 70 Analyzed I t i s worthwhile to consider the requirements to be satisfied to invoke the provisions

of Section 70 of the Indian Contract Act. The three conditions laid down by Section 70 ar e: (i)

The person should lawfully do something for another person;

(ii)

The other person for whom something is done must enjoy the benefit thereof;

(iii)

The thing done must not be done fraudulently or dishonestly nor must it be done gratuitously.

When these conditions are satisfied, S. 70 imposes upon the latter person the liability to make compensation to the former in respect of the things so done. When claim for compensation is made by one person against another, under S.70 it is not on the basis of any subsisting contracts between the parties. It is on the basis of the fact that something was done by the party for another and the said work so done has been voluntarily accepted by the other party.

Like ordinary citizens even the State Government is subject to the provision of S.70 and if it has accepted the things delivered to it or enjoyed the work done for it, I i w '■ O i l i r a i

such acceptance and en |o y men i would afford a valid i>u •>)".> i (•!

la::u.-. :

compensation against, it.

ILLUSTRATION T he co nt ac to r s h ad u n d er ta k e n t he wo r k o f co n s tr uct i n g go d o wn s f o r t h e Civ il S up p l ie s D ep ar t me n t o f t he Sl ate . W he n t he c o nt r ac t w o r k w a s i n p r o g r e s s , i.ho co n tr a cto r s, a t t h e r eq ue s t o f t he S ub Di v is i o na l O f f ic er , V ir a mb a g h, s u b m i t t e d t h e i r esti ma te fo r t he co n str u ct io n o f a kat c ha r o ad , g u ar d r o o m, ki tc h e n a nd o f f ice r o o m fo r t he u s e o f t he D ep ar t me nt . T he Ad d itio n al Dep u t y Dir ec to r o f C i vi l S up p l ie s, d u r i n g hi s v i si t to Vir a mb a g h r eq u e st ed t he co ntr ac to r to c ar r y o u t t he wo r k. I n a s i mi lar wa y t he co n tr a cto r wa s to b ui ld c er t ai n sto r a ge s h ed s fo r t h e Dep ar t me n t at C ha r ia k ul . T he co n tr a cto r e x ec uted b o t h t he wo r k s. H e t he n s ub mi tt ed h is b i ll s fo r p a yme n t. T he Sta te d ec li ned to p a y t he b i ll s, wh er e up o n t he co n tr a cto r fi led a s ui t i n th e C alc u tt a Hi g h Co ur t. T he S ta te i n d e f e nc e a lle g ed , t ha t u nd er Se ct io n 1 7 5 ( 3 ) o f t he Go ver n me n t o f I nd ia Act, 1 9 3 5 ( a na lo go u s to Ar t. 2 9 9 ( 1 ) o f t he Co ns ti t ut io n) t he r eq u e st fo r t he co n str u ct io n wo r ks wer e i n va lid , u na u t ho r i zed a nd d id n o t co n st it u te a v al id c o nt r ac t. I n t h e ab se n ce o f b i nd i n g co n tr a ct s t h e Sta te wa s no t l iab l e to p a y t he co n tr ac to r 's b il ls. I t wa s h eld b y t he Hi g h Co ur t t ha t ha v i n g r e g ar d to S ec. 1 7 5 ( 3 ) o f t he Go ver n me n t o f I nd i a Ac t, t h er e wa s no v al id co ntr act b e t we e n t h e co ntr ac to r a n d th e St al e. Ho we v er , t he co n tr a cto r 's c lai m a g ai n s t t he S ta t e wa s j us ti f ied u nd er Se c. 7 0 o f t he I nd ia n Co ntr act Ac t. T he S up r e me Co ur t wh i l e d is mi s si n g t h e S ta te 's ap p eal wi t h co s ts co n fi r med b o t h t h e ab o ve f i nd i n g s. 5 9

Sections 71 and 72 are self-explanatory and read : "71. Responsibility of finder of goods.- A person who f i nd s go o d s b elo n gi n g t o another and takes them into his custody, is subject to th e same responsibility a s a bailee." "72. Liability of person to whom money is paid, or thing delivered by mistake or under coercion.-A person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or return it. Illustrations (a) A and B jointly owe 100 rupees to C. A alone pays the amount to C, and B, no t knowing this fact, pays 100 rupees over again to C. C is bound to repay the amount to B. A railway company refuses to deliver up certain goods to the consignee, except upon the payment of an illegal charge for carriage. The consignee pays the sum c h a r g e d (b)

in. order to ohiain die goods. Me is en Li tied lo recover so much of the charge as 59 M/s B. K. Mondal and Sons v. State of West Bengal AIR 1962 SC 779.

was illegally excessive."

2.13

CONTRACT OF GUARANTEE AND INDEMNITY

142:

2.13.1

Contract of Guarantee

I n b i g co n str u ct io n p r o j ect s large s u ms o f money have to be invested i n mobilization o f me n a nd machinery. Although this is primarily a responsibility of the contractor

undertaking such projects, provisions are made in contracts whereunder the owner advances specified sums to the contractor for mobilization. Invariably such sums ar e advanced against the security of bank guarantees. The law applicable to such guarantees is embodied in chapter VIII of the Indian Contract Act. Relevant Sections read as under: SECTION 126 "Contract of guarantee", "Surety", "Principal debtor" and "Creditor" -

A "contractor of guarantee" is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the "surety"; the person in respect of whom the guarantee is given is called the "creditor." A guarantee may be cither oral or written." Further aspects of enforcement of bank guarantee are considered in Chapters 7 and 12. 2.13.2

Contract of Indemnity

A contractor is required under certain provisions incorporated in the construction contracts to indemnify the owner against any loss caused by the contractor's men or machinery to the property of others. The relevant provisions of the Indian Contract Act applicable read as under: "SECTION 124 : Contract of indemnity defined - A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or any other person, is called a 'contract of indemnity'. Illustration A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity." "SECTION 125 "Rights of indemnity-holder when sued. - The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor ( I j a h d a m a g e s w h i c h t i c m a y b e c o m p e l l e d l u p a y i n a n y s u i t \u i c s p c c t i ; | a n y m a i l e r t o w h i c h t h e p r o m i s e t o in c i e i i m i f y a p p l i e s ;

all co s t s wh i c h l ie ma y b e co mp e lled lo p a y i n a n y s uc h s u it i f, b r i n gi n g o r d ef e nd i n g i l, h e d id no l co n tr a v e ne t he o r d er s o f the p r o mi so r , and a cted as it wo u ld ha v e b ee n p r ud e nt fo r h i m to act i n t he ab se nc e o f a n y co ntr a ct o f i nd e mn i t y, o r i f th e p r o mi so r a u t ho r i sed hi m lo b r i n g o r d e fe nd t he s u it ;

(2)

(3) all s u ms which h e ma y have p aid u nd er the te r ms o f any co mp r o mi s e o f a n y s uc h s ui t, if the compromise was not contrary lo the orders of the p r o mi s o r , and wa s o ne which it would have been prudent for the promisee to make i n the absence of

an y contract of indemnity, or if the promisor authorized him to co mp r o mi se t he s ui t."

2.14

CONTRACTS, WHICH NEED NOT BE PERFORMED

I n addition to Sections 64 to 67 dealt with earlier the following provisions of the I nd ia n Contract Act dealing with this aspect are self-explanatory.

SECTION 62: "Effect of novation, rescission and alteration of contract - I f t he parties to a contract agree to substitute a new contract for it, or to rescind or al ter i t, the original contract need not be performed. Illustrations (a) A owes money to B under a contract. It is agreed between A, B and C that B shall henceforth accept C as his debtor instead of A. The old debt of A to B is at an end , and a new debt from C to B has been contracted. ( b ) A owes B 10,000 rupees. A enters into an agreement with B, and gives B a mortgage of his (A's) estate for 5,000 rupees in place of the debt of 10,000 rupees. This is a new contract and extinguishes the old.

(c) A owes B 1,000 rupees under a contract. B owes C 1,000 rupees. B orders A to credit C with 1,000 rupees in his books, but C does not assent to the arrangement. B still owes C 1,000 rupees, and no new contract has been entered into." "SECTION 63 : Promisee may dispense with or remit performance of promise -

Every promisee may dispense with or remit, wholly or, in part, the performance of the promise made to him, or may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit. Illustrations (a) A promises to paint a picture for B. B afterwards forbids him to do so. A is no longer bound to perform the promise. 122

Hinlding

and

l:nvji S C I 1 3 . 'I h e f a c t s i n k a i l i a R a m e a s e

:4

wer e a s u nd e r : -

T he C hi e f Dir ecto r o f P ur c h a se ( Di sp o sa ls ) , p o o d Dep ar t me n t, Go v er n me n t o f I nd i a in v it ed l e nd er s. T he r e sp o nd e n t s ub mi tted hi s le nd er . T he acc ep ta n ce let ter ( wi t h wh ic h e nc lo sed Fo r m D CM 7 0 set ti n g o ut t he ge n er a l co nd it io ns o f t he co ntr ac t) wa s si g ned b y t he C h i ef D ir ec to r o f P ur c ha s es. T he g e ner a l co nd i t io n s o f l h e co n tr a ct b y t h e f ir s t C la u se d e fi n es 'Go ver n me n t ' a s me a ni n g " t he Go ver no r - Ge ner al

fo r I nd ia i n Co u n cil a n d wh e n t he co nte x t so a d mit s hi s s ucc es so r s a s s ig n s a nd t he Go ver n me n t o f I nd ia o f f icer s ac ti n g fo r h i m.o r t h e m. O n t he ab o ve fa ct s t he q ue s tio n d ec id ed b y t h e S up r e me Co ur t wa s, " D id t he l er ms o f t he ac ce p ta nce le tter wh ic h fo r med t he co n tr ad b et we e n l h e p ar tie s co mp l y wi t h t he r eq u ir e me n t o f t h e Go ver n me n t o f I nd ia A ct, 1 9 3 5 ? " Afte r c it i n g wi t h ap p r o v al t he d ec is io n o f t he S up r e me Co ur t 2 5 , i t wa s he ld : " Sect io n 1 7 5 ( 3 ) d o e s no t i n t er m r eq u ir e t h at a fo r ma l d o c u me nt e xec u t ed o n b e h al f o f t he Do mi n io n o f I nd i a a nd t he o t he r co n tr ac t in g p ar t y, alo ne i s e f fe c ti ve. I n t he ab se n ce o f a n y d ir e ct io n b y t he Go v er no r -G e n er al u nd er S ect io n 1 7 5 ( 3 ) o f t he Go ver n me n t o f I nd i a Act p r e scr ib i n g t he ma n n er , a val id co n tr ac t ma y r es u lt fr o m co r r e sp o nd e nc e i f t h e r eq u i si te co nd itio n s ar e f u l fi lled . T he co n tr ac t fo r sa le, o f " W ar d isp o sa l" go o d s wer e no t d ir ec ted b y t h e Go ver no r - Ge ner al to b e mad e b y a fo r ma l d o c u me nt e xec u ted o n b e ha l f o f t h e G o ver no r -Ge n er a l a s we l l a s b y t he p ur c h a si n g p ar t y. I t i s t r ue t hat Sec tio n 1 7 5 ( 3 ) u se s t he e xp r es s io n " Ex ec uted " b u t th at d o e s no t b y i ts el f c o nt e mp l at e e xec u tio n o f a fo r ma l co ntr ac t b y t h e co n tr a ct i n g p ar ti es . A t e nd er fo r p u r ch a se o f go o d s i n p ur s ua n ce o f a n i n v ita tio n i s s ued b y o r o n b e h al f o f t he Go ver no r Ge ner al o f I nd ia a nd a ccep ta n ce i n wr it i n g wh ic h i s exp r e ss ed to b e mad e i n t he na me o f t h e Go v e r no r - Ge ne r al a nd i s e x e cu ted o n h is b eh al f b y a p er so n a u t h o r is ed i n t ha t b e hal f wo uld co n fo r m to t he r eq u ir e me n t s o f Sec tio n 1 7 5 ( 3 ) " . I n a construction contract tenders are invariably invited in a bulky blank tender form, which not only includes all the conditions of the contract but a formal deed as well. These blank tender forms are filled in by the tenderers and signed at relevant places. W he n the duly authorized Government officer sends communication of acceptance by any mode such as telegram, telex or post, the binding contract comes in to existence under the normal law at the time when and at the place where the letter of acceptance is posted. Although such a letter of acceptance may mention signing of a formal deed at a later stage on payment of the requisite security deposit the validity of the contract would not depend upon execution of a formal deed subsequently.

The only exception to this will be the cases in which the letter of acceptance 2 4 Union of India v. Rallia Ram AIR 1963 SC 1685. 25 Bhikraj Jaipuria v. Union of India AIR 1962 SC 113.

incorporates certain important conditions that would require acceptance by the successful tenderer. Even in such cases if the successful tenderer communicates his acceptance of such conditions, a binding and enforceable contract under Art. 299 of the Constitution will result. In such cases, however, the agreement would be made at the place where and at time when such acceptance is posted by the contractor. 25 The above can be taken as a well-settled position in law as a result of the decision of the Supreme Court in the Union of India v. Rallia Ram case. This proposition finds support in a subsequent decision of the Supreme Court 26 wherein it was held: "It is now settled by this Court that though the words 'expressed' and 'executed' in Article 299 (1) might suggest that it should be by a deed or by a formal written contract, a binding contract, by tender and acceptance can also come into existence if the acceptance is by a person duly authorised on this behalf by the President of India.

A contract whether by a formal deed or otherwise by persons not authorised i\v the President cannot be binding and is absolutely void" ILLUSTRATIONS (1) The plaintiff in a case admitted that his bid was accepted and the acceptance intimated by a letter directing him to pay the bid amount in four installments. He declined to do so on the ground that the formal agreement duly signed by the competent authority had not been made over to him. It was held that the attitude of the plaintiff was thoroughly misconceived and termination of the contract by the respondent was upheld though forfeiture of security deposit was held as not tenable because under the rules the said action could only be taken by the Government and not by the authority competent to execute the agreement. 27 (2) A submitted a tender for supply of livestock, cattle feed, etc. for a period of one year from 1st April 1961 and this was accepted by the Director of Animal Husbandry on 12th April 1961 and communicated to 'A' on the next day. But even before its acceptance, the petitioner supplied goats .... on the terms of the tender made by him. Subsequent to his receiving the intimation of acceptance, the petitioner withdrew his offer to supply goats on the ground of some domestic calamity. The Government, however, insisted on 'A' executing the necessary agreement and furnishing security deposit and fulfilling the terms of the contract to supply goats. A's plea was that there was no concluded valid contract and that therefore he was entitled to get a refund of the security deposit and recover the value of the goats supplied by him. The Government, on the other hand claimed that 'A' had forfeited the security 25

Murthy ajid Bros v.State AIR 1971 Mad.393; Also see AIR 1982 Oril47 and AIR 1980 Ori 40. India v. N. K. Pvt Ltd AIR 1972 SC 915. 27 State of Orissa v. Ganeswar Jena, AIR 1994 Ori. 94.

16

Union of

deposit, that he was bound to pay damages for breach of contract and that therefore he was not entitled to recover any amount of money.' It was held, that it was not the intention of the parties that a valid contract should come into existence only on 'A' executing a "formal agreement. "Hence if there is otherwise a valid concluded contract between the parties, the mere absence of a formal agreement preceded by the furnishing of security would not in any way affect it" 28

3.6 EXECUTION OF A FORMAL CONTRACT: WHEN A CONDITION PRECEDENT In a case where the correspondence does not conclusively establish agreement between the parties, execution of a formal contract may become necessary. I LLU ST R AT I O N I n a ca se 2 '' t h e contract wa s under negotiations for more than 17 months. The o r i gi na l t e nd er l ap s ed b y s heer p a s sa g e of ti me a nd o v er a nd above tha t, t h e ad d it io n s, ' . s ub tr ac tio n s and modifications o f t he ter ms d ur i n g t he co ur se o f mo r e th a n se ve n tee n mo nt h s ch a n ged it s s hap e b e yo nd recognition. E ve n t h e le tte r o f accep ta nc e me n t io ned a lar ge n u mb er o f co nd i ti o n s. I n vi e w o f t he se fa ct s t he De l hi Hi g h Co ur t h eld t hat execution o f a formal contract wa s a n inevitable co nd i tio n precedent T he r el e va n t portion of the judgment reads :

"Probably, the formal agreement which was contemplated to be executed by the parties subsequently, was to be executed in proper form according to law by and in na me of the President. As a matter of law, it is possible to deduce a contract on behalf of the President from a series of correspondence exchanged between the p ar ti es ; but I find no letter whatsoever between the notice inviting the tender and the acceptance of tender in dispute had been expressed to be issued in the name of or on behalf of the President and it is reasonable to infer that in the circumstances o f the case the President could not intend a binding contract to result from a mass of uncertain negotiations and unauthorised correspondence spread over 17 months and so in my opinion, the execution of a formal contract was an inevitable condition precedent in circumstances of the case".

3.6.1 Provision in agreement contrary to directions by the Governor If a contract contains two provisions apparently opposed to each other, the provision which is contrary to the stipulations contained in directions issued by the Governor cannot be enforced.

2 8 Murthy and Bros v. State AIR 1971 Mad. 393. 29 Union of India v.U.S. Dugal & Co.,AIR 1972 Del. 110.

ILLUSTRATION In a case 30 the question to be decided was if the arbitration clause 73 of the M.D.S.S. which was to be read as part of the contract could render the deletion of arbitration clause of the contract ineffective. Relying upon the earlier Full Bench decision of the same Court " it was held that not only the arbitration clause but the entire arbitration process was consciously annihilated. The Kerala High Court held:'2 "...Even assuming that CI.73 of the M.D.S.S. should be read as part of the Form of contract, the existence of that condition which is contrary to the expressed intention of the executive Government will be inoperative, because it will be contrary to the direction which the Governor is competent to issue under Art. 299 of the Constitution of India. A, provision of a contract which is contrary to the stipulations contained in directions issued by the Governor under the above Article cannot be enforced against the executive: Government." 3.7 EFFECT OF NON-COMPLIANCE WITH REQUIREMENTS OF ART. 299 (1) The discussion above makes it plain that non-compliance with the requirements u l Art 299(1) renders the contract void, and as such the plea of implied contract or estoppel or ratification or specific performance or damages for breach of contract is not permitted. The question then remains for consideration as to what relief, if any, a party to such a void contract will be entitled to if such a party has done work or provided services or supplied materials to or received any advance from the Government. Section 70 or Sec. 65 of the Act will be attracted. 3.7.1 Applicability of Section 70 of The Indian Contract Act

30 31 32

M/s Leo Construction Contractors v. Govt, of Kerela, AIR 1989 Ker. 241. State v. C. Abraham AIR 1989 Ker 61 (F.B.). M/s Leo Construction Contractors v. Govt, of Kerela, AIR 1989 Ker. 241.

In view of the foregoing discussion it is true that a party to a transaction with the Government, in the absence of a properly concluded contract under the provisions of Art. 299(1) cannot recover ? for the work done or materials supplied under the contract. However, where hundreds of Government officers who have to daily enter into a variety of contracts, the possibility of a transaction based on oral or written order not complying with the requirements cannot be ruled out. Under the circumstances, can the government be allowed to have the benefits of the transaction without liability to pay for them? Admittedly there is no liability to pay under the contract, the contract being void. But the aggrieved party can nevertheless have a claim for compensation against the Government under Section 70 of the Indian Contract, Act. The said Section reads as follows : SECTION 70. Obligations of person enjoying benefit of non-gratuitions act -

"Where a person does lawfully anything for another person or delivers anything to him, not intending to do so gratuitously, and such other person enjoys the benefit thereof, the ; latter is bound to make compensation to the former in respect of, or to restore, the thing so done, or delivered." The interpretation of this Section and the essential conditions to be satisfied before a claim can be allowed are laid down by the Supreme Court of India in the case of B. K. Mondal v. State of West Bengal" These are mentioned below:(i) The person should lawfully do something for another person; (ii) The other person for whom something is done must enjoy the benefit thereof; (iii) The thing done must not be done fraudulently or dishonestly nor must it be done gratuitously. 3.7.2

Section 70: When Not Applicable

T he Sec tio n wi ll no t b e ap p li cab l e i f a n y o ne o f th e t hr ee r eq u is it e co nd i tio n s is no t sa ti s fi ed . Fo r , i n o n e c a se t he cl ai m wa sd is al lo we d a lt ho u g h t wo co nd i tio n s na mel y ( i ) and ( i i) we r e sa ti s f ied , b ut t he t hir d co nd i tio n na me l y, t ha t t he o t her p ar t y to th e co n tr a ct e nj o yed the b e ne fi t t her eo f wa s ne it her p l ead ed no r any evidence to t ha t ef f ec t wa s laid by the p ar t y. Also if a person delivered something to another it would be o p en to the latter lo refuse to accept the thing o r to return it. In that case Section

70 would not come into operation. Similarly if a person did something for another, it would be open to the latter not to accept it, as had been done by the former. In that case again Section 70 would not apply. In other words, the person said to be made liable under Section 70 always had the option not to accept the t hi n g or to return it. It is only when he voluntarily accepts the thing or enjoys the work done that the liability under Section 70 arises. The following is one more instance under which S. 70 may not apply. It is well established that a person who seeks restitution has the duty of being accountable to the defendant, for what he has received from the transaction from which his right to restitution arises. This is a condition applicable to cases under S.65 of the Contract Act for restitution. Applying this test, to the case under S-70, the Calcutta High Court held: 34 "In the instant case the plaintiff has failed to account for the total amount of money received from the defendant in the transaction: The plaintiff failed to give any evidence with regard thereto. In the absence of any evidence on this point tendered by the plaintiff, the plaintiff is not entitled to restitution or payment in : respect of the

3 3 AIR 1962 SC 779, Also see Art. 2.12 for full facts. 3 4 Nanalal Madhavagi v. State of M.P., AIR 1982 Cal. 167.

,*.

two consignments for which the present suit has been filed. Under these circumstances the plaintiff is not entitled to any benefit under Section 70 of the Contract Act." The Patna High Court expressed similar view. 3.7.3

35

Absence of Alternative case Under S. 70 not Fatal to the Suit

It is obvious that the first plea of the party claiming money due would be under the alleged valid contract. Normally if the validity of the contract is doubtful, the plaintiff should set out in the plaint an alternative case that he is entitled to get compensation. However, mere absence of setting up the alternative case will not disentitle him to such relief. Reliance is placed upon the following observations of the Supreme Court of India. 36 " ............ The Respondent claimed under an oral agreement compensation at prevailing market rates for work done by him: even if he failed to prove an express agreement in that behalf, the court may still award him compensation under S.70 of the Contract Act. By awarding a decree for compensation under the Statute and not under the oral contract pleaded, there was in the circumstances of this case no substantial departure from the claim made by the respondent." Re l yi ng up o n t he ab o v e o b ser v atio n s it wa s h eld b y t he Al la hab ad Hi g h Co ur t " I n my v ie w, t hi s e as e t her e fo r e ver y cle ar l y l a ys d o wn t h at i t i s no t n ece s sar y t ha i an al ter na ti v e case must necessarily be p lead ed . 1 d o no t think t h at t he me r e ab se n ce o f a fo r mal alternative case under S. 70 o f th e Contract Act is fa ta l to t h e maintainability o f the suit in question".

3.7.4

Agreed Rates may be Reasonable Compensation

The following case is a typical example of developments in cases where work is d o ne wi t h o ut a formal agreement. The Superintending Engineer, P. H. Bhubaneshwar, rejected all the tenders and ordered that till fresh tenders were invited and finalized, for urgent cases the lowest rates for the carriage tender decided in respect of Drainage and Sewerage Division should be adopted and the lowest or any other contractor might be asked to execute the works. Accordingly the plaintiff executed the work for three months on the verbal orders of the officers of the Division, as no written order was issued at any level. Seven bills out of 19 bills submitted by the plaintiff were paid. The matter was, in the mean time referred to the Chief Engineer, who examined the matter. The Chief Engineer gave a decision that the carriage charges should be paid at the declared rates or scheduled rates whichever was less. The contractor was to execute the agreement and recoveries were to be made from the pending bills. The contractor 35 36 37

Manoharlal v. Union of India, AIR 1974 Pat. 56. Subramanyam v. Thayappa, AIR 1966, SC 1034. Union of India v. Saheb Singh, AIR 1977, All 277(279).

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refused to do so. In a suit filed by the contractor both the trial Court and the High Court held that the requisite conditions contemplated under Art.299 have been fulfilled except that formal deed of contract was not executed. The High Court held: 38 "Obviously the above decision of the Chief Engineer was a deviation from the terms of the contract agreed upon by the parties for carriage of materials. Once the plaintiff agreed to execute the work at a particular rate and got the work done to the satisfaction of the defendant, it is no more open for the defendant or any of its officers to vary the rate to the prejudice of the plaintiff." It was further held that the plaintiff is entitled to reasonable compensation under Section 70 of the Contract Act and the rates approved are reasonable. This decision, it is respectfully submitted, lays down a good guiding principle for deciding reasonable compensation under Section 70 in the cases of its kind 39 . This approach will restrict the scope of enquiry. If the Court is to uphold that the agreed rates are reasonable, there will be no serious error to justify interference in appeal 40 In a case decided by a Division Bench of the Madhya Pradesh High Court on an admitted position that the contractor had not signed the contract held that there was no concluded contract as per Art. 299. In the said case the plaintiff had submitted a tender for recovery of toll tax on a bridge. Earnest money was deposited. The offer of the plaintiff was the highest. It was duly accepted. However due to some reasons agreement was not entered into nor the work of toll collection started. The earnest money was forfeited and compensation was sought to be recovered as arrears of land revenue by issuing RRC (Revenue Recovery Certificate). This order was challenged and the trial Court declared that the State had no right to recover the amount by way of RRC. The High Court upheld the said judgement subject to modification about the direction of payment of ad valorem Court fees. 41 The facts in another case decided by the Orissa High Court are worth noting. In the said case the State accepted the quotation of a firm for supply of electrical goods. The goods were dispatched in time by rail but in transit there was some delay and the goods reached the destination alter the due date stipulated for delivery. The State retained the goods but did not pay for the same on the ground of the goods having been received late. The agreement provided for liquidated damages for delay up to ten days and power to annul the contract altogether, if the delay exceeded ten days. The State, perhaps on the basis of the opinion that there existed no contract to effect payment included the said goods in the amended order given the next year. 3 8 State v. Ananda Prasad, AIR 1985 Ori 142. 39 Mir Abdul Jalil v. State AIR 1984 Cal. 200. 40 Subramanyam v. Thayappa AIR 1966 SC 1034. 41 State of M.P. v. Siyaram Verma, 2004(1) CTLJ 356(M.P.) (DB).

supplier sought payment at the market rates or return ol" the goods supplied because the prices of the goods had substantially increased in between. The State neither returned the goods nor made any payment.

The

On the above facts, it was rightly held by the Orissa High Court, it is submitted with respect, that Section 70 of the Contract Act would have no application to the case as

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the original contract subsisted and even if Section 70 had application, the supplier had not proved market rates at the date of supply and hence the contract rates could be considered as the market value of the goods. 42 3.7.5 Section 65: When Applicable Section 65 of the Indian Contract Act provides that any person who has received any advantage under a void contract is bound to restore it, or to make compensation for it, to the person from whom he received it. ILLUSTRATION Where a contractor entered into an agreement with the Government to construct a godown cum inspection room and received advance payment for the same, in a sun liy the Government for realization of the amounts advanced due to failure of the contractor to complete the work, it was held that the contract not being in conformity with Art 299(1) of the Constitution of India was void from its inception. The Government could recover the amount under S. 65 of the Indian Contract Act, 1872. 4J

3.8

PERSONAL LIABILITY OF GOVERNMENT OFFICER EXECUTING THE CONTRACT

plain reading of Clause (2) of Art. 299 makes it clear that neither the Executive heads nor the officials executing contracts for and on behalf of the Government are personally liable under the contract. A very important question nevertheless remains to be considered. Where the Government is not bound for want of due compliance with Art- 299(1) is the officer who executed the contract personally liable? The answer to this question can be sought in provisions of Sections 230 and 235 of the Indian Contract Act. Section 230 reads as follows : A

SECTION 230. Agent cannot personally enforce, nor be bound by, contracts, on behalf of principal-

"In the absence of any contract to that effect, an agent cannot personally enforce contracts; entered into by him on behalf of his principal, nor is he personally bound by them. 42 43

M/s Jain Mills & Electrical Stores v. State, AIR 1991 Ori 117. State of Orissa v. Rajballav, AIR 1976, Ori 19.

"Presumption of contract to contrary - Such a contract shall be presumed to exist in the

following cases:(1) (2) (3)

Where the contract is made by an agent for sale or purchase of goods for a merchant residing abroad; Where the agent does not disclose the name of his principal; Where the principal, though disclosed; cannot be sued."

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It is a fact that Government officers act as agents on behalf of the Government to th e knowledge of everybody. Thus only Clause (3) of the above Section is relevant for the discussion and is analyzed below. The essential ingredients that must be satisfied for applicability of this Section, in the opinion of the author, are: (i) There must be a contract entered into by the agent on behalf of his principal. (ii) The principal, though disclosed, cannot be sued. No w. i n c as es wit h i n t he p r in cip l e o f Ar t. 299 a n d th is Sec tio n, t he s eco n d co nd i tio n ma y b e f ul f il led . I t ma y b e s ho wn t ha t t he Go ve r n me n t i n wh o se ser v ice th e o f fi cer wa s e mp lo yed i s t h e p r in cip al d is clo sed a nd i n vi e w o f Ar t. 299 t he Go v er n me n t ca n no t b e s ued . Ho we v e r , i s t h e fir s t co nd it io n s ati s f ied '. '

Section 230 of the Contract Act clearly implies an existence of a contract for its application. It is now well settled that a contract entered into without complying with the conditions laid down in Art.299 (1) is void and cannot be ratified. Under the circumstances the first condition is not fulfilled and Section 230 (3) is not applicable. This, it is respectfully submitted, is the law as laid down, by the Supreme Court of India in the State of U. P. v. Murari Lai. 44 In an earlier decision in Chatturbhuji's case, 45 the Supreme Court, dealing with a contract which was not in proper form, had observed: "In our opinion this is a type of a contract to which S.230(3), Contract Act would apply." It was also held that the contract is capable of ratification by the Government. In the case of the State of U. P. v. Murari Lai, the Supreme Court, referring to the above decision observed : "It is clear that the observations in Chathurbhuji's case, have been regarded either as not laying down the law correctly or as being confined to facts of that case. The consensus of opinion is that a contract entered into without complying with the conditions laid down in Art. 299(1) is void. If there is no contract in the eye of the law it is difficult to see how S. 230(3) of the Contract Act would become applicable."

In view of the above, the decision of the Calcutta High Court 46 which was given by 4 4 State of U.P. v. Murari Lai, AIR 1971 SC 2210. 4 5 Chaturbhuj Vithal Das V. Moreshwar Parashram, AIR 1954 SC 236.

placing reliance upon the decision of the Supreme Court in Chaturbhuji's case has also to be regarded as not laying down the law correctly, it is respectfully submitted. It now remains to be'seen whether the officer will be personally liable under Section 235 of the Indian Contract Act. The Section reads as below :SECTION 235 Liability of pretended agent "A person untruely representing himself to be the authorized agent of another, and thereby inducing a third person to deal with him as such agent, is liable if his alleged employer does not ratify his acts, to make compensation to the other in respect of any loss or damage which he has incurred by so dealing."

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The essential ingredients for applicability of the Section can be thus stated ; (i) (ii) (in.) (iv)

A person represents himself to be the authorized agent of another. He thereby induces a third person lo deal with him as such agent, His representation is untrue, His alleged employer does not ratify his acts.

If the above ingredients are satisfied such a person is liable lo make compensation lo the other in respect of any loss or damage which the other has incurred by so dealing. It is to be noted that the word 'contract' which is used in Sec.230 is not used in this Section. If the officer has no authority from the President or the Governor to enter into a transaction on behalf of the Government, it is obvious that the first three ingredients could easily be satisfied. The fourth ingredient, therefore, assumes importance. The Section uses the wording "if his alleged employer does not ratify his acts." A careful reading of this brings out the basic underlying presumption namely, the Section contemplates that the act of the agent is capable of ratification. Thus, where an act of the agent is not capable of ratification the fourth ingredient is absent. It is, therefore, submitted that a Government officer will not be personally liable even under this Section because the contract in violation of Art. 299(1) cannot be ratified. In support of this view the following observations of the Supreme Court of India are noteworthy. 47 "But it seems that S. 235 also can become applicable only if there is a valid contract in existence. This appears to follow from the words 'if his alleged employer docs not ratify his acts' The contract should thus be such that it is capable of ratification" . The attention of the reader is invited to the fact that their Lordships of the Supreme 4 6 Union of India v. B.M.Sen, AIR 1963 Cal 456. 4 7 AIR 1971 SC 2210.

Court, have kept the question open for future determination. This is obvious from .the following observations in the same paragraph of the judgment. "However, we do not wish to express any final opinion on the applicability of Section 235 of the Contract Act to cases where the contract suffers from the infirmity that requirements of Art-299(1) of the Constitution have not been complied with". The reason was that the appeal before them was against the decision of the High Court based on Section 230. ft is significant to note that the observations on applicability of Section were made with reference to the judgment in the trial Court in that case. The trial Court in that case had held that the defendant Government officers had no authority to enter into a contract on behalf of the State Government but still they purported to do so. There was an implied warranty of authority which had be presumed and the plaintiff was entitled to receive compensation for breach of that warranty under Sec. 235 of the Contract Act. Under the circumstances, it is submitted, that their Lordships have more than indicated the way Section 235 may be interpreted. 3.9 CONSTITUTIONAL RIGHTS AND OBLIGATIONS OF PARTIES IN GOVERNMENT CONTRACTS

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What are the constitutional obligations of the State when it takes action in exercise of statutory or executive power? Is the State entitled to deal with its property in any manner it likes or award a contract without any constitutional limitations upon it? What are the parameters of its statutory or executive power in the matter of awarding a contract in dealing with its property? Can a party aggrieved by the action taken by the State seek legal redress? These questions fall in the sphere of both the administrative law and the Constitutional law. They assume special significance in a modern welfare State, which is committed to egalitarian values and dedicated to the rule of law. But these questions cannot be decided in the abstract. They can be determined only against the background of facts. In recent times, judicial review of administrative action has become expansive and is becoming wider day by day. The traditional limitations have been vanishing and the sphere of judicial scrutiny is being expanded. State activity too is becoming fast pervasive. As the State has descended into the commercial field and giant public sector undertakings have grown up, the stake of the public exchequer is also large justifying larger social audit, judicial control and review by opening of the public gaze: these necessitate recording of reasons for executive actions including cases of rejection of highest offers. That very often involves long stakes and availability of reasons for action on the record, assures credibility to the. action, disciplines public conduct and improves the culture of accountability. Looking for reasons in support of such action provides an opportunity for an objective review in appropriate cases both by the administrative superior and by the judicial process. 48 4 8 M/s State Enterprises etc. v. The City and Industrial Development Corporation of Maharashtra Ltd. (1990) 2 JT SC 401.

Constitutional Provisions Judicial review is invariabl y in the li ght of Art. 14 and Art. 226 of the Constitution of India. These provisions read: "Art. 14. The State shall not deny to any person equality before the law or the

equal protection of the law within the territory of India". "Art. 226. (1) Notwithstanding anything in Art. 32 ever y Hi gh Court shall have

power, throughout the territories in relation to which it exercises jurisdiction, to issue to any person or authorit y, incl uding in appropriate cases, any Government, within t hose territories directions, orders or writs, including writs in the nature of habeas corpus, mandamus, prohibition, quo warranto and certiorari, or any of them, for the enforcement of any of the rights conferred by Part III and for any other purpose. "(2) The power conferred b y clause (1) to issue directions, orders or wr i t s to any government authority or person may also be exercised by any Hi gh Court exercising j ur i sd i ct io n in r ela tio n to t he t er r ito r ie s wi t h i n wh i c h t he ca u se o f act io n, wh o ll y o r i n p a r t , ar i se s fo r t he e x er c is e o f s uc h p o we r , no t wi t hs ta nd i n g t hat th e se at o f s uc h Go ve r n me n t o r a u t ho r i t y o r t he r e sid e nce o f s uc h p er so n i s no t wi t h i n t ho s e t er r i to r i e s ;

"(3) Where any party against whom an interim order, wh et h er by way of inj unction o r stay or i n any other manner, i s made on, or in any proceedings relating to, a p et it io n under Clause (i), without -

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" ( a) furnishing to such party copies of such petition and all documents in

support of the plea for such interi m order, and " ( b ) gi ving such part y, an opportunit y of bei ng heard, makes an application to the High Court for the vacation of such order and furnishes a copy of such

application to the party of whose favour such order has been made or the counsel of such part y, the Hi gh Court shall dispose of the application within a period of two weeks from the date on which it is received or from the date on which the copy of such application is so f urnished, whichever is later, or where the Hi gh Court is closed on the last day of that period, before the expiry of the next day on which the Hi gh Court is open; and if the application is not so disposed of, the interim order shall, on the expiry of that period, or, as the case may be the expi ry of the said next day, stand vacated, "(4) The power conferred on a Hi gh Court by this Article shall not be in derogation of the Dower conferred on the Supreme Court by clause (2) of Article 32." Article 32(1) and 2 : "Remedies for enforcement of rights conferred by this part

- (1) The right to move the Supreme Court by appropriate proceedings for the enforcement of the ri ghts conferred by this Part is guaranteed. "(2) The Supreme Court shall have power to issue directions or orders or writs, including writs in the nature of habeas corpus, mandamus, prohibition, quo warranto and certiorari whichever may be appropriate, for the enforcement of any of the ri ghts conferred by this part." At the outset the question as to whether by merely inviting tenders, the authority is in any way liable or answerabl e to a party who has submitted a tender may be considered. In other words what are the rights and liabilities of the parties to a tender invitation? This question has been briefly discussed in Chapter one and is 'fur ther considered below under the heading the Doctrine of Legiti mate Expectation. 3.9 .1

The Doctrine of Legitimate Expectation

Doctrine means a rule, principle, theor y or t enet of the law. 4 9 Legitimate used as an adj ective accor ding to Blacks Law Dictionary means that "which is lawful, legal recogni zed by law or according to law". (6 t h Ed. Pp. 90). Thus, for legal purpose expectation cannot be the same as anticipation. It is different from a hope, a wish or a desire nor can it amount to a clai m or demand. The doctrine of legiti mat e expectation means a rule of law that recogni zes expectation of a person to be l a w f u l or legal. This concept first stepped into English Law in 1969, i n Schmi dt v. Secretary of State for Home Aff airs (1969) 2Chl49. A person may have a legiti mate expectation of being treated in a certain way by an administrative authority even though he has no legal right in private law to receive such treat ment. The expectation may arise from a repr esentation or promise made by the authority including an implied representation, or from

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consistent past practice. It may have a number of different consequences including: (i) It may gi ve locus standi to seek leave to appl y for j udicial review, (ii) It may mean that the authority ought not to act so as to defeat the expectation without some overriding reason for public policy to j ustify its doing so, or (iii) It may mean that, i f the authority proposes to defeat a person's legiti mate expectation, it must af ford hi m an opportunity to make representati on on the matter. The Supreme Court of India, in a case, held: "... it is clear that legiti mate expectation may arise (a) if there is an express promise gi ven by a publ ic authority; or (b) because of the existence of regular practice which the clai mant can reasonably expect to continue; (c)

such an expectation must be reasonable. However, if there is a change in policy or in public interest the position is altered by a rule or legislation, no question of legiti mate expectation would arise." 5 0 For

49 Black's Law Dictionary, 6th Ed. pp 481.

example, A part y who has been granted a license may have a legiti mate expectation that it will be renewed unless there is good reason not t o do so and may therefore be entitled to greater pr ocedural protection than a mere applicant for a gr ant. 5 1

The Kerala High Court, however clarified that the doctrine of legiti mate expectation -has no application if the action is in public interest. The action by K.S.T.R.C of inviting tenders for grant of license to the shops which were held earlier under' 3 year license was upheld. 5 2 Similarl y in a case where contract stands concluded by acceptance, the doctrine of legitimate expect ancy has no application. As soon as a contract is concluded the expectation, if any, comes to end; whereafter the parties will be bound only by the ter ms of the contract. 5 3 The question arises: can the lowest tenderer f or a wor ks contract or the highest bidder in an auction sale of public propert y seek the benefit of this doctrine when his tender or bid is not accepted, all tenders are rejected and/or negotiations are held with all bidders with a view to obtain an offer beneficial to the State? The answer to this question is not a straightforward yes or no. Even though the authority inviting tenders or bids has the right to rej ect any tender including the l owest tender (or the highest bid in an auction) yet if this right is not exercised with reasonable care and caution but arbi trarily, the credibility of the procedure of inviting sealed tenders or bids would be lost.. In such a case the answer to the question will be yes. On the other hand, without the test of reasonableness, absence of arbitrariness or presence of cogent reason, the principle simpl y stated that once tenders have been invited and the lowest tenderer (or highest bidder) has come forward to compl y with the

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conditions stipulated in the tender notice, it is not per missible to switch over to negotiations with all tenderers and thereby rej ect the lowest tender (or highest bid) is too wide to be acceptable. 5 4 A few illustrations will help clarify this viewpoint. ILLUSTRAT IONS (1) In a case, tenders were invited for the sale of stocks of damaged food grains by FCI in accordance with the ter ms and conditions contained in the tender notice. K's bid was found to be highest on opening of the tenders. The FCI not satisfied with the adequacy of the amount offered in the highest tender, instead of accepting any of the tenders invited all the tenderers to participate in the negotiations. As a result FC1 received offers totaling to Rs. 1 5 0 Madras City Wine Merchant's Association v. State of T.N. 1994 (5) SCC 509. Also see: A.C. Roy v. Union of India, AIR 1995Cal. 246. 5 t Halsbury's Laws of England, 4th Ed. Vol I (I) 151 cited with approval, it is submitted in Union of India v. Hindustan Development Corporation, AIR 1994 SC 988 (1013). 5 2 M.S.N.Medicals, Thiruvalla v. K.S.R.T.Corpn., Thiruvananthapuram, AIR 1995 Ker. 119. 5 3 D.Wren International Ltd. v. Engineers India Ltd. AIR 1996 Cal. 424. •5 4 Food Corporation of India v. Kamdhenu Cattle Feed Industries, AIR 1993 SC 1601 (1605).

crore 10 lakhs from a bidder as against Rs. 90 lakhs offered by K who refused to increase rates in the negotiation. Upon refusal to accept K 's tender, a Writ Petition was submitted on the ground that the action of FCI was arbitrary and therefore, in substance violati ve of Art. 14 of the Constitution. This contention found favour with the P. & H Hi gh Cour t. In appeal the Supreme Court observed, 5 5 "Procuring the hi ghest price for the commodit y is undoubtedly in public interest - Accordingl y, inadequacy of the price offered in the highest tender would be a cogent ground for negotiati ng with the tenderers giving them equal opportunity to revise their bids with a view to obtain the highest available price. - Retaining the option to accept the highest tender, in case the negotiations do not yield a significantl y hi gher offer would be fair to tenderers besides protecting public interest - this procedure invol ves gi ving due wei ght to the legiti mate expectation of the hi ghest bidder to have his tender accepted unless outbid by a hi gher bidder would be a reasonable exercise of power for public good." In a case, the petitioner had submitted tender in response to the first tender invitation and it was found to be the lowest. However, no tender was accepted and in repl y to the query by the petitioner he was told that no funds were available. After a few months though funds were available the tender was not accepted. More than a year after the first invitation, fresh tenders were invited for wor ks including the items of wor ks for ming the part of the first invitation although the petitioner was ready and willing to execute the wor ks at the earlier quoted rates. The petitioner filed a writ which was rej ected holding that the mere fact that the petitioner had gi ven lowest rates in response to the first invitation pursuant to which no one was gi ven the contract, cannot vest the petitioner with any right to get the contract for the said items when a fresh tender notice was issued after more than a year.'

(2)

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(3) Global tenders were i nvited for i mplementi ng a scheme for moderation of Air Traffic Control Service at Bombay and Delhi Airports by NAA on turnkey basis in four parts: I Pre-qualification bid II Technical Bid III Commercial Bid and IV Financial Bid. Three tenders were received all of them having been found t o meet the prequalification criteria. After seeking cl arifications, an exter nal experts committee was appointed by the tender committee to look int o technical evaluation. The exter nal experts short listed two bidders. Thereafter the financial bids of the said two bidders were opened. Negotiations followed with the two and final off ers submitted by the two were opened. One of the two bidders having come t o know the decision of NAA (after having l ost the race) and the third bidder not short listed filed writ petition on the ground that the decision to award the contract w as arbitrary and actuated by f raud and mala fides. A preli mi nary obj ection w as raised to the maintainability of the 55 Food Corporation of India v.Kamdhenu Feed Industries, AIR 1993SC 1601(1605). 56. R. R. Co-op Labour and Construction (LOC) Ltd v. State of Punjab, AIR 1999 P & H 244.

writ petition on the ground that the petitioners were foreign companies and therefore not entitled to the protection of fundamental right conferred by Art. 19(1) (g).

b was held that having invited the tenders f rom all over the world and having taken the position that the tenders would be considered on their respective merits, the petitioners were entitled to legiti mate expectation of fair consideration. Like a citizen, a foreigner is also entitled to avail of personal rights enshrined in Ar t. 14 of the Constitution. Beside the foreign companies can challenge the deci sion by availing of pri nciples of the. Admini strative law without taking recour se to Arts. 14 and 19 of the Constitution. The writ petitions were considered and dismissed on merits. 5 6 (4) Ever y year the InHL ; i ,-Railways Boar d enters into a contract with the manufacturer of suppl y of cast steel bogies f or building the wagons from about a dozen established sources of proven ability. Li mited tender notice was issued for procurement of 19,000 cast steel bogies from 1-4-92 to 31-3-93. on opening of the tenders it was found that the top three manufacturers quoted an identical price of Rs. 77,666/ - per bogie while others quoted between Rs. 83,000 and Rs. 84,500 per bogie. Bef ore finalization of the tenders two maj or concessions including reduction of customs dut y were announced by the government. After taking into account the effect of the concessions, the tender committee concluded that Rs 76,000 per bogie woul d be a reasonable rate. It was concluded that the three large manufactures have for med a cartel and quoted lower rates. Counter offers were given to the three big ones at Rs. 65,000 per bogie and lo the other s at Rs. 76,000. This was challenged on the ground of discrimination in the Delhi High Court. The petitioner offered to accept Rs. 67,000 per bogie. The Railways accepted this offer. The Hi gh Court at an interlocutory stage directed the board to "pay a price at the rate of Rs. 67,000/ only per bogie and t hat would be subj ect to the final decision of the writ

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petitions". Being aggrieved by this order, the Railways fded special leave petition which the Supreme Court refused with certain directions. Thereafter the High Court allowed the writs and directed that all the suppliers should make the suppl y at Rs. 67,000/ - per bogie. It was also observed that the stand that three big manufacturers formed a cartel is based on extraneous considerations. Being aggrieved by this j udgment, the Uni on of India filed a special leave petition. The Supreme Court held that there was not enough material to conclude that the three manufactur ers formed a cartel. However, there was scope for entertaining suspicions by the tender committee that they f or med a cartel since all the three quoted i dentical prices. It was also held that dual pr icing under the circumstances may be reasonable and t he stand of the Railways to do so under the circumstances is bona fide and not mala fide. The Rai lways had taken the stand that the three bi g manufacturers offered a low price with a hope to get the entire or larger quantit y allotted, resulting i n monopol y 56

Thompson - CSF v. National Airports Authority of India, AIR 1993 Del 252.

extinguishing the smal ler manufacturers. The plea of legitimate expectation advanced on behalf of the three manufacturers was considered and taki ng a review of t he j udicial pronouncement from various countries, the Supreme Court negativated it on the ground: "the protection of such legiti mat e expectation does not require the fulfillment of the expectation where an overriding public inter est requires otherwise." However , it was obser ved that the doctrine gives the applicant suff icient locus standi for j udicial review and that it is to be confir med mostl y to the right of a fair hearing before decision. It does not gi ve scope to clai m relief straightaway from the administrative authority as no cr yst allized ri ght as such is invol ved. " (5) Where the flats were allotted by a Housing Board subsequent to the sanction of the layout plan in which area for communit y f acility was ear mar ked, in a writ petition for restraining the board from converting use of the area for residential or commercial building, it was held that allotees had legiti mate expectation that they would be provided with such facilities. 5 8 (6) Where the Government invited tenders for sale of certain quantity of G.I. pipes and the tender notice stipulated that the highest quoted rate would be accepted and yet, the State allotted certain quantit y to non-tenderer after accepting the highest tender, it was held that the doctrine was applicable and the action w a s arbitrary. 5 9 3.9.2

Types of Cases under Art. 226

The cases in which breaches of alleged obli gation by the State or its agents can be set up are di visible into four t ypes, in so far as the exercise of power under Art. 226 of the Constit ution 6 0 .

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(i) Where a petitioner makes a grievance of breach of promise on the part of the State in cases where on assurance or promise made by the State he has acted to his prej udice and predicament, but the agreement is short of a contract within the meaning of Art. 299 of the Constitution; (ii) Where the contract entered between the person aggrieved and the exercise of a statutory power under Acts or Rules framed thereunder and the petitioner alleges a breach on the part of t he State; and (iii) Where the contract entered into between the State and the person aggrieved is hon-statutor y and purely contractual and the rights and liabilities of the parties are 57 58 59 60

Union of India v. Hindustan Development Corporation AIR 1994 SC 988. Bhagat Sing Negi v. H.P. Housing Board AIR 1994 H.P. 60. Mogo Nagi v. State of Nagaland, AIR 1995 Gau. 6. Radhakrishna Agarwal v. State of Bihar; AIR 1977 SC 1496.

governed by the ter ms of the contract, a petitioner complains about breach of such contract by the State. (iv) Where the contract entered into between the State and the person aggrieved is non-statutory and purely contractual but such contract has been cancelled on a ground, dehors any of the terms of the contract which is per se violati ve of Article 14 of the Constitution. The Patna Hi gh Court has held that in the first two and the four th categor y above, applications under Art. 226 of the Constitution are maintainable. 6 1 These categories can be further subdivided into nine categories in respect of the procedure to be followed in inviting and accepting tenders which may attract Art. 226. 3.9.3 Procedure to be followed for inviting and accepting tenders In a State governed by rule of law, ever y t ender process by the State or its instrumentalities shoul d be transparent, fair and open. The State cannot adopt a tender process, which does not notify the procedure that will be f ollowed for acceptance or rej ection of tenders. The process in such a case cannot be treated as transparent, fair and open. In such a case the writ Court can interfere. 6 2 The rule is that an executive authority must be vi gorousl y held to t he standards by which it professes its action to be j udged and it must scrupulously obser ve those standards on pain of invalidation of an act in violation of them. But it cannot follow that the executive authority cannot at all deviate from or relax the standards. That would depend upon the nature of the act, the necessity for

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making the deviation or relaxation and the effects which the deviation or relaxation is likel y to cause. A distinction must be made bet ween those terms and conditions, which are essential terms and conditions of eli gibility and those, which are i ncidental or of inconsequential nature. If the relaxation is made in the essential conditions such as condition relating to turn over, fair ness and equal treat ment requires that the process shoul d be carried out afresh. 6 3 Ordinaril y the Cour t refuses to substitute itself to examine the comparati ve merit of bidders but will not abdicate its j urisdiction and authorit y to examine the merit of allegations of arbitrariness in the procedure and the decision to gi ve some one an unfair advantage or to keep eligible persons out of competition. ILLUSTRAT ION (1) The State of Assam invited bids for the settlement of ri ver fi shery Mahal. The highest bidder fail ed to deposit securit y deposit and other amount after his bid was accepted. The State thereafter issued a notice for resale at the cost of the bidder, after warni ng hi m that his earnest money would be f orfeited. In the 61 M/s Pancham Singh v. State, AIR 1991 Pat. 168 (F.B.). 62 Dutta Associates Pvt. Ltd. v. Indo Merchantiles Pvt. Ltd.,1996 (10) JT 419; 1997 (1) SCC 53. 63 Konark Infrastructure Pvt. Ltd. v. Commissioner Ulhasnagar Municipal Corpn.; AIR 2000 Bom. 389.

resale, the hi ghest bi dder was asked to pr oduce some document s. Pending scrutiny, the S'.?te cancelled the resale notice. Deciding the writ petition filed by the hi ghest bidder in the resale process the Gauhati Hi gh Court held that " ever y power is coupled with dut y and discretion is unfettered. The impugned notice - not backed by acceptable logic and rationale and is a product of mechanical exercise of power". The notice of cancelling resale was set aside and quashed and the St ate was directed to complete the resale process. 6 4 If the scrutiny shows no arbitrariness the Court may refuse t o grant any relief. 6 5 A tender noti ce categoricall y provi ded three tier eligibil ity test and invited offers in three covers. On opening the first cover, the petitioner tenderer was found not eligible. Other two covers were not opened. The AP Hi gh Court declined to interfere in the decision. 6 6 The cases from the building and engi neering contracts, which may attract Art. 226 under the four categories stated in Ar 3.9.3 can be divided into the following nine categor ies. 1

Eligibility of tenderers

2.

Pre-qualification of tenderers

3.

Reclassification of tenderers

4.

Essential conditions of lender Notification

5.

Negotiations prior to acceptance

6.

Acceptance / Rej ection of tenders

7.

Nomination of or preference gi ven to a tender er or class of tenderers

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8.

Blacklisting of Disqualification of tenderers

9.

Breach of contract after the tender is accepted

173

Illustrative cases under each of the nine categories mentioned are gi ven below in Art. 3.10 onwards with a view of hi ghli ghting the principles applied by the Courts. Knowledge of these principles and cases may be of help to the State authorities on the one hand and to seek redress if a tenderer or contractor feels aggrieved by any action of the State authority, on the other hand. 6 4 Bijon Kumar Das v. State of Assam, AIR 2003 Gau. 164. 6 5 M/s Continental construction Ltd. v. Tehri Hydro D.C.Ltd.; AIR 2002 SC 3134; 2002(3) Arb. LR 255(SC). Also see: M/s Bharat construction Co.v. State of Rajasthan; AIR 2002 Raj. 279 M/s Doshi Ion Exchange & Chemical Inds. Ltd. v. Union of India AIR 2001 Raj. 276. Madhu Construction Co. v. National Aluminium Co. Ltd.; AIR 2001 Ori. 169. M/s Ritz Construction Co. v. Union of India; AIR 2001 J & K 7. 6 6Neelambar Ropeways v. A.RTourism Develop. Corpn. Ltd., 2002(3) Arb. LR 150 (AP); N.D.Grover v. State of M.P., 2002(3) Arb. LR 224 (MP). Also see: Jay Bee Energy Services Pvt. Ltd. v. Oil India Ltd. 2002 (2) Arb. LR 374 Gauhati.

3.10 ACCEPTANCE/REJECTIO N OF TENDER -INTERFERENCE BY COURT-WHEN JUSTIFIED - GUIDING PRINCIPLES In the case of the Stale or a public body, there could be, in a gi ven case, an element of public law/public interest involved. The elements of public interest include: (i) Public money (ii) The subj ect matter being of publi c wor ks and public utility services (iii) Expeditious completion (iv) Qualit y of goods supplied or wor ks executed The High Court will interfere with the acceptance or rej ection of tenders by the Government or other public authorities, when it is seen that a decision is influenced by extraneous considerations, which ought not to have been taken into consideration. Even if the action was taken in good faith, it is bad in law and cannot be upheld. Guiding Principles The Supreme Court of India had from time t o time indicated the principles to b e fo llo wed by Hi g h Courts when a wr it p eti tio n is f iled in t he High Court ch al le n gi n g ( he a war d o f a co n tr ac t b y a p ub l ic au t ho r i t y. I t may b e u se f u l to r e vi e w so me i mp o r t a nt ear li er d e ci sio n s o f t he S u p r e m e Co ur t o l I nd ia i n order to understand fully t h e sco p e o f Ar t. 2 2 6 in co n n ect io n wi t h co n tr a ct ua l obli gation of t he Slatt on the citi zen.

In the well known c?se of Ramana Dayaram Shett y v. The International 67 Air p o r ts Authorit y of India it was pointed out that the "modern welfare State which is committed to egalitarian values and dedicated lo the r ule of "aw", has to act whi le awar ding a contract, under the constitutional mandat e of Article 14, as also the j udicially evol ved rules of the administrative l aw. It was pointed out.-

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" It must, therefore, be taken to be the law that where the Government is dealing with the public, whether by way of gi ving j obs or entering into contracts or issuing quotas or licenses or granting other for ms of largess, the Government cannot act arbitrarily at its sweet will and, li ke a pri vate individual, deal with any person it pleases, but its action must be in confor mit y with standard or nor m which is not arbitrar y, irrational or irrelevant." It was also pointed OL : " It is indeed unthin.cabie that in a democracy governed by the rule of law the executive Government or any of its of office should possess arbit rary power over the interests of the individual. Ever y action of the executive Government must be infor med with reason and should be free from arbitrariness. That is the ver y essence of the rul e of law; and its bare mi ni mal requirement. 67 AIR 1979 SC 1628.

"...The State cannot, therefore act arbitrarily in entering into relationship, contractual or otherwi se with a third part y, but its action must conf or m to some standard or nor m which is rational and non-discriminator y. " In the case of M/s. K asturi Lai Lakshmi Reddy v. State of Jammu & Kashmir 68 again it was reiterated : - "Whatever be its activit y, the Gover nment is still the Government and is, subj ect to restraints inherent in its position in a democratic society. The constitutional power conferred on the Government cannot be exercised by it arbitrarily or capriciously or in an unprincipled manner." It was i mpressed in the case of Maneka Gandhi v. Union of India* 9 that rule of reason, rule against arbitrariness and discrimination, rule of fair play and natural j ustice are part of the rule of law applicable in the actions by the State instrumentality. In t he case of Mahabi r Auto Stores v, Indian Oil Corporation, 7 0 the same question was considered : In that case the petitioners' firm was carr ying on business of sale and distribution of lubricants for 18 years on the basis of supply being made by Indian Oil Corporation. Abruptl y the supply of lubricants was stopped to the firm by the Indian Oil Corporation without any notice or intimation. In that connection it was pointed out as follows: Where there is arbitrariness in State action of this t ype of entering or not entering into contracts, Article 14 springs up and j udicial review strikes such an action down. Ever y action of the State executive authorit y must be subj ect to rule of law and must be infor med by reason. So whatever be the activit y of the public authority, in such monopol y or semi -monopol y dealings, it should meet the test of Articl e 14 of the Constitution. ... Even though the rights of the citizens are in the nature of contractual rights, the manner, the method and moti ve of a decision of entering or not enter ing into a contract, ar e subj ect to j udicial review on the touchstone of relevance and reasonableness, fair play, natural j ustice, equality and non-discri mination in the type of the transactions and nature of the deali ng as in the present case."

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In connection with ter mi nation of the appointment of the District Government Counsel by the State Government of Uttar Pradesh the same question was considered' by the Supreme Court in the case of Kumari Shrilekha Vidyarthi v. State of U.P. 7 1 wherein it was pointed out : "Applicability of Arti cle 14 to all executi ve actions of the State being settled and for. the same reason its applicability at the threshold to the making of a contract in exercise of the executive power being beyond dispute, can it be said 68 69 70

AIR 1980 SC 1992. AIR 1978 SC 597. AIR 1990 SC 1031.

71

Kumari Shrilekha Vidyarthi v. State of U .P. (1990) 3 SCJ 336.

that the State can thereafter cast off its personality and exercise unbridled power unfettered by the requirements of Article 14 in the contractual matters and claim to be governed therein only by pri vate law principles applicable to private individuals whose rights flow only from the ter ms of the contr act without anything more? We have no hesitation in saying that the personality of the State, requiring regul ation of its conduct in all spheres by requirements of Article 14, does not under go such a radical change after the making of a contract merel y because some contractual rights accrue to the other party in addition. It is not as if the requirement s of Article 14 and contractual obligations are alien concepts, which cannot co-exist." It was further obser ved: "We have no doubt that the Constitution does not envisage or per mi t unfairness or unreasonableness i n State actions in any sphere of its activit y contrary to the professed ideals in the Preamble. In our opinion, it would be alien to the constitutional Scheme to accept the argument s of exclusion of Article 14 in the contractual matters. The scope and per missi ble grounds of j udicial review in such ma tter s a nd t h e r e l ie f which may be avail able ar e different matt ers but that does not j us ti f y t h e vi e w o f i ts to tal e xc l u sio n. T hi s i s mo r e so wh e n t he mo d er n tr e nd i s a lso to e xa mi n e th e u n r ea so nab le ne s s o f a ter m i n s uc h co n tr a c ts wh er e t he b ar g ai n i n g p o we r i s u n e q ua l so t h at t he se ar e n o t ne go t ia ted co ntr a ct s b ut s ta nd ar d fo r m co ntr ac ts b et wee n u neq u al s."

It was then obser ved : " Ho we ver , to the extent, challenge is mad e on t he ground of violation of Ar t ic le 14 by alleging that the impugned act is arbi trary, unfair or unreasonable, the fact that the dispute also falls within the domain of contractual obligations would not relieve the State of its obligation to compl y with the basic requirements of Article 14. To this extent, the obligation is of a public character invariably in ever y case irrespective of there being any ot her right or obligation in addition thereto. An additional contractual obligation cannot divest the clai mant of the guarantee under Article 14 of non-arbi trariness at the hands of the State i n any of its actions." 7 0

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The law is well settled that in respect of proceedings and decisions taken in administrative matters, the scope of j udicial review is confined to t he decision making process and does not extend to the merits of the decision taken. 7 1 The other principles can be summed up as follows: 1. The Court must be satisfied that there is some element of public interest invol ved. 2. A mere difference in prices offered by two tenderers may or may not be decisive.. 7 0 Also see Bmipendra Engg. & Constn. Pvt. Ltd. v State of Jharkhand, 2004 (1) CTLJ 450 (Jharkhand).

71 K. Vinod Kumar v. Palanisamy and Ors.; 2004(1) CTLJ 436 (SC). 3. The proposed proj ect may be considerabl y delayed thereby escalating the cost far more than the saving which the Court may ulti matel y effect public money by deciding the dispute in favour of one or the other tenderer. 4. The obvious consequences of delay in the commissioning of the proj ect and cost escalation. That the Hi gh Court "does not interfere in a gi ven case onl y because it would be lawful to do so". The High Court may refuse to issue any writ in the event it is found that substantial j ustice has been done to the parties or in the larger interest it would not be prudent to issue such a writ. The right of an individual someti mes has got to give way to the right of the public at large. In the interest of the public, the wor ks allotted to a tenderer should be allowed to continue in view of t he fact that, thereby t he public exchequer shall benefi t to a huge extent. 7 2 ILLUSTRAT IONS (1) Tenders were invited by the T.N. Electricity Board for undertaki ng a hydroelectric proj ect. The tender of a parly who had failed lo comply with lhe tender conditions was accepted. The acceptance of the tender was held to be illegal. However , in this case the facts were such that the work was started b y the tenderer whose lender was accepted and nine months time had already elapsed when the Court was considering the relief to be granted. I t was held b y the Madras Hi gh Court that i t would not be in the public interest t o put the hands o f the clock back and t o direct the authorities to reconsider the tenders. It was therefore held that the aggrieved party should approach the appropriate court for an action in damages. 7 3 (2) In a case decided by the Bombay Hi gh Court the M.S.E. Boar d had invited tenders from r egistered contractors, but accepted the tender of an unregistered contractor. The Hi gh Court held that it was an essential condition and that the decision of the Board accepting the tender of a part y not fulfilling the essential condition was liable to be quashed. However, in that case the wor k had already been commenced by the tenderer and the Hi gh Court thought it fit not to upset lhe decision of the Board and lo declare the contract void. The decision not to declare the contract void was taken in the peculiar facts and circumstances of the case 7 4 (3) Two tenders were found to be the lowest. The authority accepted the tender of the bidder who was senior with regard to the date of registration.

72 73 74 75

Y. Swamidhas v.Thamil Nadu Anaithu Vagai Oppan.,Sangam,2002(l)Arb.LR54 Madras (DB). M/s Chinnamman & Co., Kadamparai v. T.N.E Board, Madras, AIR 1986 Mad. 302. Haribai Velhi v. M.S.E.B, AIR 1988 Bom. 114. Khursheed Alam v. State of Bihar, AIR 1994 Pat. 20.

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The agreement was duly executed. However, the Minister ordered the wor k to be divided between the two tenderers. The order was quashed and the matter was ordered to be considered in accordance with the rules which apparently did not per mit division of the wor k. 7 5 5. In the case of publi c interest litigation challenging the award of contract, it needs to be seen that the petitioner is litigating bona fide for the public good and the PIL is not a cloak for attaining pr ivate ends of a third party or the petitioner. 6.. The Court can exami ne the previous record of public service rendered by the organization bringi ng in PIL. 7. The Court must wei gh conflicting public interests before intervening. 8. When the decision has been taken bona fide and the choice has been exercised on legiti mat e considerations and not arbitrarily, there is no reason why the Court should entertain a petition under Art. 226. 9. Onl y when the Court comes to the conclusion that there is an over whel ming public interest that the Court should inter vene. 10.Where there is an allegation of mala fides and the Court, based on the material before it is satisfied that the allegations need further investi gations, the petition should be entertained 11 When the decision-making procedure Mas been structured and t e n d e r conditions set out the requirements, the Court is required to examine if these conditions have been considered. 7 6 12. If any relaxation in tender requirements has been granted, the Cour t should examine if it was for bona fide reasons, whether the tender conditions permit such relaxation and if the decision has been arrived at after a fair consideration of all offers. 13. If an evaluation committee of experts is appointed to evaluate offers, the expert committee's knowledge plays a decisi ve role and price is onl y one of the criteria. The Court should not substitute its own decision for the decision of the expert evaluation committee. 14. The mentioned consi derations above must wei gh with the Court when interim orders are being passed. Balance of convenience would play a maj or role in moulding interi m relief. For example, in a case, where neither any mala fides were alleged nor any allegation of collateral moti ve was present, except that the tenderer whose bid was accepted did not fulfill the qualifying criteria. The petitioner too did not fulfill the qualifying criteria. It was held by the Supreme Court that the Hi gh Court had seri ously erred in granting the interi m

7 6 Also see: M/s Kesar Enterprises Ltd. v. State of U.P. AIR 2001 A11.209. 7 7 Raunaq International Ltd. v. I.V.R. Construction Ltd.; AIR 1999 SC 393;Also see: Asst. Collector of Central Excise, West Bengal v. Dunlop India Ltd. AIR 1985 SC 330.

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order. 7 7 (15) Merely because of some disputed questions of facts arise for consideration, the same cannot be a ground to refuse to entertain a writ petition in all cases as a matter of rule. (16) A writ petition invol ving a consequential relief of monetar y claim is also maintainable. 7 8 In a case even after holding that the di sputes in question could not be agitated in a writ petition, the Supreme Cour t refused to dismiss the writ pet ition where dismissal at that stage was likel y to result in miscarriage of j ustice on account of l apse of ti me resulting in the foreclosure of all other remedies.™ (17) If the Government acts fairly, though falters in wisdom, the Court should not interfere. 8 0 ILLUSTRAT IONS Where, at the instance of the Court, the tenders were to be recalled and while issuing fresh notice for recall, new conditions for eligibility were i nserted; the Court refused to interfere al the instance of the party which did not fulfill the requisite criteria It was held that if by inserting certain ter ms the State wants the best to come for ward, such incorporation cannot be said to be arbitrary." '

(1)

When the lowest tenderer is found to lack t he requisite experience and all the tenderers agree to execute the work at the rates tendered by the lowest tenderer, who should be selected? The Orissa High Court upheld the decision under the provisions of Orissa P.W.D. Code of awarding the contract to the lowest eligible tenderer and only if he refuses to extend such offer to the next lowest tenderer. 8 2 (2)

(3) Generally ever y tender notification contains a provision to the eff ect that the right to accept or rej ect any or all tenders without assigning any reason is reserved by the authority inviting tenders. The Calcutta High Court clarified its purpose as to save time and trouble of replying to lar ge number of rej ected tenderers of different considerations on which each tender may have been rej ected. However, it was obser ved that there is a presumption that an act done by the public officer is fair, reasonable and above board. In the case before the Di vision Bench, an order rej ecting the wri t petition by the learned Single Judge, the public offi cer, in spite of opportunity being gi ven by t he Court to j ustify the action of not accepting the lowest rates and accepting the tenders with high rates for supply of dietary articles to district hospitals, no reason 7 8 ABL International Ltd. v.Export Credit Guarantee Corpn. of India Ltd.,2004(l)CTLJ 1 (SC). 7 9 Kerala State Electricity Board v. Kurien E. Kalathi, 2000(6) SCC 293; 2000 (2)Arb.LR 652 SC. Also see: Ganga Retreats & Towers Ltd. v. State of Rajasthan 2004(1) CTLJ 104 (SC). 8 0 Fertilizer Corporation Kamgar Union (Regs.) , Sindri v. Union of India, (1981) 1 SCC 568; AIR 1981 SC 344. 8 1 M/s Dredge & Dive v. State of Jharkhand AIR 2000 Jha. 124; M/s Riaz Construction Co. v. Union of India, AIR 2001, J.& K.7. 82 Debendranath Balbantaray v.. Commr.-cum-Secretary Govt, of Orissa; AIR 2002 Ori.142.

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was gi ven. The Di vision Bench allowed the petition a n d ordered f o r calling fresh tenders and also directed to carry out investi gations by a competent police officer as to why without any reasons the higher rates were accepted and to forward the report to the Vigilance Depart ment for taking steps against erring officers if it was found that the officers shun public dut y." In response to t h e invitation of tenders for construction of an earthen dam and spillway, tenders were recei ved. After scrutiny it was found that the lowest tenderer did n o t posses th requisite experience and machiner y. The 'second lowest ' was rej ected because of having quot ed abnor mall y low rat es and not having submitted analysis of the rates quoted. The 'third lowest ' tender was recommended for acceptance. In the mean time the 'second lowest ' tenderer appealed to the Gover nment, submitted anal ysis of rates and stated that he had no wor k in hand and therefore c a n commence the wor k at once. The Government directed the Committee t o reconsider the issue. The Committee initially rej ected the second lowest tender o n t h e ground t h a t h e did not possess a valid license. The li cense was valid when t h e tender was submitt ed and was subsequentl y renewed. There after it was decided t h a t t h e w o r k b e awarded t o the second lowest tenderer if he is willing to execute t h e w o r k a t t h e cost o f the lowest tenderer, if not gi ve the same offer to the third l o w e s t . T h e s e c o n d lowest accepted t h e o f f e r . I t w a s held t h a t t h e authorities h a d not a c t e d i l l e g a l l y a n d t h e a c t i o n d i d n o t s u f f e r f r o m t h e v i c e o f a r b i t r a r i n e s s or m a l i c e . * 4 (4)

instrumentalities, in order l o earn revenue, i gnore t h e essential conditions o f the tender invitation (NIT) o r act contrary t o public policy? A di vision Bench o f Gauhati High Court considered the above mentioned question a n d answered in t h e negati ve. 8 5 I n a recent decision a number of the said cases were considered and in t h e light o f the said pronouncements it was held that the following l e g a l principles emer ge as t o the maintainability o f writ petition: (5) Can the Slate or its

appropriate case, a writ petition as against a State or an instrumentality o f a State arising out of a contractual obligati on is maintainable ......" "(a)

In

an

3.10.1 Malice in f act and in law - Meaning of : The term malice in law means " ill -will or spite towards a party and indirect or improper moti ve in taking an action. " This is someti mes described as "malice in fact". "Legal malice" or " malice in law" means ' something done without lawful excuse'. In other words, ' it is an act done wrongfull y and willfully without reasonable or probable cause, and not necessarily an act done from ill feeling and spite'. It is a deliberate act in disregard of the rights of others. 8 3 Adhir Ghosh v. State of West Bengal; AIR 1998 Cal. 317. 8 4 Debendranath Balabantaray v. Commr.-cum-Secretary Govt, of Orissa, AIR 2002 Ori.142. 8 5 Multipurpose Development Society v. State of Assam; 2004(1) CTLJ 365 (Gauhati) (DB).

Bijulibari

180

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Where malice is attributed to the State, it can never be a case of personal ill will or spite on the part of the State. If at all, it is malice in the legal sense, which can be described as an act, which is taken with an oblique or indirect obj ect. For example, an action of State can be described as mala fide if it seeks to 'acquire land' ' for a purpose not authorized by the Act ' i.e. ot her than the statutory purpose 8 6 .

3.10.2 A Person not submitting tender may have a locus standi to maintain a Writ Petition It is interesting to note that a person who has not submitted a tender because he did not fulfill the requisite qualification can challenge the action of acceptance of tender. Can an Aut hority contend that the appellant had no locus standi to maintain the writ petition and he was a mere stranger? The argument can be that if the appellant did not enter the fiel d of competition by submitting a tender what did it matter to him whose t ender was accepted or not; what grievance could he have if the tender of some one else was wrongl y accepted. A person whose tender was rej ected mi ght very well complain that the tender of someone else was wrongl y accepted. The Supreme Court of India, rej ected this argument in the case below: ILLUSTRAT ION A tender notice stated in the clearest ter ms that "sealed lenders in the prescribed for m are invited from Registered Second Class Hoteliers having at least 5 years experience for putting up and running a second class restaurant and two Snack Bars, at this Airport for a period of three years". The Authority accepted one tender, which did not satisfy the requisite qualification. It was held: 8 7 "This argument, in our opinion, is misconcei ved and cannot be sustained for a moment. The grievance of t he appellant, it may be noted, was not that his tender was rej ected as a result of improper acceptance of the tender of the 4th respondents but that he was differentially treated and denied equality of opportunity with the 4th respondents in submitting a tender. His complaint was that if it were known that non-fulfill ment of the condition of eligibility would be no bar to consideration of a tender, he also would have submitted a tender and competed for obt aining a contract. Bui he was precluded from submit ting a tender and entering the field of consideration by reason of the condition of eligibility, while so far as the 4th respondent were concerned, their tender was entertained and accepted even though they did not satisfy the condition of eligibility and this resulted in inequality of treatment which was constitutionally i mper missible. This was the grievance made by the appellant in the writ petition and there can be no doubt that if this grievance was well founded, the appellant would be ent itled to maintain the writ petition. The question is whether this grievance was j ustified in law and the acceptance of the tender of the 4th respondents was vitiat ed by any legal infir mi ty. 86 87

State of Andhra Pradesh v. Goverdhanlal Pitti, AIR 2003 SC 1941. Ramana v. I.A.Authority of India AIR 1979.SC 1628.

"Now, there can be no doubt that what para (1) of the notice prescribed was a condition of eligibility which was required to be satisfied by ever y person

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submitting a tender. The condition of eligibility was that the person submitting a tender must be conducting or running a registered II Class Hotel or Restaurant and he must have at least 5 years' experience as such and if he did not satisfy the condition of eligibility, his tender would not be eligible for consideration. This was the standard or norm of eligibility laid clown by the 1st respondent and si nce the 4 respondents did not satisfy this standard or nor m, it was not competent to the first respondent to entertain the t ender of the 4 respondents, which is a well settled rule of administrati ve law that an executive authorit y must be rigorousl y held to the standards by which it professes its actions to be j udged and it must scrupulousl y observe those standards on pain of invalidation of an act in violation of them."

3.10.3 Conditions of Eligibility Where for Public Works, tenders are invited from tenderers with certain qualifications; persons not fulfilling the said qualification are not eligible for submitting tenders. The obj ect of restricting competition to a certain categor y or kind of contractors with some credentials such as registration, is to have a person with some experience, ability and infrastructure as also necessar y machiner y and equipment with technically competent personnel to complete the wor k 8 8 . What would be the eligibilit y criteria for participation in a tender is a matter to be decided by the State Authority and this being a policy decision the Court in exercise of its discretionary powers will interfere with such decision onl y when it is arbitrary, unreasonable and irrelevant. The rule is well settled that the State cannot accept the tender of a person who does not fulfill the requisite qualification and, as such, by accepting such a tender a discrimination is made by and between the person whose tender was accepted and the person who did not submi t his tender in ter ms of the said tender notice, because he did not fulfill the qualification. ILLUSTRAT IONS ( I ) A tender invitation required that the tenderer should own l/3rd of the total

number of trucks requi red for the tender work, for the transportation of coal. A person who did not ful fill the above condition of owning the requisite number of trucks was allotted the work. It was held by the Patna Hi gh Court 8 9 that a person not fulfilling the requisite qualification and, therefore, not submitting the tender has the locus standi to maintain a writ application. 9 0 88

M/s The Indian Hume Pipe Co. Ltd. v. Bangalore .Water S. & S. Board, AIR 1990 Kant. 305.

89

Jai Bharat Transport Co.Central Coal Fields Ltd. AIR 1989 Pat. 170.

90

Refer to Art. 3.10.2.

(2) One of the conditions for eligibility was three years experi ence o f manufacturing the required item. One of the bidders, an. Indian Company did not satisfy this condi tion, but assured that its foreign collaborator had the experience. It was held that the experience and expertise of the foreign collaborator could be of no avail to the Indian Company. It was f urther held

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that the fact that the foreign company held 10% of the share capit al would not advance the case of t he Indian company any further. It was further observed that if two manufactur ing units are mer ged into o ne , and one of them has the requisite experience and expertise the new entity after the mer ger mi ght be gi ven the benefit. 9 1 (3) In a case the eli gibility criteria was that the ship builder should have built and delivered tugs of 15 ton bollard pull and above. One of the tenderer had built and delivered tugs of 13-ton capacit y. Hi gher capacity tugs were being built but no t delivered at the time of submission of the tender. The Special Tender Committee after enquir y found that t he wor k of building tugs of hi gher capacity was in progr ess and declared that the tenderer was quali fied. By the time the tender came t o b e accepted after clarifications, negotiations with all parties and receiving revised finance bids, the tugs of higher capacity were delivered by t he tender er who se b id incidental ly was found to b e the lowest. T he Or i s sa Hi gh Co ur t r e j ected t he p l ea t ha t th e t e nd er e r o u g ht to ha v e b e e n 92 d isq u al i fied i n t he f ir st in s ta nc e a nd h i s o f fer n o t considered a t all. (4) In a ca se o f contract fo r tr a n sp o r t at io n o f e ss e n tia l co m mo d it ie s to r at i o n s ho p s one of the tender conditions stipulated that t he te nd er er s s ho u ld p o s se s s a t lea st two lorries for carrying out the said contract. Rej ection of the tender of th e lo we s t tenderer who had on the date of submi ssion of tender had only one lorr y and t he award of the contract to the next tenderer wh o besides satisfying the co nd it io n s also had huge experience in transportation, was held valid and proper. 9 3 (5) A tender for transport contract submitted by a fir m of which an officer's father was a partner, in breach of stipulation that near relative of an employee wa s not per mitted to tender, was rej ected. It was held that rej ection was valid. 9 4 (6) A tender notification fixed pre-qualification criteria of having done successfully drilling wor k 5000 m and grouting to the extent of 100 tonnes in drainage gallery of masonr y dam /Tunnel or si milar structures. In the subsequent notice, the words "Tunnel or similar structures" were eliminated. The writ contending that due to the change the whole process was vitiated was dismissed. 9 5 91

M/s. Continental Pump and Motors Ltd. Oaziabad v. State of Bihar, AIR1995 Pat. 183

92

Bharati Shipyard Pvt. Ltd. v. Paradeep Port trust AIR 1995 Ori. 147

93

L. V. Basavaraj v. Dy. Commr., Chikmagalur Dist., AIR 2002 Kant. 81.

94 M/s. Rajendra Road Liner v. Indian Oil Corpn., AIR 2003 All. 77. 9 5 Reddy Brothers,& Company v. State of M.P.and others, 2002(3) Arb. LR 347 (MP). 96 AIR 2000 J &. K 30.

(7) In Mohammad Ashraf Gilkar v. State of J. & K, a condition pr ohibiting defaulting contractors from tendering was upheld by obser vi ng that the question of contractual obligations cannot be gone into in the writ j urisdiction. 9 6

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(8) The Allahabad Hi gh Court held that the condition of submitting the good moral character certificate of not more than three months old to qualify for participating in the auction of right to collect toll on bridge was mandator y and could not be relaxed. 9 7 (9) A tender notice for pri nting, binding and supply of yellow page telephone directories contained a stipulation that tenderers should substantiate their experience with documentar y proof by furnishing credentials in the field of having complied, pri nted and supplied telephone directories to the large telephone systems with the capacity of mor e than 50,000 lines. A company, which had no experience and attempted to depend upon the experience of its shareholders, though i t offered the highest r oyalt y, found its offer rej ected. In a writ petition filed it was held by the Delhi Hi gh Court 9 8 that the approach of the authorities in arriving f t a conclusion that the petitioner di d not satisf y the eligibility condition was not arbitrar y. (10) A tenderer was being denied an opportunit y of award of contract on the ground that he was not registered with Bui lding Construction Division. The Depart ment contended that after bifurcation of the Public Wor ks Depart ment in Road Construction Depart ment and building Construction Department, the state had made the registration in the bifurcated Building Construction Depart ment compulsory. However, the contractors who were regi stered with erstwhile Public Wor ks Depart ment before 31-3-1982 were exempted from such registration. Others registered after that date till 28-6-1983 were gi ven 3 months' ti me for registration in the BCD. It was contended that registration* of the tenderer on 5-1 1-1983 was beyond the deadline and therefore not eli gible fo take up the wor k . The tenderer on the other hand contended that he was the senior most contractor duly registered in the PWD and his renewal request was granted on 5-1 1-1983 for both the Departments. The Court after perusing the register of the Building Construction Department opened in 1983 showed that all contractors including the tenderer were r egistered for Road and Building by indicating R and B 83, negati veted the contention of the Department and allowed writ petition by quashing the work older in favour of another tenderer. 9 9 (11) In Ar unkumar v. Chief Engineer, P.W.D., Bhopal the High Court held that because a fresh auction was ordered in the case on the ground that an important condition was not inserted in the earlier auction notice, the fresh auction could not be said to be illegal, arbitrary or mala f ide. It was not a case where after rej ection of the highest bid, the contract was gi ven to any other person with a lower bid or in a clandestine way, unilaterally without infor ming the person 97 98

Bashishtha Narain Pandey v. Commissioner , Basti Divn.; AIR 2002 All. 280. M/s. New Horizons Ltd., v. Union of India, AIR 1994 Delhi 126 = 1995 (1) SSC 478 = 1995 AIR SCW 275. 9 9 Dhanpat Prasad v. State of Bihar,

AIR 2004 Pat. 80. 100

Arunkumar

v.

Chief Engineer,

Jaiswal, AIR 1972 SC 1816.

P.W.D., AIR 1989 M.P. 288; State of Orissa V. Harinarain

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who bid the hi ghest. The fresh auction was not set aside. 1 0 0 (12) The State Government of Meghalaya invited tenders for operating a weigh bridge. It accepted the highest bid at Rs. 1.21 crores and entered into the contract with the highest bidder. The action was challenged by an unsuccessful bidder on the ground that the bid amount was speculatory and predatory. Both the learned Single Judge and the Division Bench allowed the writ and fixed the approximate value of the contract at Rs. 4,029.600. It is interesting to note that the tender accepting committee had reassessed the value at Rs. 2 crores. Allowing an appeal the Supreme Court set aside the judgement and the order of the High Court by holding that the reasonable assessment made by the High Court was only a tentative expression of opinion and the State Authorities had the right to differ. It was held that offering of the bid after knowing the commercial value of the contract is a matter left to the business acumen or prudence of the tenderer and application of principle of predatory pricing is wholly alien to this type of contract. It was further held that principle of monopoly also does not come into play in this type of contract.101 ( 1 3 ) For a materials handling contract, the tender notice specified eligibilit y condition of having experience of handling of steel materials of at least 28,000 MT during any of the last five financial years. It was challenged in a writ petition under Art. 14 on the ground that it was discriminatory and excluded the petitioner having experience but not fulfilling the eligibility condition. Dismissing the writ it ,M was held by the Allahabad High Court: "Whenever any condition is imposed with an objective of increasing the efficiency even if it restricts the field of eligibility could not be said to be discriminatory or violative of Art. 14 of the Constitution of India. Discrimination under this is discrimination among the same class of persons similarly placed not among different class of person dissimilarly placed.—" (14) A Public Sector Undertaking invited tenders for transportation of food grains, etc. Seven tenders were received. The tender accepting committee decided to call the second lowest for negotiations. The second lowest gave in writing that he was not ready to reduce the tendered rates. His tender was recommended for acceptance. The acceptance was communicated telegraphically. The lowest tenderer filed a writ petition in the High Court. The acceptance was revoked and the second lowest was called for renegotiations and persuaded to accept the rates five paise per quintal less than the lowest tenderer. The lowest tenderer was not even called for negotiations. The defence of poor financial position was rejected by observing that no standard for fiscal fitness was laid down and the plea was trotted out to reject the lowest tender. It was held that the action of accepting the second lowest tender was arbitrary. The authorities were directed to invited fresh tenders.103 (15) A tender condition stipulated the eligibility criteria of having satisfactorily completed at least two runways/National high way, preferably, rigid pavement works, 101 Jespar I. Slong v. State of Meghalaya, 2004 (1) CTLJ 527 (SC); AIR 2004 SC 3533. . 102 Vijay Kumar Ajay Kumar v. Steel Authority of India Ltd., AIR 1994 ALL 182. 103 Pawan Kumar v. Food Corporation of India, AIR 1999 P. & H. 76.

invol ving considerable earth filling each values Rs. 400 lakhs and one wor k of Rs. 600 lakhs during the last five years and having a annual turnover of Rs.

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500 Lakhs in each of the last three years. Having failed to get a blank tender for m on the ground of lack of fulfilling the eligibility criteria, a contracting company filed a writ in the Hi gh Court of Madhya Pradesh. The Petitioner had two proj ects of gi ven value ongoing but not completed and had produced certificates to the extent that the progress on the two proj ects was satisfactory. The High Court by an interim order directed to issue the blank tender form and the petitioners duly submitted their tender. The Ld. Single Judge as also the Di vision Bench dismissed the writ at the final hearing. An appeal was filed in the Supreme Court. It was held that the wor d "completed" would i ndicate that as on the date of the application for the t ender, the tenderer should have completed at least t wo wor ks. In other words completion of the two wor ks is a precondition. It was fi nally held: "On their own admissi on, they had not completed though the maj or part of the wor k as professed by them is completed. Under these circumstances, the view taken by the Hi gh Court cannot be said to be unwarranted ... We cannot find any illegality in Respondents not giving the tender form nor in nonconsideration of their cases pursuant to the Interi m Direction given by the Hi gh Court.' 1 0 4 (16) In another case it was found that neither the firm nor its partners, t hough the lowest tenderer, had previous experience of the t ype of wor k and could produce the certificate. This called for rej ection of the lowest tender and award of the contract to the second lowest after negotiating on par with the rates quoted by the lowest tenderer. It was held that there was no arbitrary or illegal action on the part of the Respondent. 1 0 5 (17) In a case tenders wer e invited for clearing and unloading bitumen from railway station and transportation of the same, one of the qualification for eligibility was registr ation as a Transport Carrier under the Indian Bankers Association. It was held by the Gauhati Hi gh Court that the condition was a symbol of denoting credibility and cannot be said to be superficial. 1 0 6 (18) A tender notification fixed the eligibility criteria of the bidder having executed a single contract of value not less than Rs. 72 lacs for supply and installation of ash handling system. The said criteria were challenged as arbitrary and irrational and to prefer one contractor to the others. Rel ying on Tata Cellular case and taking cogni zance of the fact that four eligible tenderers had already put in their papers, it was held that the eligibilit y criteria was not irrational or arbitrary. 1 0 7 (19)

A petitioner tenderer had challenged the notice inviting tenders, which

104 105 106 107

M/s Shapers Constructions(P) Ltd v.Airport Authority of India,1996(2)Arb.LR612 (SC). M/s Adilaxmi Constructions v. C E (R&B), Buildings, Hyderabad, AIR 1999 AP 437 Anal Roy Choudhary v. State of Tripura AIR 1999 Gau.5. Mecgale Pneumatics v. Bhillai Electrical Supply Company Ltd. , AIR 2004 Chhat. 5; 2004 (l)CTLJ 147 ( Chatt,).

imposed a condition of submitting a security of one-third amount of consideration and gave onl y seven days ti me for submission of tender. It was held that the condition o f security was to safeguard interest of the State and

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Building and Engineering Contracts

not to oust the small contractors and as such not arbitrary or illegal. Similarl y taking cogni zance of the facts that five tenders were submitted and prior contract was coming to an end it was held that the seven days ti me allowed for submission of tenders was proper being equal for all. 1 0 8

(20) A petitioner was denied tender form for a wor k on the ground t hat his brother was wor king as a clerk with BSNL and as such he could not gi ve t he affidavit stating that none of his near relative was wor king in the BSNL unit. A Di vision Bench of the Punj ab and Har yana Hi gh Cour t held the said conditi on of filing affidavit as clearly unconstitutional and viol ating Art. 14 of the Constitution. It was pointed out that the brother of the petitioner could not have infl uenced the decision of the General Manager. It was furt her observed that under Rule 4(3) of the CCS ( Conduct) Rules, a Government ser vant is restrained from dealing with any matter or gi ving sanct ion to any contract in favour of his relatives requiring reference of such mat ters to his superior for his decision. It was held that of Clause the tender in question was contrary to the mandate of Rule4(3) of the CCS (Conduct) Rules. 1 0 9 (21) Where, at the instance of the Court, the tenders were t o be recalled and w h i l e issuing fresh notice for recall, new conditions for eligi bility w e r e inserted, t h e Court refused to interfere at the instance o f the party which did n o t f u l f i l l t h e requisite criteria. It was held that if by inserting certain terms the State wants the best to come for ward, such incorporation could not be said to be arbitrary. 1 1 0 (22) In a tender invitation for supply , erection, testing and commissioning of Power Station, the eligibilit y condition required performance certificate from certain specified authorities for similar nat ure of wor k. On opening of the tenders, the lowest t enderer was found t o have full y complied with all qualifications including techno-commercial considerations. One tender was rej ected on the opening day because of non-production of perfor mance certificate. All the engineers concerned recommended acceptance of the lowest valid tender. The aut hority competent to accept tender, based on the advice gi ven by the Law Secr etary not onl y declared the rej ected tender as valid but accepted the same at t he rate negotiated wit h the lowest tenderer. The lowest tenderer filed a writ petition. The Law Secret ary had gi ven the advi ce based on the decision of the Supreme Court of India i n New Horizons Ltd. v. Union of India, 1995(1) SCC 478. 1 1 1 It was held that as per the law interpreted by the Apex Court in its decision, mentioned above the deciding authorities must rigorousl y hol d on to the standards specified in the Notice inviting the tenders. The Court noted that the 108 109 110 111

Vinod & Associates v. State of M.P., 2004(1) CTLJ 549 (MP). Tarsem Singh v. Bharat Sanchar Nigam Ltd., AIR 2004 P. & H. 156. M/s Dredge & Drive v. State of Jharkhand AIR 2000 Jha. 124. Also see 2003 (1) Arb. LR 212 (Jharkhand). See illustration No. 9 pp-160 for the decision of the Supreme Court.

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decision of first rej ecting the tender and afterwards accepting it was wrong. In result the Court allowed the writ petition and set aside the Letter of Intent issued in favour of the tenderer whose tender was first rej ected and subsequentl y accepted in preference to the l owest tenderer. The Court further referred the matter back to the authorities to take a decision afresh." 2

(23) Director of Education had invited open tenders for leasing of supply, installation and commissioning of computer systems in various Government/ Government aided senior secondary and middle schools. The expenditure was to the tune of Rs. 100 crores per annum. In consultation with Technical Advisor y Committee, and in the light of experience of failure by the tenderers in the earlier years, the Director took the decision to invite tenders from fir ms having turnover of more than Rs. 20 crores over the last three years. Aggrieved by this condition a writ petition was fil ed in the Delhi Hi gh Court. The Di vision Bench of the said High Court allowing the petition held that the financial turnover of the bidder has nothing whatsoever to do with the computer education and as such the term was arbitrary and irrational. Aggrieved by the aforesaid judgement appeals were filed in the Supreme Court of India.

to tender open to scrutiny the same being in the realm of contract. ...The courts would interfere with the admi nistrative policy decision only if it is arbitrary, discriminator y, malafi de or actuated by bias." Appeal was allowed and the decision of the Hi gh Court was set aside." 4

Relying upon the decisions in the earlier decisions"* it was held "that the terms of the invitation arc not

3.10.4

Modif ication of Eligibility Conditions

Once the authority decides upon and lays down the eligibility conditions in a notice inviting tenders, no maj or modification in the said condition should be attempted subsequent to the date of issue of tender notice. If absolutely necessary modification should be published by way of addendum t o the tender notice and communicated by post to the tenderers who had al ready been supplied with blank tender for ms. ILLUSTRAT IONS In a case where pur chase orders to be placed on bidders selected from the list of technically and commercially r esponsible bidders arranged in decreasing order of the tender rating, change in the rating of the tenderers after (1)

112 113

114

P.S.C. Engineers Pvt. Ltd. v. State of Tripura, AIR2000 Gau. 198. Tata Cellular v. Union of India, AIR 1996 SC11; Air India Ltd. v. Cochin International Airport Ltd. AIR 2000 SC801 and Monarch Infrastructure Pvt. Ltd. v. Commissioner, Ulhasnagar Municipal Corporation, AIR 2000 SC 2272. Directorate of Education v. Educomp Datamatics Ltd.AIR2004SC1962;2004(1)CTLJ339 (SC).

the date of opening of the tender was held as not per missible. The authority was directed to consider the tender on the basis of the ori ginal rati ng and place additional purchase or ders from the balance supplies. 1 1 3

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Building and Engineering Contracts

(2) A tender notice for transportation and loading Iron ore lump and fines into Railway wagons specified eligibility criter ia of 8 lacs MT. Tenders were cancelled on four occasions. On the fifth occasion the qualification was reduced to 2.5 lacs. MT and the wor k was awarded to a party. The unsuccessful party filed a writ petition that favour was shown to the party of which tender was accepted. The writ was dismissed. After the Judgement was received writ petitioner found that f or the fourth tender 3 tenderers were qualif ied but the picture was presented as if none was qualified. This important fact when discovered, review was allowed and the aut horities were directed to open the fourth tender and consider the case of the pet itioner and the opposit e party. 1 1 6 Some more interesting questions that may ari se are discussed below. 3 .10 .5 Experience of partners if can be considered as that of the firm? An interesting question, not easy to answer, may arise in some cases, where the tender notice stipulates the condition of eligibility of mini mum experience of say 3 or 5 years and turnover of a particular amount in any year during the previous 3 to 5 years. Indi vidual entities having experience of the gi ven years and collective turnover of the specified amount, if were to for m a partnership or j oint venture for the purpose of tenderi ng, can the tender be considered responsive and valid, fulfilling the eli gibi lity criteria? In other words the question to be decided is 'can the exper ience of indi vidual partners be considered as the experience of partnership firm itself?,' For proper appreciation of this question one more question needs to be raised and answered. Is a part nership firm an entit y or 'person' in law? In so far as a Li mited company is concerned, t he law recogni zes it as a separate and distinct j uristic person from its shareholders. 1 1 7 However, in a case it was held 'a fir m has no legal existence and its property vests in its partners. 1 1 8 In another case it was held that the general concept of partnership firml y established in the Engl ish and the Indian syst ems of Law is that a fi r m is not an entity or 'person' in law. But is merel y an association of individuals and the firm name; is onl y a collective name of those individuals who constitute the firm. However, it is true that the law recognizes partnership fir m as a distinct personality onl y for the purpose of income tax by virtue of the specific 115 1.16 117 118

Telephone Cables Ltd. v. Bharat Sanchar Nigam Ltd.,2004(l) CTLJ 537 (Delhi) (DB). Ores India Pvt. Ltd. v. Steel Authority of India, AIR 2003 Ori. 134. Bacha F Guzdar v. Commissioner of IT., Bombay, AIR 1955 SC 74. Narayanappa v. Bhaskara Krishnappa, AIR 1966 SC 1300.

provisions of the Income Tax Act. The Partnership Act defines an "act of a firm" to mean any act or omission by all the partners, or by any partner or agent of the firm which gives a ri ght enforceable by or against the fir m. Section 4 of the said Act defines 'Partnership' as a rel ationship between persons called "partners" who have

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entered into partnership and collecti vel y "affirm" to share the profits of a business carried on by all or any of them acti ng for all. From the provisions of these above t wo Sections, if an act of fir m means act of partners - 'experience; of the firm can be said to mean the experi ence of the partners of the firm. Indeed in New Horizons Li mited v. Union of India," 9 it was held: 1 2 0 "While considering the requirement regarding experience it has to be borne in mi nd that the said requirement is contained in a document inviting offers for commercial transaction. The ter ms and conditions of such a document have to be construed from t he standpoint of a prudent businessman. When a businessman enters into a contract wher e under some wor ks are to be perfor med he seeks to assure hi mself about the credentials of the person who is entrusted with the performance of the work. Such credentials are to be examined from commercial point of view, which means that if the contract is to be entered with a company he will look int o the background of the company and the persons who are in control of the same in their capacity to execute the wor k. He would not go by the name of the company but by the persons behind the company. While keeping in view the past experience he would also take note of the present state of affairs and the equipment and resources at the disposal of the company." It was held: " ........ In respect of a j oint venture company, the experience of the company can onl y mean the experi ence of the constituents of the venture....". Relying on the above decision it was held by the Andhra Pradesh Hi gh Court : 121 "...though a fir m is distinct and separate from a company and since it has no personality of its own, the experience of the partners can be tr eated as the experience of the fir m". The above statement lays down the correct position in Law, it is respectfully submitted. The earlier decision of the same Hi gh Court in another case can be distinguished on the facts peculiar to the said case and/or not having laid down good law, in so far as it held: " ....the experi ence of partners of the firm prior to the constitution of the partnership firm cannot be treated as the experience of the partners of the said firms". 1 2 2 As already stated the question of experience of partners if it can be considered as that of the firm may not be easy to answer. The facts of a given case will be 119 1995(1) SCC 478, 1995 AIR SCW 275. 120 See Art. 3.10.3 Illustration No. 9 pp.160. 121 Avula Constructions Pvt. Ltd v. Sr . Di vn. Electrical Engineer , T.D, AIR 1999 AP 318. 122 M/s Margadarsi Borewells v. Singareni Colleries Co. Ltd, AIR 1997 AP decisive. ILLUSTRAT IONS (1) A tender notification for running a ferr y boat service stipulated that the persons should have at least three years experience of management of Ferr y

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ghat ser vice. The authority accepted the tender of a person having experience in a societ y running such ser vice. It was hel d by the Calcutta Hi gh Court that the said person had no requisite qualification to bid. 1 2 3 (2) A tender notification for compiling, print ing and suppl ying telephone directories stipulated that the tenderers should have experience of printing directories and should substantiate it by documentar y proof . The petitioner, who had offered the highest royalt y, alleged that it was j oint venture between different limited companies which j oint venture partners had the experience of printing directories. T he j oint venture, it was alleged, had the sanction of the Central Government. C o u r t referred to the explanation of a j oint venture in Black's Law Dictionary a s a l e g a l e n t i t y i n t h e n a t u r e o f t h e partnership e n g a g e d i n t h e j oint undertaking o f a p a r t i c u l a r transaction f o r m u t u a l p r o f i t . It i s a l s o a n a s s o c i a t i o n

The

of persons or companies... It is a one time grouping of two or more persons in a

undertaking h u t unlike partnership, a j o i n t v e n t u r e d o e s n o t entail a continuing relationship a m o n g t h e parties.

business

Court found that the petitioner was not a j oint venture as alleged but there was onl y a certain amount of equity participation by a foreign company.

The

was held that a company is an independent legal person and distinct from its m e m b e r s . Experience of the shareholders cannot be t h e experience of the company. The plea that the authorities should have looked b e h i n d the facade of corporateness of the petitioner was rej ected holding that it was none of their duties. 1 2 4 It

3.10.6 Experience of collaborator, if to be considered as experience of tenderer When the NIT uses the expression that tenderer should possess such experience, would it mean the experience of the tenderer itself or that of its collaborator? It appears that the expression would mean the experi ence of the tenderer itself and not that of the collaborator. Award of contract to a public sector undertaking not having experience but having the collaboration with a foreign company havi ng the experience was quashed and the tender of the lowest tenderer at a pr ice reduced on account of changed parameter s offered to the public sector under taking alone, was directed to be accepted. 1 2 5 123 124

Birendra Prasad Singh v. State of West Bengal, AIR 2003 Cal. 142. M/s New Horizon Ltd. v. Union of India, AIR 1994 Delhi 126.

125

P.C.T. Ltd. v. Bongaigaon Refinery and Petrochemicals Ltd., AIR 1994 Delhi 322.

ILLUSTRAT IONS (1) One of the conditions for eli gibility was three years experience of manufacturing the required item. One of the bidders, an Indian Company did not satisfy this condition, but assured that its foreign collaborator had the experience. It was held that the experience and expertise of the foreign

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collaborator could be of no avail l o the Indian Company. It was further held that the fact that the foreign company held 10% of the share capital would not advance the case of the Indian company any further. It was further observed that if two manufactur ing units are mer ged into one, and one of them has the requisite experience and expertise the new entity after the mer ger mi ght be gi ven the benefit. 1 2 6 (2) One of the conditions of eligibility for tendering in a case read: "The tenderer should have desi gned, install ed and constructed at least three sets o f equipment/ machinery o f treatment plants of t ype/t ypes specified in appendix 'A' w h i c h a r c i n s u c c e s s f u l commercial o p e r a t i o n f o r a t l e a s t t w o y e a r s . The tenderer must indicate in the tender details including capacities, date ol" start of operation etc of the I'lants".

The tenderer whose tender was accepted had collaborated with outside f i r m f o r technical know-how which fir m fulfilled the qualifications. The Petitioner whose tender was not accepted and had challenged the award l o another had also availed of the f acility and tendered in another case on the basis of collaboration with outside firm. On these facts the Punj ab and Haryana Hi gh Court refused to interfere with the decision to accept the tenderer. The High Court distinguished its earlier decision reported in AIR 1991 P & H. 38 on the facts of the case. 1 2 7 3.11 ELIGIBILITY CONDITION BY REGISTRATION CLASSIFICATION - RECLASSIFICATIO N It is customar y to avoid stipulating elaborately the conditions of eligibility in the tender advertisement by mentioning the eligibility by class i n which the contractors are registered with different public authorities. The list of registered contractors is generally renewed periodically by each depart ment or Authority. The condi tions of renewal may contain fresh conditions and contractors already listed cannot claim to be exempted from fulfilling the said 126

M/s. Continental Pump and Motors Ltd. Gaziabad v. State of Bihar, AIR1995 Pat. 183.

127

M/s Flow Treatment Incorporate v. Punjab W.S.& Sewerage Board, AIR1993 P.& H.,66.

128

J.P.Aggarwal v. Director General of Works, 2002(3) Arb. LR 426 (Delhi); Paradise Hotel Restaurant v. Airport Authority of India, 2002(3) Arb. LR 105 (Gauhati) (DB).

conditions. 1 2 8 The Public Works Depart ments of the Central as well as State governments maintain a list of contractors registered under different categories. Periodically such lists are revised. Care must be taken while revising the list not to make new classification applicable with retrospective effect. If it is so made it is likel y to be declared invalid.

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ILLUSTRAT ION By an advertisement published in August and September 1982, t enders were invited for construction of the lining wor k i n K m 73 to 80 of K.L.B. Canal by the State of Maharashtra. The class of contractors eligible to offer tenders for the wor k was amended from Class A to Class B+. By a Government Resolution dated 6th Sept., 1982 revised rules provided for a fresh system according to which the Petitioner was reclassified as belonging to Class IV categor y prescribing a limit of Rs. 50 lacs. The tender submitted by the Petitioner was for a sum of Rs. 58 lacs and it was the lowest bid. The tender was not accepted on the plea of the petitioner being ineligible. The Di vision Bench of the Bombay Hi gh Court held: 1 2 " " It is worthwhile mentioning that the resolution dated 6th September, 1982 could only be gi ven prospect ive effect and could not in any manner affect the right of the parties in respect of the offers that were earlier invited from them. It is worthwhile mentioning that Class B+ as it originall y stood prescribed a limit of Rs.60 lacs, in which case the petitioners were clearly eli gible. ..." The High Court further held that had the petitioner placed adequate material before it, the Court would have awarded adequate compensation to hi m relying upon the Supreme Court decision reported in AIR 1976 SC 49 1 3 0 . 3.12

PRE-QUALIFICATION OF TENDERERS

In the case of maj or proj ects invol vi ng deployment of huge funds, sophisticated machinery/equipment and expertise, it is quite common to invite applications for pre-qualification of bi dders. A notice inviting such applications must clearly gi ve full particulars of expected qualifications. The authority must have a free hand in setting the terms of tender and is further entitled to pragmatic adj ustments, which may be called for by the particular circumstances. The Courts would interfere with the administrative policy decision onl y if it is arbitrary, discri minatory, mala fide or actuated by bias. As already stated in Chapter 1, there must be a rational nexus between the demand made and condition imposed. 1 3 1

129 B.G. Ahuj a v. State of Maharashtra, AIR 1991 Bom. 307 ( 309). 130 Rameshwar v. Jot Ram.AIR 1976 SC 49. 131 See Chapter 1, Art. 1.6 pp.26. It is not uncommon i n the case of large proj ects that one contractor is not qualified on his own to submit tender and, therefore, he enters into a j oint venture agreement wi th another so that the j oint venture partners will be eligible to submit their tender. Care must be taken to see that joint venture application for prequalification is properly scrutini zed and if there is any doubt, clarification should be sought. In the absence of such procedure, the

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decision not to pre-qualify is liable to be set aside. The following illustrations will help clarify the matter. ILLUSTRAT IONS (1) A tender condition stipulated" "annual turnover of Rs. 20 crores (to authenticate more than 20 crores annual turnover, last three years statements duly authenticated by C.A...is required..)." The question arose if the turnover of more than 20 crores was required for one year or for three years. It was held that three years figures were called for to ascertain that there was a progressi ve increase in the turnover and the last year's fi gure was not exaggerated. The cont ention of the Depart ment that it called for turnover for three consecutive years was rej ected and the tender was dir ected to be considered for placing orders. 1 3 2 An order disqualifying a tenderer for non-submission of labour contract license, w h i c h was not required to be submitted in terms of the tender notification, was set aside by a Di vision Bench of the Orissa Hi gh Court. The license could be obtained onl y after award of contract. The technical bid called for submission of profile and experience and the tenderer was not allowed to prove its experience was the other point considered as relevant for the decision. 1 3 3

(.2)

(3) In a case the tender notification for prequalification stipulated a condition that the applicant must have annual turnover in any one financial year of last five years of Rs.10 crores and total turnover of Rs.20 crores or mor e in the said five years. A tenderer who did not fulfill the conditions having the maxi mum turnover of Rs. 8 crores and total turnover of Rs. 15.99 crores was not allowed to participate. The Division Bench upheld the decision of the learned Single Judge dismissing the writ petition challengi ng the decision of the authority. 1 3 4 (4) In response to separate invitations issued by the State to pre-qualif y prospective bidders for construction of a concrete dam and excavation, tunneling and other wor ks for the under ground ri verbed powerhouse and appurtenant wor ks for the Sardar Sarovar proj ect, the petitioners submitted their pre-qualification infor mation and documents, as a j oint venture consortium. When other parties were pre-qualilied and the petitioners did not hear anything from the Government, they repeatedl y asked the State Government to advise them ori the prequalification and on getting no response 132 133 134

Sterling Lab. v. UOI & Ors., 2004 (1) CTLJ 154 (Delhi) (DB). M/s. Trident Softech Pvt. Ltd. v. State of Orissa and others, AIR 2004 NOC 170 (Orissa). M/s. Bharat Construction Co. v. State of Rajasthan, AIR 2002 Raj. 279. Also see Hira Lai . S/o of Shri Suraj Bhan v. Food Corporation of India, AIR 2004 NOC 173 (Punj. And Har).

from the State they approached the Guj arat Hi gh Court for an appropriate writ, order or direction. Thereafter they recei ved repli es from the Government that they were not pre-quali fied either for the dam or for powerhouse wor k.

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Building and Engineering Contracts

The State Government alleged that the information gi ven by the petitioners in from "C annexed to their application for pre-qualification showed that the first petitioner company had no experience in dam construction and that the contract work was to be executed by the fi rst petitioner company under the guidance and super vision of the second petitioner. It was ar gued that no exception could be taken to the decision of the State rej ecting the petitioners' applications when the responsibilities of the j oint venturers were not clearly demarcated. However , the j oint venture agreement furnished by the petitioners clearly stated that the responsibilities under the contract were to be assumed by them j ointly and severall y. The Guj arat High Court observed" 5 that the authorities did not consider the most relevant infor mation contained in the basic j oint venture contract and proceeded o n t h e basis of some i mprecise statements in for m ' V . It was also observed t h a t i f t h e r e w a s s o m e d o u b t d u e t o t h e statements in for m 'C they c o u l d have sought clarification. It was held that the respondents had failed lo apply their minds to the correct criteria to be adopted in deciding the question of prequalificalion in case of joint venture consortia applications. The decisions of the respondents rejecting applications for pre-qualification were set aside as bad in law and also on the ground of

application of wrong criteria.

In a case the petitioner h a d applied for pre-qualification for a work of construction of commercial complexes and parking lots. He was a Class I contractor. His application was rej ected. The petitioner insisted before the Andhra Pradesh Hi gh Court in pr oceedings under writ, that the action of the respondents was violative of the principles of natural j ustice. If the respondents had gi ven him a notice, he alleged, he would have satisfied the authorities that he was capable of executing the wor ks and had gained experience though not in the same building constructions.

(5)

The High Court obser ved 1 3 6 that the obj ect of evaluating the pre-qualifications of the contractors was to finalize the process of awarding contr acts by an expert body of engineers as expeditiousl y as possible. If the tardy process of hearing was extended to this arena the process would be unduly i mpeded also adding to the cost. The rules as well as t he published notices require the contractors to furnish the required particulars and details. Where the contractor is found to be relatively unquali fied, the rej ection to enter into a contract with hi m, does not invol ve forfeit ure of any pre-existing ri ghts or interest nor does defeat his legitimate expect ations The High Court held that a tenderer is not entitled to a hearing before rej ection of his claim at the stage of 135 136

Asia Foundations & Constructions Ltd v. State, AIR 1986 Guj. 185 (206-7). S. M. Quadri v. Spl. Officer, Hyderabad Municipal Corporation, AIR 1987 A.P. 6.

pre-qualification. It was further observed that the decision should not be arbitrary and that insistence on reasons is a valuable safeguard against the exercise of discretionary power. The record must establish that the claims were in fact considered and the rej ection must be supported by ger mane and relevant

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reasons. It need not be like a j udicial order; the reasons may be brief. If demanded by an aggrieved person, they may be supplied at his cost. 3.13 MODIFICATIO N OF TENDER REQUIREMENTS PRIOR TO SUBMISSION OF BIDS If the ori ginal ter ms of the tender notice were changed, all the tenderers should be gi ven an opportunity to resubmit their tenders in conf or mity with the changed ter ms. 1 3 7 In this connection the following obser vations of the Supreme Court in Sachidanad Pandey v. State of West Bengal, AIR 1987 SC 1109 quoted in Haj i T.M. Hasan's case 1 3 8 are also noteworthy: "There may be situations where there are compelling reasons necessitating departure from the rule, but then the reasons for the departure must be j ustified by compulsion and not b y compromise. The j ustification should b e for compelling reasons and not j ust for convenience." As an illustration refer to Margam Anj aneyulu, President. 1 3 9 In the said case, Water Users Association had challenged the decision of the State lo invite tenders by national competitive bidding rather than awarding the work exclusivel y to the Association. It was held by the Andhra Pradesh Hi gh Court, placing reliance on the Supreme Court decision 1 4 0 that it is settled principle that the Court will have pri ma facie lo presume all reasonable f actors have ani mated a State policy. The writ was dismissed. The Madhya Pradesh Hi gh Court while deciding a case 1 4 1 did not find fault with the following procedure. After the tenders were submitted a meeting was held in which all tenderers participated. Thereafter, on the basis of infor mation received thr ough lhe t ender for ms a rational and reasonable criterion was laid down. A list of five eligible tenderers was prepared from whom selection was made. It was held that there was nothing unfair in this procedure. A tender invitation stipulated that the employer may amend t he biddin g documents and notif y in writing to all prospective bidders and the bidders would be required to take into account such amendment. The employer amended the bid documents by inserting an additional condition. One of the tenderers requested withdrawal of the said amendment but submitted his 137 138 139 140 141

Harminder Singh v. Union of India 1986 SC 1527. Haji T. M. Hassan v. Kerala Financial Corpn., AIR 1988 SC 157. Margam Anjaneyulu,President, WUA v. S.E.,Irrigation Circle.2002(3) Arb.LR 462 (AP). Ram Krishna Dalmia and others v. Shri Justice S.R. Tendolker and others, AIR 1958 SC 538. M/s Mai Ca Constructions (I) Pvt Ltd v. M.P. Housing Board AIR 1990 M.P. 49.

tender. His tender was the lowest and yet rej ected. He filed a writ petition in the Orissa High Court. It was held that the amendment was per missible and the writ petition rej ected. 1 4 2

3 .14

OPENING OF TENDERS

196

Building and Engineering Contracts

Tenders must be opened in the presence of the tenderers or their representatives for achieving transparency, fairness and not to provide roo m for manipulation to suit the whi ms of the St ate agencies. 1 4 3 That is the reason why most tender notices publish the date time and place of opening of tenders. If tenders are opened behind the back of tenderers for lack of communication of the date and ti me of the opening of tenders, the action is likel y to be held illegal. ILLUSTRAT ION In a case, technical bids were scrutinized after 18 days of opening of the bids and the financial bid was opened the ver y next day, allegedl y by telephonic intimation l o the bidders whose technical bids were found in order. Only two tenderers were present at the time of opening of the financial bids. A tenderer filed a writ alleging t hat he did n o t receive any inti mation about t he date and lime o f opening of t h e f inancial bids. It was held that the decision making process was not fair, bona fide and transparent The tender notice and subsequent actions taken there on were set aside. (2) In an appeal decided by the Supreme Court the facts were as f ollows. The Union of India invited tenders for organi zing tourism related expositions. There were 12 applicants. Out of the twelve four were short listed. The Selection Committee found that all the four tenderers appeared to be equal including experience and other factors. The main criterion for selection was the guarantee of upfront payment. The highest bidder was appointed as event manager. The third lowest filed a writ petition, which was dismi ssed by the learned Single Judge but upheld by the Di vision Bench. The successful tenderer appealed to t he Supreme Court as also the Union of Indi a. The main ground that appealed to the Division Bench was that according to the rules framed the Minister in charge had to issue directions to the Secretary to appoint an event manager which procedure was not followed. T he Supreme Court after scrutiny of the documents found that the Secretary had permitted due to ur gency and the Minister otherwise busy. However the file was put up before the Minister with a note stating that event manager was appointed for three years. The Minister endorsed " file returned" and signed. It was held by the Supreme Court that the decision of the Di vision Bench was erroneous on 142 143 144 145

M/s. EMCO Ltd. v. Grid Crpn. Of Orissa ltd., AIR 2003 Ori. 168. West Bengal Electricity Board v. Patel Engg. Co,. Ltd.; AIR 2001 SC 682. Bhupendra Engg. & Constn. Pvt. Ltd. v. Sate of Jharkhand, 2004 (I) CTLJ 450 (Jharkhand). M/s. Tafcon Projects (I) Pvt. Ltd. v. Union of India, AIR 2004 SC 949.

factual grounds and set it aside. 1 4 5

3.14.1

Tender submitted after the time fixed

Whether a lender submitted after the time fixed for the purpose would or not be a valid tender for being accepted for consideration; if not considered would it amount to an arbitrary decision on the par t of administrative authority and

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whether the administrative authorit y could relax the ti me li mit and entertain a lender submitted beyond the ti me li mit? These are important questions likel y to arise in cases involving alleged delay of a few mi nutes each party referring to the t ime shown by its own watch. The author submits t hat tenderers who had submitted tenders are likel y to disclose the tendered cost or price to others on the presumption t hat the time limit for submission of the tenders is over. If a tenderer is per mitted to submit a tender late, he is li kel y to exploit this knowledge to the detriment of the person who has disclosed his offer. Strict adherence to the condit ion of time limit for submission, t herefore, deserves to be followed. The questions raised here stand indirectly so answered by the Supreme Court, in the following cases, it is respectfully submitted. , A It was obser ved that the conditions and stipulations in a tender notice have t wo types of consequences. The first is that the party issuing the tender has the right to punctiliousl y and ri gidl y enforce them. The second is: it is not that the party inviting tenders cannot deviate from the guidelines at all in any situation but that any deviation, if made, should not result in arbitrariness or discrimination. A Di vision Bench of Gauhati Hi gh Court in deciding writ appeals followed the above principles. It was held: " By appl ying the above principles also it appears that if an admi nistrative decision was taken or administ rativel y the authorities acted in a particular manner, namel y, in this case by not opening the tenders submitted by the petitioner -respondents, it would not be open for the Court to sit over t hat administrative acti on or non-action on the part of the authorities, unless it suffered from the vice of discrimi nation or arbitrariness." 1 4 6 This case invol ved yet anot her question: Whether the two tenders opened on another day could be opened without notice to other tenderers whose tenders were opened earlier on the scheduled date and time. It was held that it was incumbent upon the authorities to send indi vidual notices to all the tenderers to be present, if they so chose at the ti me of opening of tenders of the petitioner respondents. It was further observed that this fact assumes i mportance because the respondent petitioners had not 145 146

1. Tata Cellular v. Union of India , (1994) 6 SCC 651: AIR 1996 SC 11). 2. G.J.Fernandez v. State of Karnataka(1990) 2SCC 488 : AIR 1990 SC 958. Sailen Konwar Dutta v. M/s Satya Capital Services (P) Ltd. AIR 2000 Gaii. 152; Also see: M/s S. Ali v. Union of India 1995 (1) Gauhati LT 458.

impleaded the other tenderers as parties in their writ petitions.

In a case the Allahabad High Court refused to interfere with the decision of the Government not openi ng a tender submitted 15 minutes late. 1 4 7

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Building and Engineering Contracts

In another case wherei n tenders were opened 50 minutes before ti me and in the absence of one of the members of the committee and lawful t enderers, the Government decided to re-tender. The action of the Government, it was held could not be considered arbitrary and no ri ght accrued to the hi ghest bidder. 1 4 8 3.15

FULFILLMENT OF REQUISITE CONDITIONS OF TENDER NOTICE

Tender notices invariably incorporate several conditions to be fulfilled by the intending tenderers. Such conditions include documentary support of qualifications, payment of earnest money, etc. It so happens that occasionally the authority accepts a tender, which is not accompanied by t he requisite documents, or otherwi se not fulfilling the conditions of notification. Can it be done'.' It is per missible so far as the condit ion concerned is not an essential condition. As a matter of general proposition it cannot be said that an authority inviting tenders is bound to gi ve effect to ever y condition mentioned in the notice in meticulous detail, and is not entitled to waive even a technical irregularit y of little or no significance. The requirement in a tender notice can be classified into two categories, those which lay down the essential conditions of eligibility and the ot hers which are merel y ancillar y or subsidi ary with the main obj ect to be achieved by the condition. In the first case the authority issuing the tender may be required to enforce them ri gidl y. In the ot her cases it must be open to the authority to deviate from and not to insist upon the strict literal compliance of t he condition in appropriate cases. 1 4 9 A number of cases decided on these points illustrate as to which conditions are essential and which are not. For example, non-submission of loan clearance certificate from Gover nment and Sales Tax clearance certificate along with the tender was held to be a breach of essential condition and the tender could not be accepted. 1 5 0 147 148 149 150

Sailesh Kumar Rusia v. State of U.R All. 237; Also see Nokia India Pvt. Ltd. v. Mahanagar Telephone Nigam Ltd., AIR 2003 Del. 474. State of J. & K. v. Qazi Nazir Ahmad, AIR2000 J. & K. 73. Poddar Steel Corpn v. Ganesh Engineering Works, AIR 1991 SC 1579; Also see Mahabir auto Stores v. Indian Oil Corporation AIR 1990 SC 1031 reversing the decision in AIR 1989 Delhi 315. Bikash Bora v. The State of Assam, AIR 2004 NOC 79 (Gauhati); 2004 (1) CTLJ 66 (Gauhati) (DB).

A Di vision Bench of the Gauhati High Court held that tender invitation conditions requiring t he tender to be si gned in the presence of a Gazetted Officer and to be accompanied by Bakij ai clearance certificate were essential conditions and nonfulfillment of the same rendered the tender i nvalid. 1 5 1 A tender not accompanied by document in evidence of possessing or holding on lease the requisite machiner y and labour license was considered nonresponsive and rej ected. Writ petition filed by the tenderer was dismissed as having no merit. 1 5 2

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A tender notification did not require submission of tender in two covets. Subsequentl y by letter tenderers were asked to submit the tenders in two covers. Tender submit ted by one of the tenderers who had not submitted his tender in two covers was not considered. The said tenderer filed a writ petition. It was held t hat the said condition of two covers not being a part of original tender notification, non-consideration of the tender was bad and the authority was directed to reconsider the case of the petitioner. 1 5 3 3.15.1 Qualif ication certificate issued by of f icer or authority not being a Government off icer or authority - Care to be taken A lender notification specified eligibility criteria and further stipulated that tenderer shall produce documentar y proof in support of meeting the requirements of the said criteria. A tenderer produced certificate of a private party. An unsuccessful tenderer challenged t he correctness and val idity of the said certificate.. The authorities made reference to the party issuing the certificate and confirmed the fact. A Divisi on Bench of the Orissa High Court dismissed the writ filed by the unsuccessful tenderer whose tender was found invalid but obser ved: "There is no difficulty when the certificate is issued by a Government official. The tenderee at any point of time can verif y whether the officer concerned has issued the certificate. Problem arises when a certificate is issued by any nonGovernment concern. A careful approach has to be adopted and verification has to be done to find out the authenticity of the document and acceptability thereof." 1 5 4 In another case due to delay in dispatch of letters asking the tenderer to produce certain documents some tenderer s were unable to pr oduce those documents. The tenders of the tenderers who had submitted the documents were opened and the petitioner's was found to be the lowest. When the other tenderers pointed out the mistake of the department an opportunit y was gi ven to the tenderers to submit the requisite documents. Those who qualified technically and whose tenders were not opened were called for opening of the 151 152 153 154

Bijulbari Multipurpose Development Society v. State of Assam, 2004 (1) CTLJ 365 (Gauhati) (DB). M/s. Singh Electrical and Constructions v. State of Jharkhand, AIR 2004 Jhar.13. M/s Pritam Singh and Sons v. State of Punjab, AIR 1996 P.& H. 260. Santilata Sahoo v. State of Orissa; AIR 1999 Ori. 199.

tenders along with the petitioner who was the lowest when tender s were first opened. Respondent no. 7 was found to be the lowest tenderer and his tender was accepted. The petitioner filed a writ petition. After scrutiny of documents the Division Bench of the Jharkhand Hi gh Court held that there was no arbitrariness or unfairness in the awar ding of the contract, upheld the decision of the learned Single Judge and dismissed the appeal. 1 5 5

200

Building and Engineering Contracts

3.15.2 Refer to Tender Schedule for full details of terms and conditions It is important to note that tender advertisements ar e generall y incomprehensi ve and may not be treated as code in themsel ves. One is expected to look into tender schedule to have full details and knowledge of the terms and conditions of the tender. ILLUSTRAT ION A tender schedule mentioned that the tender covers, which do not contain the superscription of the important particulars including acceptance of terms and conditions, would not be opened. A tender, which did not contain the superscription of the acceptance of tender conditions, was returned unopened In the writ filed by the tenderer it was contended that the tender notice did not contain the said stipul ation and the tenderer had si gned all the pages inside the cover including those relating to acceptance of conditions and as such the action was illegal. The Andhra Pradesh Hi gh Court held that the petition was bereft of any merits and dismissed it. 1 5 6

3.15.3

Payment of Earnest Money/Security Deposit

Tender notifications invariabl y specif y payment of earnest money in one for m or the other with the t ender to be submitted and payment of earnest money or security deposit for t he auction sale as the case may be. This is an essential condition and the tenderer is advised to follow it carefull y or else face rej ection of his tender. As a matter of general proposition it cannot be said that an authority inviting tenders is bound to gi ve effect to ever y condition mentioned in the notice in meticulous detail, and is not entitled to waive even a technical irregularit y of little or no significance. The requirement in a tender notice can be classified into two categories, those which lay down the essenlial conditions of eligibility and the ot hers which are merel y ancillar y or subsidi ary with the main obj ect to be achieved by the condition. In the first case the authority issuing the tender may be required to enforce them ri gidl y. In the ot her cases it 155 156

Mahto Automobiles v. Union of India, 2004(1) CTLJ 519(Jharkhand)(DB). Shilpa Engineering Contractors And Suppliers v. APNPDCL.2004 (1) CTLJ 30(AP).

must be open to the authority to deviate from and not to insist upon the strict

literal compliance of the condition in appropriate cases. 157

ILLUSTRAT IONS (1) A tender notification required intending t enderers to supply security deposit in the form of Banker 's Guarantee from a scheduled Bank in a gi ven form or in cash

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for a named sum. A tenderer failed to compl y with this condition. His tender was therefore rej ected on that ground. A writ appeal was filed in Karnataka Hi gh Court. Placing reliance upon the ruling of the Bombay Hi gh Court it was argued that not ever y condition of the tender could be considered to be essential, and therefore, rej ection of tender must be held to be arbitrary. The Karnataka Hi gh Court, placing reliance upon the decision of the Supreme Court 1 5 8 ,held that the condition was an essential one and non-compliance with it enabled the authorit y t o rej ect the tender. The Supreme Court has held in the case referred to above that where an essential condition is not complied with, i t is certainly open to the person inviting the tender to rej ect the same. The decision of the Bombay High Court was distinguished on t he gr ound that in the case the condition related to earnest money and it was released not onl y in favour of one but also in favour of all 15 ''. (2) In one case decided by the Supreme Court, the relevant clause required the tender to be accompanied by earnest money, cash or by demand draft drawn on the State Bank of India. The tenderer had sent a cheque of the Union Bank of India drawn on its own branch and not on the State Bank. On these facts reversing the decision of the Hi gh Court, it was hel d: 1 6 0 "8. In the present case the certified cheque of the Union Bank of India drawn on its own branch must be treated as sufficient for the purpose of achieving the obj ect of the condition, and the Tender Committee took the abundant caution by a further verification from the bank. In thi s situation it is not cor rect to hold that the Diesel Locomoti ve Wor ks had no authority to wai ve t he technical compliance of clause 6, especially when it was in its interest not to rej ect the said bid which was the highest." (3) In a case the State deviated from earlier policy of collecting earnest money at Rs. 5000/ - for participating in auction for tendu leaves and on the basis of 157 M/s. B. D. Yadav and N. R. Meshram, Engineer and contractor v. Administrator of the City Nagpur, AIR 1984, Bom. 351. Also see Poddar Steel Corpn v. Ganesh Engineering Works, AIR 1991 SC 1579; Mahabir auto Stores v. Indian Oil Corporation AIR 1990 SC 1031 reversing the decision in AIR 1989 Delhi 315. .158 M/s. G. J. Fernadez v. State of Karnataka, AIR 1990 SC 958. 159 N.O. Shetty v. K.S.R.T Corpn., Bangalore, AIR 1992 Kant. 94. 160 Poddar Steel Corpn v. Ganesh Engineering Works, AIR 1991 SC 1579; Also see Mahabir auto Stores v. Indian Oil Corporation AIR 1990 SC 1031 reversing the decision in AIR 1989 Delhi 315.

separate tender for each unit. According to the revised policy each par ticipant was required to deposit gate money at the rate of Rs. 25/ - per bag through bank

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draft. First lot was for as many as 65,479 bags requiring the prospective bidder to deposit Rs. 16,36,975/ -. Bidders challenged the said order by writ petition. In defence it was stated that tendu leaves are perishable in nature and need t o be disposed of before the arrival of the fresh crop. The past experience showed that the petitioner and other purchaser formed a cartel and boycotted the auction. Besides to exclude illegiti mate and fake bidders the amount of security deposit was enhanced. The Allahabad Hi gh Court, holding that there were special reasons f or resorting to distress/clearance sale and action was not illegal, dismissed the writ. 1 6 0 (4) The lowest tender was rej ected on the ground that the earnest money in F.D.R. was wrongl y drawn in the name of " Dy. F.A. and CAO.. " "instead of FA and CAO ..." Subsequently the bank clari fied to read it in the correct name. It was held that a deci sion mi ght also be arbitrary and discri minat ory where it is unduly oppressi ve and unj ustifiably inflict excessive hardship to a citizen. The decision of rejecting the lowest tender and accepting the other tender was set aside. 1 6 1 The obj ect and purpose of a tender condit ion that tender document be scaled with red sealing wax is that the confidentiality and secrecy of the document should be strictly maintained. It is the substance and not the form what matters for compliance of a condition such as this. (5)

In a case decided by a Di vision Bench of Allahabad Hi gh Court , of the three tenders received one was sealed with cello tape and not with red sealing wax as notified by the tender notification. The tenders were opened. However, in the next meeting, the Purchase Committee decided that the tender of the petitioner be ignored for noncompliance with the tender condition and since mini mum three valid tenders were not received fresh t enders be invited. It was held that admittedly the secrecy and confidentiality of the tender document had not been breached or i mpaired, refusal to consider the petitioner 's tender wit h the other two tenders was wholl y illegal and unreasonable. 1 6 2 3.16

NEGOTIATIONS PRIOR TO ACCEPTANCE

In the cases where t he procedure for pre-qualification of tenderers is not followed, a question someti mes arises as to the procedure to be adopted while accepting a tender hi gher than the lowest or accepting a bid lower than the highest for the disposal of government pr operty. Invariably, the terms and conditions of the not ice inviting tenders i nclude a provision entitling the accepting authorit y to accept any tender or to rej ect all tenders including the right to accept a tender higher than the lowest .

160 161 162

U.P.Biri Evam Patta Udyog Samiti v. U.P. Forest Corpn., AIR 2004 A11.21. Bibhu Bmishan Choudhury v. Union of India, AIR 2000 Gaii. 192. M/s Antex Printers v. Ram Manohar Lohia Avadh University; AIR 2002 A11.237.

The law on the point is also well settled that the Government, for good and sufficient reasons, has the right not to accept the lowest tender or r ej ect all the tenders. In Raman a v. International Airport Authority 1 6 3 , the Supreme Court

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has held that no one has any ri ght to enter into a contract but all who offer tenders or quotations are entitled to equal treatment. The Government, whil e granting a contract, is not free like an ordinary indi vidual to deal with any person it pleases. It is obligator y upon the Government to act fairly and at any rate it cannot act arbitrarily. The Government may not deal with any one, but if it does so. it must do so fairly without discrimination and unfai r procedure. These principles and guidelines were referred to and relied upon by the Gauhati Hi gh Court in a case 1 6 4 Unilateral action of secret negotiations with one of the tenderers behind the back of the others is ar bitrary and not support ed by usuall y incorpor ated condition of contract, conferring absolute right to accept or rej ect any tender 1 6 5 This is so, even where the Governmental policy requires preference to be gi ven to a certain categor y such as SSI Uni t. I n a no t h er c as e t h e M ad h ya P r ad e s h Hi g h C o ur t r e f u sed to i n ter fe r e u nd er t he fo llo wi n g f act s : T end er s wer e i n v ited p ub l ic l y fr o m r e g is ter ed co n tr ac to r s fr o m ca te g o r y S - V a nd o th er s. The tend er s r ec ei ved we r e p r o ce s sed i n ac co r d a nc e wi t h t he M.P . P .W .D. Manual. The tenderers wer e called for negotiations a nd to offer r e v i sed tenders with a view to reduce the cost and to extend the validit y period along wi t h

confir ming the other conditions of the NIT. The Petitioner filed a writ petition contending that although its tender was the l owest the contract was not gi ven to the petitioner. The Court held that the invitation to the t enderers for negotiation was not in consonance with the P.W.D. Manual . The order inviting the tenderers for negotiation was quashed and the State was directed to consider the offers received on merit. Thereafter, the State rej ected all the tenders on the basis of the recommendation of an expert committ ee. Tenders were re-invited. Again the petitioner filed a writ petition. The State placed comparati ve statement before the court. Another petitioner intervened. The Hi gh Court rej ected the petition mainl y on t he gr ound that the re-i nvitation of the tenders, reduced the cost of the proj ect. 1 6 7 ILLUSTRAT IONS (1) In a case, the Government of Assam, by a public notice invited tenders for supply of potable alcohol/rectified spirit Grade I. In issuance of the said notice fourteen tenders were received. According to the procedure provided under Rule 93 of the Assam Excise Rules, the Commissioner forwarded the tenders with the observation that, although no specific tender could be recommended 163 164 165 167

AIR 1979 SC 1628. M/s. Noble Sales Agency v. State of Assam AIR 1992 Gau. 46. M/s The Indian Hume Pipe Co. Ltd v. Bangalore Water S & S Board, AIR 190 Kant. 305. Precision Tecnofab And Engineering Co. Ahmedabad v. State, AIR 1990 M.P.55.

for acceptance by the Government, in consideration of the past and present experience of the eleventh lowest tenderer, the Government may like to consider its tender for acceptance at the revi sed maxi mum contract rate of Rs. 10.68 LPL. The Government offered the eleventh lowest tenderer the rate

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quoted by the Petitioner, the second lowest tenderer, at Rs. 9.27 LPL. Again in supersession of the ear lier offer the Government, after about four months, gave a revised offer to the eleventh lowest tender er at Rs. 8.96 per LPL, which was quoted by the lowest tenderer.

The said second offer was accepted by the eleventh lowest tenderer and the contract settled at Rs. 8.96 per LPL. The second lowest tenderer submitted an application under 226 of the Constitution of India challenging the settlement of the above said contract. It was ur ged on behalf of the State that in view of the provisions of Clause 4 of the Tender, the action was not arbitrary or violati ve of Art. 14 as contended by the Peti tioner. Clause (4) read as follows : "The tenderers should quote their rate for supply of countr y spiri t per proof litre. The Government of Assam reser ved to itself the right to accept or rej ect any tender or all tenders and to reduce the tender rates at the time of accepting any tender." On the above facts it was correctly held by the Gauhati Hi gh Court, it is respectfully submitted, that the decision making process by gi ving an opportunity to lower t he rate to one tenderer only, i gnoring others, was not fair and it was violati ve of Art. 14 of the Constitution. 1 6 8 ( 2 ) FCI took policy decision to abolish contract labour system for handling foodgrains at various godowns in India and instead decided to offer guaranteed employment of perennial and regular nature to the erstwhile wor kmen of the then existing contract ors by engaging labour co-operati ves of such wor kmen. Despite having taken t his policy decision, the FCI invited tenders f rom others.

It was held that the action of FCI negotiating with ineli gible par ty quoting higher rate and gi vi ng wor k order to it at the lowest rate quoted by another party without inviting the part y quoting the lowest rate for negotiations is violati ve of Art. 14. it was further held that inviting opinion and recommendation of Registrar of cooperative societies was illegal and FCI of its own must accept tender of eligible societ y. 1 6 9 3.16.1

Circular issued by Central Vigilance Commission

It is a settled practice of authorities that whenever the tenders received are not acceptable, to undertake negotiations with t he persons who responded to the tender invitation. Car e should be taken, while doing so, to invite all the participants and gi ve an opportunit y to them. Any selecti ve negotiations do not fit into the scheme and any action of an authorit y based on selecti ve 168 169

M/s. Noble Sales Agency V. State of Assam; AIR 1992 Gau. 46. Karnataka C.L. & T. Co-op Society Ltd v. FCI Madras, AIR 1994, Kant 147.

negotiations is likel y t o be held illegal and quashed by the Court. 1 7 0

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It is necessary at thi s stage to take cogni zance of a circular issued by the Central Vigilance Commission directing all the Departments of the country to the effect that only the lowest tenderer should be called for negotiations. This direction may not be binding on the Stat e Government Depart ments. For example, the State 'of Madhya Pradesh had prepared a manual in accordance with which all tenderers were invited for negotiations. The petitioner in a case hi mself participated in negotiations and submitted the rates. However he submitted a petition challenging the act ion of the State to enter into negotiations with all tenderers and sent negotiated rates in sealed envelopes in preference to his lowest tender. It was held the circular issued was applicable to Central Government depart ments and Cor porations, and cannot override the provisions of manual prepared by the Stat e Government. The action of the State was strictly within the rules. 1 7 1 3.16.2

Rules of the CPWD Manual regarding Negotiations

R ul e s o f t he CP W D Ma n ua l i n r e sp e ct o f ne go t iat io n s p r io r to acc ep t a n ce ha v e b ee n d eal t wi t h i n C hap t er o ne. 1 1 2 T he r u le st ip ul at i n g t h at n e go t iat io n s ca n o nl y b e had wi t h t h e lo we s t tender er n eed no t b e c ar r i ed o u t in le tt er . J ud ici al l y, wh at i s exp ect ed is that all tenderers are treated eq u al l y on p ar in the ma tter o f ne go ti at io ns as well. What is the position of the rules in the Code and if violation of the sa me will be prej udicial to the action taken, or in short if the rules have statutory f orce o r not was considered by the Supreme Court in a

case. In the said case two contentions were urged on behalf of the appellant that the wa y in which the tenders were d ealt with for July 30, 1966 showed that the rules contained in the Code relating to te nd er s were no t followed and there was d is cr i mi na tio n b e t wee n the ap p el la nt a nd the Respondent No. 3. The Supreme Court held: 1 7 3 "Taking first the contention with respect to the Code not being followed in the matter of tenders, the question that arises is whether this Code consists of statutory rules or not ...If they have no statutory force they confer no right on anybody and tenderer cannot claim any rights on the basis of these administrative instructions. If these are mere administrative instructions it may be open to Government to take disciplinary action against its servants who do not follow these i nstructions but non-observance of such admi nistrative instructions does not in our opinion confer any ri ght on any member of the public like a tenderer to ask for a writ against the Government by petition under Article 226. The matter may be different if the instructions contained in 170 171 172 173

M.V.Krishna Reddy v. Govt, of A.P. AIR 2003 A.P.81.; 2003(1) Arb. LR 446 (AP). . Shrikishan & Co. v. State of Chhattisgarh, AIR 2003 Chhat. 18. See Art. 1.12. G. J. Fernandez v. State of Mysore, AIR 1967 SC 1753.

the Code are statutory rules. Learned counsel for the appellant is unable to point out any statute under which these instructions in the Code were framed. He also admits that they are administrative instructions by the Government to its servants relating to the Public Works Department. But his contention is that

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they are rules issued under Article 162 of the Constitution. Now Article 162 provides that "execut ive power of a State shall extend to the matter with respect to which the l egislature of the Stat e has power to make laws". This Article in our opinion merel y indicates the scope of the executi ve power of the State; it does not confer any power on the State Government to issue rules thereunder." It was further held : "We are therefore of the opinion that instr uctions contained in t he Code are mere administrati ve instructions and are not statutory rules. Therefore even if there has been any br each of such executive instructions that does not confer any ri ght on the appellant to appl y to the court for quashing orders in breach of such instructions. It is unnecessar y for us to decide whether there has been in fact a breach of any i nstruction contained in the Code with respect to tenders and we do not therefor e so decide. But assuming that there has been any breach, that is a matter between the State Government and its servant, and the State Government may take disciplinary action against the servant concerned who disobeyed these instructions. But such disobedience did not confer any ri ght on a person li ke the appel lant, to come to court for any relief, based on the breach of these instructions. It is for this reason that we are not referring t o the Code, though the Hi gh Court did consider whether there was any breach of these administrative instructions and came to the conclusion that there was no breach. In the view we take it is unnecessary for us to consider this, for we are of the opinion that no claim for any relief before a court of law can be founded by a member of the public, like the appellant, on the breach of mer e administrative instruct ions," The Supreme Court accepted the Chief Engineer 's assertion on the basis of evidence before it and held that there is no question of discrimi nation in connection with what happened on October 19,1966. The Guj arat High Court in a case, did not f ind fault with the acceptance and consideration of the corrigendum before t he last date of submission but on merits found that the rates quoted by one party were not unconditional and coupled with more than one if's and but 's and whereas the rates quoted by the other party are strai ght and unconditional and may be more favourable as a whole, the competing parties whose tenders are found to be valid could not be subj ected to a differential treatment. It was held that the petitioner could not be excluded from negotiations and both the parties should have been called for 174

Siddhi Travels v. Indian Airlines Ltd. AIR 2000 Guj 102.

negotiations. 1 7 4 In conclusion it is submitted that when the lowest eligible tenderer is established the other tenderers go out of the picture and the Authority may be

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j ustified in negotiating with the lowest tenderer alone for bringi ng the rates further down.. 1 7 8 3.17

ACCEPTANCE/REJECTION OF TENDERS

The Government may enter into a contract with any person but in so doing the State or its instrumentalities cannot act arbitrarily. The tenders should be adj udged on their own intrinsic merits in accordance with the terms and conditions of the tender notice. The general principle of law is that a contract with the Government does not stand on a diff erent footing from a contract with a private party. Merely because one pereson is chosen in preference to another, it does not follow that there is a violation of Article 14 of the Constitution. The Government is necessarily entitled to make a choice. But the choice cannot be arbitrary or fanciful. The choice must be dictated by public interest and must not be unreasonable or unprincipled 1 7 9 The Madras Hi gh Court, in a case, refused t o relax a condition for eligibility by relying upon the decision of the Supreme Court in West Bengal State Electricity v . Patel Engineering Co. (2001) 2 SCC 45 1;2001 (1) Arb. LR 540 (SC). 1 8 0 If the State or its instrumentality chooses to invite tenders, it must abide by the result of the tender and cannot arbitrarily or capriciously accept t he bid of a party which is high and to the detri ment of the State, when the tender was to be gi ven to the lowest bidder according to the invitation 1 8 1 . Fairness demands that the authority should notify in the tender noti ce itself the procedure, which they propose to adopt while accepting the tenders. ILLUSTRAT IONS (1) A petitioner dealing with suppl y of vehicles submitted his tender with all requisite documents and earnest money. Though found lowest, the tender was not accepted for some items. The petitioners approached the Cour t for relief. The respondent resisted the reliefs on the ground that there were several sets of parameters which were required to be taken into considerat ion by the competent authority which had reser ved the right to rej ect any tender. It was further contended that the Government of India, Ministry of Defence had issued a letter laying down a condition that the tenders below 20 % of reasonable rates woul d be rej ected as fictitious. The rates of the petitioner in respect of items in question were found to be far lower than the reasonable 178

Kumar Transports v. Central Ware Housing Corporation, 2002(3) Arb. LR 119 (Madras); Koratemjen v. State of Nagaland, 2002(3) Arb. LR 622 (Gauhati).

179

Ramana Dayaram Shetly v. International Airport Authority of India. AIR 1979 SC 1628.

180 181

Taxi Owners-cum-Drivers Asso. V. Reg. Dir., SRBC.ONGC, 2004 (1) CTLJ 304 (Madras). Harminder Singh v. Union of India. AIR 1986SC.1527; M/s. Kesar Enterprises Ltd. v. State of U.P..AIR2001 A11.209.

rates fixed by the Authority. Taking cogni zance of letters issued by the Central Vigilance Commission to the effect that it is the post-tender negotiations,

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which for m the main source of corruption, and hence, post -tender negotiations are banned except in case of negotiations with lowest tenderers, i f the tender relates to award of work/suppl y orders, wher e the Government of India has to make payments, it was held that post tender negotiations are not onl y per missible but mandatory in case of a tenderer whose rates are lower than 20%. In other words no tender can be straight away rej ected on the ground as done. Onl y after negotiations if the rates tendered are found unworkable, the tender may be rej ected. 1 8 2 (2) An authority invited t enders for hiring vehicles of different categories at the rates fixed and appended to the tender invit ation. The procedure for selection stipulated that after scrutiny qualif ying offer would be gi ven 1 Serial Number and " agencies for different categories— shall be selected by lottery of the serial number in the presence of bidders". A tenderer after purchasing tender documents challenged the selection process on the ground that it was gambling in nature and contrary to the public policy. It was held that in case of lottery there are general ingredients namel y consideration, prize and chance. The ulti mate element i s gaining a prize by chance by investing consideration. In the procedures there are no elements of consideration and prize and therefore not a gambling and much within the per missible li mits under Art. 14 of the Const itution. ( 3 ) A Municipal corporation invited tenders for settlement of mar kets and after

receipt of tenders decided not to accept any tender at any amount more than the double esti mated value, in view of the al legations of extortion during the previous ter m of the lease. Applying the said basis all higher offers were ignored and finally the tender of the eighth tenderer was accepted.. Three writ petitions were filed. Recognizing the power of the authority to refuse to accept the highest or higher bid, it was held that if the authority felt that any bid in excess of double the estimated value woul d be unreasonable, the tenderers should have been put to notice by due publication in the notice inviting tenders. The procedure adopted was held to be in derogation of the rights of the petitioners to fair treatment. As result the order accepting the tender was quashed and set aside 1 8 4 . (4) Where the Government discri minated between persons si milarl y sit uated by excluding from consideration the tender of the petitioners on the basis of the undisclosed criteria was held to be wholly unreasonable, arbitrary and violati ve of Art. 14 of the Constitution. 1 8 5

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(5) However, wherein persons discri minated against are not si milarly situated there may not be violation of Article 14, it is submitted. A Di vision Bench of 182 183 184 185

R.R.Co-op, Labour and Construction(LOC) Ltd. v. State of Punjab AIR 1999 P.& H. 244. Dip Gogoi v. Numoligarh Refinery Ltd., 2004 (1) CTLJ 393(Gauliati). Saurabh Das v. Gauhati Municipal Corpn., AIR 2004 Gau. 38.; 2004(1) CTLJ 456 (Gauhati). Golam Mohammad v. Supdt., N.R.S. Medical College and Hospital, AIR2001 Cal.5.

the Allahabad Hi gh Cour l held lhat a forei gn company, while competing with Indian companies for supply, installation of electronic meters cannot complain of violation of ri ghts under Article 19 when tender of an Indian company, though second lowest, was accepted in pref erence to the forei gn company. It was held that forei gn company cannot clai m any relief for violation of Article 14. 1 8 6 (6) In another case, where the essential conditions of tender documents wer e deviated from while accepting the tender, it was held that award on the basis of varied ter ms of contract was bad. It is noteworthy that during the pendency of the petition, the tender with deviated condition was accepted and by the ti me the petition was heard part perfor mance was completed. The learned Single Bench refused to consider this aspect and hel d that delay could not deprive the petitioner of its right. 1 8 7 An appeal was filed before the Di vision Bench, which reversed the above finding on the ground that no mala fide was shown 1 8 8 3.17.1

Conditional Tenders

Where a tender invitation contained a stipulation that conditional tenders were liable for summar y rejections, rej ection of tender containing condition will be valid. However , if the conditions are contained in a forwarding l etter which clearly states that the bid submitted was not subj ect to the said assumptions/deviations, it may not amount to conditional offer. There is no concept of conditional offer in the law of contract. Off er is always on certain terms. The acceptance thereof should be absolute and unconditional to make it a concluded contract. The gover nment contracts, as al ready stated impose predeter mined conditions and tender invitations expressly stipulate that any deviations from the said conditions would render the tender as nonresponsive offer. The nature of deviation pr oposed would decide i f the tender is responsive or not. ILLUSTRAT IONS (1) In a case, the cover ing letter contained certain assumptions and requested if the authority could agree to these assumptions/deviations. T he tenderer withdrew the assumpti ons and made an endorsement to that effect on the same covering letter withdrawing all the conditions before opening of the tender. The tender was thereafter opened with the consent of the other bi dders, as per

186 187 188 189

Power Measurement Limited v. U.PP.Corpn. Ltd., AIR 2003 All. 153. Aristocraft International Pvt. Ltd. v. Union of India, AIR2001 M.P. 99. PS.System (India) Ltd. v. Aristocraft International Pvt. Ltd., AIR2001 M.P. 135. M/s. Asian Techs. Ltd. v. State of Kerala, AIR2001 Ker. 388.

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the minutes of meeting. However on the next day protest was lodged by one of the tenderers stating that these assumptions were nothing but conditions attached to the tender and therefore tender should have been rej ected as nonresponsive. In a writ petition filed, while disposing of the above obj ection, Delhi Hi gh Court obser ved "— we find that there was provisions for maki ng assumptions/deviations and it was for the employer to consider t he same and after consideration accept or rej ect them, the bid would not become unresponsi ve." It was held that only material deviation or reservation of the nature specified in NIT clause would make the bid substantially nonresponsive. It was fur ther held that the mi nutes of the meeting demonstrated the transparency in the whole process of opening tenders, which was accepted by all tenderers who signed the Record For m. It was held that the action did not lack fairness. The bids were allowed to be evaluated and considered." 0 (2) The respondent invited tenders for the wor k of construction of a road. The construction had to be done by automatic power unit. Conditional tenders wer e liable to be rejected. Four tenders were received, out of which the petitioner's tender was the lowest. His tender was not accepted on the grounds that he had no experience of road wor k and that he did not own or possess an automatic plant and machiner y. His tender was also conditional inasmuch as he demanded 5% mobilization advance. The second lowest tender was also rej ected on similar grounds. The r espondents, therefore, called the respondent no. 3 and 4, the other two tenderers, for negotiations. Both these respondent s offered to reduce the tendered sum from Rs. 140 and Rs. ! 42 lacs respectivel y to Rs. 124.25 lacs each. The tender committee deci ded to divide the wor k equall y in two parts and awarded the same to the respondent Nos 3 and 4. It is pertinent to note that the tender submitted by the respondent no. 4 was also conditional inasmuch as he had demanded 10% mobili zation advance to be adj usted in fi ve equal installments among other conditions and yet his tender was not rej ected on that gr ound. The petitioner approached the Madhya Pradesh Hi gh Court chal lenging the award of contract to respondent Nos. 3 and 4. While holding that it was a fit case for interference, the High Court also observed that there was no condition in the tender notice that the tenderer must possess experience of road wor k or that he must own or possess an automatic power unit for doing the tarring wor k. In the absence of such clear declar ation of conditions i n the tender notice, the petitioner and the second lowest tenderer could not have been outright excluded from consideration and negotiations by the respondent. The authority was held to have clearl y depar ted from the declared mode of awarding the contract. This action was unj ust, unfair and discri minatory. If the mode of award of contract by tender had to be deviated or departed from, all the intending tenderer s should have been called for negotiations. The Hi gh Court also found force in the contention that the tender of the respondent No. 4 was also conditional and, therefore liable to be rej ected, but he was allowed to withdraw the condition and to participate i n the negotiations. Reliance was placed upon a decisi on of the Supreme Court. 1 9 1 Testing the action of the authority on the touchstone of Art. 14 of the Constitution, the High Court set 190 191 192

Gammon India Ltd. v. Union of India, 2003(1) Arb. LR 353(DeIhi)(DB). K. N. Guruswamy v. State of Mysore, AIR 1954 SC 592; Also see AIR 1979 SC 1628 & AIR 1989 SC 592. B. Shukla v. Chairman, S.A.D.A Singrauli Distt. Siddhi, AIR 1990 M.P. 365.

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aside the award of contracts in favour of the respondent nos. 3 and 4 1 9 2 .

3.17.2

Decision to accept tender other than the lowest - Illustrations

(1) Review of decision to accept tender based on the recommendations of Tender Advisor y Committee, i n the absence of any mala-fide in review of decision, it was held by the Delhi Hi gh Court as proper. In the said case the decision to accept was taken by the Minister of State and the Minister of Commerce carried out the review. 1 9 3 (2) An unbalanced tender though lowest was r ej ected by the State on that count and the wor k awarded to the other contractor. The writ filed by the lowest tenderer was dismissed for failure to show any irregularity or infirmit y in the decision making process. 1 9 4 (3) The lowest tender was rej ected and the tender of the third lowest was accepted on the ground that he had the experience of construction of the type of work at the rates quoted by the lowest tenderer. It was held that there was no infirmit y in the process. 1 9 5 3.17.3 Arithmetical errors in tender - Can Court direct to permit their corrections? The question as lo what action should be taken when a tenderer, after opening of the lender but bef ore its acceptance infor ms the authorit y that he had committed a mistake and desires to allow hi m to rectify his mistake or withdraw the tender is a vexed one and cannot be answered l o meet all situations. If the mistake is genuine and bona fide and promptl y br ought to the notice of the authority the tender should not be considered as it is, if the tenderer has sought per mission to correct or revoke his tender. At t he stage of opening of tender allowing hi m to withdraw the tender on that gr ound is, no doubt, in the interest of the authority inviting tender . Allowing him to do so would not cause any prej udice to the interest of the public authority. This again cannot be considered as a rule because it may not be followed if a tenderer is found to be habitually indul ging in such practice. The question as to his right to revoke the tender under the provi sions of the Indian Contract Act is independent and its answer will be governed by the ter ms and conditions of tender invitation. The tendency of the Courts of late to forfeit earnest money if a tenderer revokes his offer is indicated by a few decisions considered in this edition in Chapter 12. At this stage the discussion is limited to what is a proper and legal action that the authority should take. The author is firml y of the opinion that the tenderer should be allowed to revoke his offer unless he 193 194 195

M/s. Nestor Pharmaceuticals (Pvt.) Ltd. v. Union of India AIR1995, Delhi 260 Also refer to Art. 3.18.1. pp.199. « Lalzawmliana v. State of Mizoram, AIR 2001 Oau. 23. Arwish Marak v. State of Meghalaya, 2004(1) CTLJ 467 (Gauhati).

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habitually indul ges in such practice. The question as to whether he should be allowed to correct his mistake is difficult one. If the mistake is of the nature that would change the complexion of the tender it may not be all owed to be corrected. The legal position that emer ges can briefly be summed up thus : It would be beyond t he scope of the power of the writ Court t o direct the authority to allow the tenderers to correct arithmetical errors, particularly when the errors are of such nature and magnitude that if per mit ted it would gi ve a different complexion to the bid. It i s likel y to encourage and provide scope for discri mination, arbitrariness and f avouritism. The question that needs to be addressed is whether in equity a tenderer gets entitled to relief of correction of mistakes. In this respect reference to paragraph 84 of the American Jurisprudence is relevant. It reads : " As a general rule, equitable relief will be granted to a bidder for a public contract where he has made a material mistake of fact in the bid which he submitted, and where, upon the discover y of that mistake he acts promptl y i n informing the public authorities and requesting withdrawal of his bid or opportunity t o rectify his mistake par ticularly where he does so before any for mal contract is entered into." 1 9 6 The Supreme Court of India did not appl y the above rule of equit y to the case below. A tenderer filled in rate in Indian rupees per unit of excavation at Rs. 148.08 and in the next line where it was to be quoted in US dollars, the same rate in Indian rupees was repeated. The rate was sought to be corrected to US dollars 3.38. Si milar corrections were sought to be made in respect of other items. The amount column, however, showed the correct amount in US dollars. The rules of tender invitation and consideration stipul ated that the rate woul d be treated as correct and the amount would be corrected. The tenderer sought correction by treating the first rate for fifty per cent quantity and the second t o be for the balance quantity. This was not in compliance with the tender invitation. The Supreme Court of India set aside the order of the Hi gh Court directing the authority to consider the bid after correction along with other bids. 1 9 7 In another case a tenderer submitted the hi ghest bid offer of Rs. 51 lacs. The second bid was for a sum less than Rs. 27 lacs. The highest bidder made a subsequent offer of Rs. 29 Lacs. The Authority accepted the second lowest offer originall y recei ved. The hi ghest bidder filed a writ stating that the Authority ought to have accepted its original bid amount of Rs. 51 lacs. The Di vision Bench of Gauhati Hi gh Court dismissed the appeal and held that the action of the Authorit y was neither arbitrary nor illegal. 1 9 8

196 197 198

American Jurisprudence, 2nd Ed. Vol. 64 page 944; based on Moffett, H .& C. Co. v. Rochester, 178 U.S. 373;44 L Ed. 1108, 20 S Ct 957. West Bengal State Electricity v. Patel Engineering Co.(2001) 2 SCC 451; 2001(1) Arb. LR 540 (SC). Bijulbari Multipurpose Development Society v. State of Assam, 2004 (1) CTLJ 365 (Gauhati) (DB).

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Contracts by Government

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Splitting of work between two tenderers

A tender invitation contained a stipulation that the tenderer is agreeable to accept the part order against the tender i f the employer so desires. The employer accepted the lowest tender for part wor k and awarded the balance part to the next lowest tenderer at the rate quoted by the lowest tenderer. The plea of the lowest tenderer, who had accept ed the part order, that award of the part of the work to other tenderer without negotiations with the lowest tenderer, was illegal was turned down by the Bombay Hi gh Court. 1 9 9 ILLUSTRATION In a tender notification for construction of flyovers/bridges/ROB in packages,Package 1 included three flyovers at different locations. The tender notice included a condition reserving the right to the State t o delete any flyover from the package. The petitioners tender was found to be the lowest considering package 1 as a whole, however , comparati ve statement showed that in respect of one flyover it was hi gher than the 2" d and the 3 r d lowest. The authorities excluded that flyover I r o m package 1 and ordered that work to the 3 r d lowest tenderer In the process state saved Rs. 1.0 crore. In the Writ Petition the Petitioner, the lowest tenderer, sought a direction t o the authorities to allot all items of package 1 to the Petitioner. It was held " ..... it cannot be said that the process of deleting- C of Package -I and awarding it to the 3 r d Respondent, suffers from any illegality, arbitrariness, irrationality, unfairness or procedural i mpropriety and not in public interest, as such, no interference i s called for at the hands of this Court, accor dingl y, the writ petition is devoid of merits." 2 0 0

3.18 LOWEST TENDER REJECTED - WHEN ILLEGAL ILLUSTRATIONS Ordinarily the Authori ty rej ecting the tender s must record reasons for rej ection and communicate the same to the concerned parties unless there is justification not to do so. 2 0 1 However, mere non-communication of reasons may not be sufficient to interfere with the decision in all cases. Particularly if there was ever y reason to hold that the petitioners were aware of the reasons. 2 0 2 When the lowest tenderer is found to lack t he requisite experience and all the tenderers agree to execute the work at the rates tendered by the lowest tenderer, who should be selected? The Orissa High Court upheld the decision under the provisions of Orissa P.W.D. Code of awarding the contract to the lowest eligible tenderer and only if he refuses to extend such off er to the 199 200 201 202

M/s Nair Coal Services (P) Ltd. v. Maharashtra State Electricity Board, AIR 1994 Bom.163. M/s VSN Benarji, Engineers & Contractors v. State of AP and others, AIR 1998 A.P.29. M/s Star Enterprises v. CIDCO of Maharashtra Ltd., (1990) 3 SCC 280. Nagesh M. Daivajna v. State of Goa, AIR 1998 Bom. 166.

next low est tenderer. 2 0 3 The f ollow ing illustrations w ill help clarif y the law .

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ILLUSTRATIONS (1) The Petitioners tender though found lowest and recommended by the S.E and also the Chief Engineer, the Commissionerat e of Tenders, final aut hority in the finalization of tenders, did not scrutini ze the tender and the matter was transmitted to the State Government as per the direction of the State Government which rej ected the said tender without assigning any reasons. In repl y to the Petition before the Hi gh Court , the State averred that on receipt of credible information, investi gations were carried out and it was found that fraudulent practices of a grave and serious nature were indulged in, which necessitated cancellation of all bids with the per mission of the World Bank. The record showed the per mission was given by the World Bank reluctantl y and t here was no material to prove fraudulent practices. It was held that "viewed from any angle, the inescapable conclusions are that the process adopted by the Government in rej ecting the bid of the petitioner cannot be said to be fair and reasonable. The Government was directed to transmit the bids and connected documents to the Commissioner ol Tender, for evaluating the tenders and taking appropriate decision uninfluenced by the allegations, noting and opinions recorded by various officers.^ 0 4 (2) In a case decided by t he Punj ab and Haryana High Court, the decision not to accept the lowest tender and allot the work to another other agency without the permission of the higher authority was set side. The wor k carried out by the other agency was ordered to be measured and the balance wor k or dered to be allotted lo the concern found suitable and number one in merit. It was held that since the case had been dealt with by the officials in a casual manner, in violation of rules and instructions, the cost of rupees 5000/ - was ordered to be borne by the officers r esponsible for the lapses. 2 0 5 Letters addressed to seven odd tenderers who submitted their offers with earnest money etc., amount to tender invit ation in a limited competition and selection of a tenderer will attract the provisions of Art. 14. This is particularly so when a communication was addressed to intending tenderes that to provide a fair oppor tunity to all the eligible agencies final chance was gi ven to submit their best off er before taking a final decision. After recei ving revised offers, tenderers were directed to gi ve Bank Guarantee and furnish the list of equipment and audited statement of accounts for the past tree years. 2 0 6 (3)

203

Debendranath Balbantaray v. Commr.-cum-Secretary Govt, of Orissa; AIR 2002 Ori.142 Reliance placed on : Union Of India v. Hindustan Development Corpn., AIR 1994 SC 988 and Tata Cellular v Union of India, AIR 1996 SC11. 204 Lanco Constructions Ltd., v. Government of AP, AIR 1999 AP 371. 205 M/s Pritam Singh v. State of Punjab, AIR 1997 P. &H. 194. 2 06 Larsen & Toubro Ltd, Calcutta, v. Neyveli Lignite Corporation Ltd., AIR 1999 Mad. 306.

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(4) In the case bef ore the Di vision Bench, in an appeal against the order rej ecting the writ petition by the learned Single Judge, no reason was gi ven by the public officer, in spite of opportunity being gi ven by the Court to j ustify the action of not accepting the lowest rates and accepting the tenders with high rates for suppl y of di etary articles to distri ct hospitals. The Di vi sion Bench allowed the petition and ordered for calling fresh tenders and also directed to carry out investi gations by a competent pol ice officer as to why without any reasons the higher r ates were accepted and to forward the report to the Vigilance Depart ment for taking steps agai nst erring officers if i t was found that the officers shunned public dut y. 2 0 7 . (5) In a case decided by the Delhi High Court, four tenders were received. Respondent No. 4 was the lowest, the petitioner L-2 and the respondent no. 3 L-.3. Respondent No. 4 did not in fact fulfil l the eligibility criteria and after complaint by the petitioner and enquiry his contract was cancelled. The work was awarded to L-3 and not to the petitioner, though on temporar y basis. It was held that award to L-3 was not reasonable and the authorit y was directed to award contract to the petitioner, L-2. 2 0 8 3.18.1

Rejection of the low est tender -When not arbitrary

The rule that the lowest tender should be accepted is applicable only when all things are equal and not when the lowest bi dder fails to satisfy the conditions subj ect to which the bids are invited. ILLUSTRAT IONS (1) In a case the lowest tenderer had quoted 0.043% above the esti mat ed cost and the second lowest 20.67% above the esti mated cost. The lowest was rej ected on the ground that the rates were non-wor kable because the Depart ment 's esti mate was based on Schedule of rates two years prior to the tender notification. The depart ment had worked out the j ustified esti mation cost, which wor ked out to 5.66% above the original esti mate. The CPWD manual stipulates that contractors cannot be allotted wor k whose rates wor k out the cost 5% below the j ustified estimated cost. It was held : the action inviting the second lowest to negotiate and accept the cost at 1.579% above j ustified estimated cost was not illegal. 2 0 9 (2)

Tenders were invited i n two separate bids namel y technical bid along with experience certificates, turnover certificates and plan of dimensions and locations of sites for appoint ment as distributor/dealer of cellular service. The petitioner's tender in respect of technical bid was accepted. The petitioner's financial bid was found to be the lowest. However she was denied the dealership. She filed a writ petition. In defence it was contended that 75% 207 208 209

Adhir Ghosh v. State of West Bengal; AIR 1998 Cal. 317. Airogo Travel & Cargo Pvt. Ltd. v. Union of India, 2004 (1) CTLJ 220 (Delhi). Saikhom Raghumani Singh v. Chief Engineer I, PWD, AIR 1999 Gan. 143.

wei ghtage was gi ven t o financial bid and 25% was gi ven to technical bid. After adding the two weightages, the petitioner ranked second. Relying on the decision of the Supreme Court of India in Tata Cellular case, the Allahabad

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Hi gh Court declined t o interfere with the decision on the ground t hat to do so would amount to sit in appeal over the decisi on of the Hi gh Power Committee appointed for evaluation of the bids. The pet ition was dismissed. 2 1 0 (3) The Gauhati High Court upheld rej ection of the lowest tender for supply of goods on the ground that the rates tendered were below the mar ket rates. 2 " (4) Acceptance of the tender of Air India though fifth lower in preference to the lowest tenderer, by negotiations with the 5* lowest alone, was held to be arbitrary, illegal and opposed to the principles of natural j ustice by a Di vision Bench of the Kerala High Court. 2 1 2 This deci sion was set aside by the Supreme Court of India by holding that CIAL did not commit any wrong by considering the fact that Air India is an Airline and being a national carrier would be in a position to bring more traffic of Air India and other domestic lines. It was held " in a commercial transaction of a complex nature what may appear to be better, on the face of it, may not be considered so when an overall view is taken. In such matters the Court cannot subst itute its decision for the decision of the party awarding t he contract." 2 1 3 (5) A tenderer who did not submit Sales Tax Clearance certificate was awarded the contract in preference to anot her tenderer who had quoted the same price and also attached Sales Tax Clearance certificate. The person whose tender was accepted had applied f or registration but was not even registered under the Sales Tax Act. It was held that the award of the contract was wholl y illegal. However, maj or work had already been completed by the tenderer whose tender was accepted. Under the circumstances the petitioner was awarded a compensation of Rs. 1 lac to be recovered from the salary of the person or persons held responsible. 2 1 4 (6) In another case decided by the Allahabad Hi gh Court, the tender condition required the tenderer to submit character certificate not more than three months old along with the t ender. When the tenderer did not compl y with this condition, it was held that consideration of the tender not compl ying with the mandator y condition was bad and the tenderer in question was not eligible to participate. The second lowest tenderer had not challenged the decision and hence re-auction was ordered. 2 1 5 (7) In a case the State invited tenders for construction of godowns with a construction period of one year. The lowest tender was accepted subj ect to change of completion period lo five months. The lowest tenderer declined to 210 Balaji Coal Linkers, U.P. v. Bharat Sanchar Nigam Ltd., AIR 2004 All. 141; 2004(1) CTLJ 582 (Allahabad) (DB). 211 212 213 214 215

Rubul Chandra Deka v. State of Assam, AIR 2003 Gau. 169. Cambatta Aviation Ltd., v. Cochin International Airport Ltd., AIR 1999 Ker 368. Air India Ltd. v. Cochin International Airport Ltd., AIR2000 SC 801. A.K.Constructions v. State of Jharkhand , 2004(1) CTLJ 487(Jharkhand). Bashishtha Narain Pandey v. Commissioner, Basti Divn. AIR 2002 All. 280.

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accept the reduced period of completion. The lowest tenderer in the other phase agreed to compl ete within five months. His tender was accepted and he was entrusted with the wor k. It was held that the decision neither suffers from any infir mit y nor based on extraneous considerations calling for i nterference with the Court. 2 1 *

(8) In yet another case decided by the Orissa High Court, all tenders received were found to be defective. The owner gave an opportunity to all tenderers to rectify the defects. The lowest two tenders were rej ected by an expert committee because the prices quoted were lower by over 50% and 30% of the estimated cost and as such considered non-wor kable. The second lowest tenderer filed a petition. It was held that the petitioner could not have legiti mate expectation of award of contract and that the owner had the right to choose a ri ght person with the requisite experience and abilit y to do the wor k. While adj udicating the constitutional validity of executive decision concerning economic matters, cer tain freedom to the executive should be allowed. On these grounds the writ petition was dismissed. 2 1 7 3 .18.2

Lowest Tenderer - Not Entitled To Hearing?

The question as to whether the lowest tenderer or hi ghest bidder i n an auction sale is entitled to hearing if his tender/bid is not acceptable is considered below in't ne li ght of a few cases decided by the Courts. The Chief Commercial Superintendent, East ern Railways, invited tenders. On April 6, 1970 these tenders were opened, it was found that onl y two tenders were recei ved besides the petitioner 's tender. Of these three onl y t wo, namel y, those of the petitioner and the Respondent No. 3'were found in order and the rates quoted by the petitioner were lower than the rates quoted by the respondent No 3. It was further alleged t hat the tender submi tted by the respondent No, 3 did not confor m to the rules contained in Clauses 15 and 16 of the tender for m. In spite of this the tender of respondent No. 3 was accepted. Feeling aggrieved the petitioner moved the Calcutta High Court under Art. 226 of the Constitution of India. Three contentions wer e raised before the Hi gh Court. Firstl y, acceptance of the tender submitted by the Respondent No.3 was in contravention of rules and provisions embodied i n the for m of the tender. Secondl y, the rej ection of the tender offends against the fundamental rights and amounts to illegal discrimination contrary to Art. !4 of the Constitution. Thirdly, cancellation of the petitioner 's tender without gi ving an opportunity of hearing violated the rules and principles of natural j ustice. 216 217

Jayaprakasb. Nanda v. G.M., Orissa State Warehousing Corpn., AIR 2002 Ori. 199 . Also see Sudarshan Marketing v. Chief Commercial Manager, W.Rly.,AIR2004 Bom. 114. NU Calcutta Construction Co. v. National Aluminium Co. Ltd., AIR 2000 Ori. 186. Also see Optel Telecommunications Ltd. v. Union of India, AIR 2001 M.P. 161; M/s. Bishal Enterprises v. State of Orissa, AIR 2003 Ori. 207. National Radio & Electric Co. Ltd. v. Union of India, AIR 2003 Del. 308.

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It was held:

218

"Even on merits, I t hink, there is no substance in the petitioner 's case. Regarding the first and second points, even if there is breach of rules or regulations in accepting or rej ecting the tender that would at best come within the domain of contract, no writ will lie for enforcement of contractual right. No question also arises as to infringement of fundamental ri ghts under Article 19(1) (g) or violation of provisions of Article 14 of the Constitution either in acceptance or rej ection of tender for obtaini ng a contract. 2 1 9 "On the third point learned Counsel for the petitioner has relied on an unreported decision of the Supreme Court in D. F. O. South Kheri v. Ram Sanehi Singh, Ci vil Appeal No. -8 of 1969 ( SC). It is ur ged that in any case the petitioner's tender could not be cancelled wit hout gi ving hi m an opportunity of hearing. Following the principles indicated in K. N. Gur uswamy v. State of Mysore, AIR 1954 SC 592 it was held in the above case that even though "the order was administrati ve and not quasi -j udicial the order had still to be made in a manner concerned with the rules of natural j ustice when it affects the respondent 's rights of property." This decisi on, I do not think, has any bearing to the question invol ved in the present rule. For, the acceptance or rej ection of a tender was based not on any statute or statutory rules and the authority concerned did not pass any order vested with certain statutory power. Secondl y, mere submi ssion of tender did not create any right to property in favour of the petitioner. In any event, therefore, the petitioner cannot clai m any hearing before cancellation of such tender. "Thirdly, it is stated in paragraph 11 of the affidavit that one of the ter ms specified in the tender for m is that "the Railway Administration reserved the right to rej ect any tender without assi gning any reason and does not bind itself to accept the lowest or any tender or to assign any reason for doing so. The said Administration also reserves the right t o accept any tender in part or in whole. The tenderers should note that the charges quoted by them must confor m to the rates and fares sanctioned for the area by the Regional Transport Authority." There is no denial by t he petitioner to the correctness of these provisions. Such being the ter ms of the agreement between the parties no question of gi ving an opportunity of hearing arises before cancellation of the petitioner's tender j ust because he quoted, alt hough denied by the r espondents, the lowest rate." In this connection the following obser vations of the Supreme Court of India need to be noted. It was held : 2 2 0 "With regard to the grievance that in some cases the bids of persons making the highest tenders were not accepted, the facts are that persons who had made 218 219 220

Jaidev Jain & Co. v. Union of India, AIR 1972 Cal 253. See AIR 1959 SC 490 C. K. Achutan v. State of Kerala, AIR 1967 SC 1753; G. J. Fernandez v. State of Mysore, AIR 1967 SC 1753. Trilochan Mishra v. State of Orissa, 1971(3) SCC )153 (160,161.

lower bids were asked to raise their bids to the hi ghest offered befor e the same were accepted. Thus there was no loss to the Government and mer ely because

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the Government pref erred one tenderer t o another no complaint can be entertained. Government certainly has a right to enter into a contract with a person well known to it and speciall y one who has faithfully performed his contracts in the past i n preference to an undesirable or unsuitabl e or untried person. Moreover , the Government is not bound to accept the highest tender but accept a lower one in case it thinks that the person offering the lower tender is on an overall consideration to be preferred to the higher tenderer." The above obser vations of the Supreme Cour t, it is respectfully submitted, do not amount to unrestricted power, to the Government. If the Government acts arbitrarily in rej ecting the lowest tender for a wor ks contract or a highest bid for disposal of public property, such an act would be open to scrutiny by the Courts and if found arbitrary, the Court may correct the action. In a case, acceptance of a tender was revoked even before the tenderer complied with required for malities and without gi ving an opportunity to explain irregularity, if any committed, the order of cancellation was set aside by the Andhra Pradesh Hi gh Court. 2 2 1 In a case, Punj ab and Har yana Hi gh Court upheld the action of the collector of rej ecting the hi ghest bid on the ground that the amount offered was much lower than the value of the property under auction. It was held that the hi ghest bidder did not acquire any vested rights in respect of the sale unless the Collector approved the bid. 2 2 2 The Court did not interfere in one case because after scrutiny it was found by the Court: 2 2 3 "The tender by the petitioner was not i gnored or rej ected arbitrarily. It was duly considered and anal ysis of the rates was invited and only after due consi deration of the analysis the tender submitted by the petitioner Was rej ected." In another case, the Supreme Court reversed the decision of the Patna Hi gh Court and held that non-award of contract to a contractor on the ground of his having been blacklist ed earlier was in order. It was held that there was no question of issuing a show cause notice inasmuch as the authority was taking note of existing order and not sitting in j udgement over such or der or itself

221 222 223 224

M/s Sathi Devi Manila Mandali v. Medical Superintendent, AIR 2004 NOC 97 A.P. M/s Swadesh Rubber Industries v. Sardar Singh, AIR 1994 P. & H. 306. Also see K.Dashratha v. Mysore City Municipal Corporation, AIR1995 Kant. 157. Omprafcash v. Union of India AIR 1982 Cal 340 . Patna Regional Development Authority v. M/s Rashtriya Pariyojana Nirman Nigam, AIR 1996 S.C. 2074.

issuing such order. 2 2 4

3.19

REJECTING ALL TENDERS

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Building and Engineering Contracts

The power to rej ect all the tenders cannot be exercised arbitrarily and must depend for the validit y on the existence of cogent reasons for such action. In the contractual sphere, as in all State actions, the State and all its instrumentalities have to confir m to Art. 14 of the Constitution of India of which non-ar bitrariness is a significant facet. There is no unfettered discretion. There is the dut y to act 'fairly and to adopt a pr ocedure which is 'fair play in action'. Unfettered power to rej ect or accept any bid without infor ming any ground conferred on employer is ultra vires Art. 14 of the Constitution of India. 2 2 5 Due obser vance of this obligation as a part of good administration raises a reasonable or legiti mate expectation in ever y citi zen to be treated fairly in his interaction with the State and its instrumentalities. ILLUSTRAT IONS (1) The Kerala High Court, relying upon the decisions of the Supreme Court of India that the State is certainly entitled to look for the best deal with regar d to its properties and not bound to accept the highest offer or to enter into contract, refused to interfere with the order to conduct fresh auction of trees, though the tender received was for the sum i n excess of the esti mated cost. It was held that the principle of legitimate expectation was not applicable to the case. 2 2 6 Where tenders were invited and the petiti oner was found to be. the lowest tenderer but no acceptance letter was issued. Subsequentl y the authority reinvited the tenders in which the petitioner also participated. The petition challenging the second tender invitation was dismissed on the ground that unless wor k order is issued no right accrues to the tenderer and the internal note sheets have no face value. 2 2 7

(2)

3.20 NOMINATION/PREFERENCE TO A CLASS OF TENDERERS Negotiating with one party alone and awarding a contract to it, or distributing the wor k amongst few contenders without rej ecting or accepting tenders cannot be said to be per se bad actions. The Supreme Court of India, in a case, obser ved: "The wider concept of equality before the law and the equal protection of laws is that there shall be equality among equals. Even among equals there can be unequal treat ment based on an intelligible differentia having a rational relation to the obj ects sought to be achieved. Consumers' co-operative societies form a distinct class by themsel ves. Benefits and concessions granted to them 225 226 227

M/s. Gcmranga Lai Chatterjee v. State of West Bengal, AIR 2003 Cal. 44. Also see Aroma Enterprise v. Murshidabad Zilla Parishad, AIR 2003 Cal. 251. K.M.Pareeth Labba v. Kerala Live Stock Development Board Ltd., AIR 1994 Ker. 286. Dipak Kumar Sarkar v. State of W.B., AIR 2004 Cal. 182.

ultimatel y benefit persons of small means and promote social j ustice in accordance with the di rective principles." 2 2 8

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Contracts by Government

Although a citizen has a fundamental right to carry on a trade or a business, he has no fundamental right to insist upon the Government or any other individual for doing business with hi m. Where a ri ght is conferred on a particular individual or a group of individuals to the exclusion of others, reasonableness of restrictions has to be deter mi ned with reference to the circumstances relating to the trade or business in question. The reasonableness of restriction is to be deter mined i n an obj ective manner and from the standpoint of the interest of the general public and not from the standpoint of the int erest of the persons upon whom the restrictions are imposed. ILLUSTRAT IONS (1) A circular of Kerala Government in respect of scheme for suppl y of pump sets to farmers i mposed a restriction that pump sets must be purchased onl y from dealers approved by Government was held by the Supreme Court as not violati ve of Articles 14 and 19 of the Constit ution of India 2 2 9 ( 2 ) The State Governemnt of Punj ab issued a notification for gi ving pr eference to the Co-operati ve Labour and Construction Societies in the matter of allotment of wor ks by its depart ments and local bodies. By the said notification unskilled wor ks up to any value and skilled wor k up to Rs. 10 Lacs was to be allotted to these Societies only by way of tenders within common Schedule of rates fixed by PWD. If more than one Society have offered tenders, the lowest rate accepted could be made applicable to the other societies for doing that wor k up to their capacities. The left over wor k alone could be got executed by inviting open tenders. A writ petition was filed challenging the above notification. Reliance was placed upon several decisions of the Supreme Court of India. 2 3 0 Based on the above well settled position in law it was held that the notification did not suffer from any constit utional or legal infir mi ty. 2 3 1 232

(3) The Supreme Court of India in another case observed " It cannot be disputed that the Government has the ri ght to change its policy from time to ti me, 228 229 230

231 232

Madhya Pradesh Ration Vikreta Sangh Society v. State of Madhya Pradesh.AIR 1981 SC 2001. Krishnan Kakkanth v. Govt, of Kerala, AIR 1997 SC128. Indian Drugs and Pharm. Ltd. v. Punjab Drugs Manufacturers Assocn., AIR 1999 SC 1626.; Krishnan Kakkanth v. Govt, of Kerala, AIR 1997 SC128.; P.T.R. Exports (Madras) Pvt. Ltd. v. Union of India, AIR 1996 SC 3461.; Indian Railway Service of Mechanical Engineer Association v. Indian Railway Traffic Service Association, 1993 AIR SCW 2342. M/s Maya Construction Co. v. State of Punjab, AIR 2004 P. & H. 35. State of Uttar Pradesh v. Vijay Bahadur Singh, AIR 1982 SC 1234 (1236).

according to the demands of the time and situation and in the public interest. If the Government has the power to accept or not to accept the highest bi d and if the

222

Building and Engineering Contracts

Government has also t he power to change its policy from ti me to ti me; it must follow that a change or revision of policy subsequent to the provisional acceptance of the bid but before its final acceptance is a sound enough reason for the Government 's refusal to accept hi ghest bid at an auction"

Relying on the above decisions the Madras Hi gh Court upheld the decision of the gover nment restricting the order to a lesser number than the number for which tenders were invited and procuring the balance number from SIDCO. (4) In a case the tender notice provided for pr e-bid meeting during which it was disclosed in answer to a query that the price preference for public sector undertakings would depend upon the government policy at t he time of finalization of tenders. Thereafter the owner intimated to all tenderers that the price preference to PSU shall be applicable and as such the parties were gi ven the option to re-quote their price if they so desired. The petitioner did not submit the revised bid. When the tender of a PSU was accepted the petitioner filed a writ petition on the ground that the pr ice preference was not included in the tender invitation but intimated subsequently by a letter. It was held that there was no arbitrariness or preferential treatment. Incidentall y in the case the price quoted by the PSU was lower by Rs 50 crores and as such t he award to the said PSU was held to be in the public interest. 2 '' 1 (5) In pursuance of a policy decision the st ate Government invited proposals for private sector parti cipation for setting up Mini Hydro plants on canal drops at 10 sites. Tenders were received for one of the sites which were evaluated on the basis of uniform criteria for all sites. According to the said criteria ranking was gi ven to the tenderers. However in the mean ti me, the Government changed the policy for new power generation proj ects by independent power producers or by j oint venture companies with private parties. Lett er of Intent was issued to the petitioner on the basis of build, operate and own subj ect to the ter ms stipulated, whereupon Rs. 8 lacs were deposited as non-refundable processing fees. Subsequently the matter was reviewed by the Government and it was decided to cancel the Letter of Intent issued to the petitioner and award the contract to Respondent no. 3, who was not entitled to submit proposals in terms of the advertisements in public interest. Placing reliance on the decision of Ramana's case ( AIR 1979 SC 1628), it was held that after having invited proposals onl y from t he private sector , approved and allocated a site to the petitioner, the Government could not have arbitrarily reviewed the decision in the name of public interest. It was obser ved that public interest mi ght have been better served if the Government had allowed public sector participation in the advertisements inviting proposals. In the result the writ petition was 233

234 235

Danya Electric Company v. State, AIR 1994 Madras 180.Also see Shankarlal v. Indore Devel opment Authority, AIR 1995 M.R 182. Also see M/s Babu Ram Gupta v Mahanagar Telehone Nigam Ltd. AIR 1995, Delhi 223 ; Also see M/s. Nirmal Kumar Jhanwar v. Food Corpn. of India, AIR 1995 Raj. 165. Mitsui Babacock Energy (India) Ltd. v. Union of India, AIR 2000 Ori. 170. Bhoruka Power Corpn. Ltd. v. State of Haryana, AIR 2000 P.& H 245.

allowed and the decision of the Government set aside. 2 3 5 (6) In another case, a tender for the erection of a township for Ardha Kumbha Mela was accepted. A part of the wor k concerning the police department, when

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allotted to another agency, the contractor filed a writ petition challenging the said order, it was hel d by Allahabad Hi gh Court that the petition invol ved breach of perfor mance, of contract and the contract contained an arbitration clause and therefore, the petitioner was not entitled to any relief from the Court." 5 (7) The Government had been gi ving the contracts for maintenance of lifts on tender basis for the years 1983-85. The wor k was gi ven to the tenderer offering the lowest bid, the pet itioner, for the two years. After the expir y of the period of two years on 31st March, 1985 the Chief Engineer, P.W.D. decided to gi ve maintenance wor k to the 4th Respondent who had offered 35% higher rates than the rates offered by the petitioner, on a nomination basis instead of by inviting tenders. It was contended on behalf of the Respondents that with a view to effect quality, better service and to avoid risk to the users of the lift, it was decided that the maintenance wor k of the lifts be gi ven to the 4th Respondent. It was also admitted that there was no complaint against the petitioner with regard to the wor k done by hi m during 1983-85. The Andhra Pradesh High Court obser ved 2 -' 6 : "...It is now well settled that where the Government is dealing with the public, whether by way ol" giving j obs or entering into contracts or granting other for ms of largesse, the Government cannot act arbitrarily at its sweet will and like a private indi vidual deal with it, but its action must be attuned to some standard or nor m which is not arbitrary, irrational or irrelevant. The governmental action must be based on some principles which meet the test of reason and relevance." It was held that mere assurance of better ser vice by the 4th Respondent was only a ruse to extend arbitrary favour to hi m. The action was held to be discrimi nator y and ultra vi res Arts. I9(l)( g) and 1 4 of the Constitution. (8) In a case, the Gover nment circular directing to get the wor ks executed through the nominees of Panchayat and MLA or of Chief Minister was held to be violati ve of Art. 14. 2 " (9) The Government invi ted tenders in respect of used X -ray plates and wasteful hypo solution to be sold to Small Scale Unit s. Later on the Government passed a resolution purporting to distribute these two items amongst t hree parties including the petitioner, also indicating the areas in which each of the parties would operate. 235

M/s. Lalloo Ji & Sons v. State of U.P., AIR 1995 All. 142. State of Kerala v. K.P.W.S.W.L.C. Co-op. Socy. Ltd., AIR 2001 Ker. 60. 236 A.E.Services v. Electrical Engineer (GL)PWD & R.&B., AIR 1986 A..P., 358. 2 3 7 Tek Nath Sapkota v. State, AIR 1995 Sikkim 1.

The petitioner 's tenders were the highest for both the items and the petitioner claimed that he ought t o have been awarded the items exclusi vel y. The Bombay

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Hi gh Court held that t he action of the respondents in i gnoring the tenders or without rej ecting or terminati ng the tenders, proceeding to allocate the two items to the three parties by the said resolution was clearly bad in law. The resolution was, therefore, quashed by the Hi gh Court. 2 " (10) In a case, fi ve star hotels were to be established at Calcutta and this intention of the Gover nment was well publicized. In view of the r equirement of expertise and sound financial position only two parties came f orward. The Government entered into negotiations with one of them instead of inviting tenders or holding public auctions. It was held that the Government was j ustified in doing so: 2 3 9 (11) On 11.12.1984, the State Government of Maharashtra passed a resolution laying down a new policy to ensure rapid construction of reliable and good quality tenements in Maharashtra for mass housing and such other requirements. The Government had decided t hat under Section 28(1) (a)(xii) of the Maharashtra Housing and Area Development Act, 1976, it was one of the duties of MHADA t o undertake and promote pre-fabrication and mass production of houses. The Government came to the conclusion that with the view to encouraging the industrialized prefab construction technology, the name of Shir ke-Sipor ex Consortium needed to be considered in the overall policy decision. It was decided and laid down in the Resolution that out of over Rs. 200 crores worth building proj ects executed each year by the State Government and semi -Government bodies, t he building constructi on wor k of about 5 lacs square feet of built-up area at a cost of Rs.16 crores be entrusted ever y year to M/s. B. G. Shirke & Co. by the semi -Government bodies mentioned in the resolution to the extent of the value indicated against each name of the Semi - Government bodies. The above Resolution was challenged by M/s. CIDCO Contractor 's Association and others in Writ Petition No. 538 of 1985. It was obser ved. " It must be remembered that in undertaking proj ects of this kind, the first and foremost consideration that the Government and Semi -Government bodies have to bear in mind is the welfare and interests of the society in general and of the beneficiaries of such proj ects in particular. It is not necessar y that in all cases tenders must be invited. So long as the public bodies act honestly and genuinel y in the interest of the society after taking all the relevant circumstances into consideration, their actions are not open to challenge. The proj ects of this kind are not to be looked upon as lar gesse to be distributed amongst the aspiring profit-makers. These pr oj ects are meant for the benefit of the people and so long as the public bodies take care to ensure the maxi mum benefit to the people, their actions cannot be challenged and should not be interfered with by the Court merely because some enterprisers such as the petitioners come forward with a grievance that their cases were not considered which if done would have enabled them to make profits. Certainl y they are not out to do ser vice to the society but onl y to make profits for themsel ves. ... 238 239

Nitin Industrial Associates.Khamgaon v. State. AIR 1986 Bom.298. Sliri Sachidanand Pande v. State of W.B. AIR 1987 SC 1109.

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"...if the competiti ve prices become the only criterion for awar ding contract, then all public bodies and the members of public will become helpl ess victi ms of the contract -grabbing syndicates which are for med by a class of contractors to make a fast buck. The people will then have to put up with substandard constructions which crack and crash in no time. It is common knowledge that some contractors for m their own rackets and by a secret understanding among themsel ves manipulate the tenders and j ack up the prices, if public bodies fall a victi m to such tacti cs it is the society which will suffer in the end. Nor should Courts gi ve such gentr y the benefit of equality under Article 14 blindly and unmindful of such conspiracies." It was held that the action of the State: "...in the circumstances, is bona fide, reasonable and in the best interests of the society. There is not a tinge of arbitrariness, unreasonableness or malafideness in the said action. I am forfeited in my conclusion in this behalf of the Supreme Court j udgment in the case M/s. Kasturi Lai v. The State of J. & K., AIR 1980 SC 1992" The above decision was confirmed in an Appeal by the Hon'ble Mr. Justice Lentin and Hon'ble M.r. Justice Kantheria, Judges on 11.4.1985 by a speaking order. Another petition No. 362226 of 1987 filed by a taxpayer on somewhat similar grounds was rej ected by Hon'ble Mr Justice Dharmadhikari of the Bombay Hi gh Court on 13.8.1987. (12) In another case it was held that a direction by the Public Works Depart ment that all unskilled wor ks up to any value and skilled wor ks up to the limit of Rs. 2 lakhs for each wor k should be allotted to the Co-operati ve Labour and Construction societies by way of tenders within the ceiling rates fixed by the competent authority, is not violative of Art. 14 of the Constitution on the ground of discr imination. It was held that pri vate contractors were not altogether excluded f rom consideration. The classification between private contractors and co-operative societies was held to be reasonable. 2 4 0 3.21

BLACKLISTING OR DISQ UALIFICATION OF TENDERERS

Blacklisting of tenderers has the effect of preventing a person from the privilege and advant age of entering into lawful relationshi p with the Government for purpose of gains. The first question that arises is whether a person who is put on the blacklist by the State Government is entitled to a notice to be hear d bef ore the name is put on the blacklist. The second question then would arise as to whether an order of blacklisting, which is passed after affording an opportuni ty of being heard, can be quashed on the gr ound that it is arbitrary. The law is well settled that nobody should be blacklisted without 240 241

K.Moideenkutty Haji v. Superintending Engineer.P.W.D., AIR 2001 Ker. 294. Joseph Vilangdan v Executive Engineer (RW.D.) Ernakulam, AIR 1978, SC 930, Erusian Equipment and Chemicals Ltd. V. State of West Bengal, AIR 1975 SC 266. Dandapani Roula v. State, AIR 1986 Ori. 220 also see Illustrations below.

gi ving an opportunit y of being heard. 2 4 1

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The Government is a government of laws and not of men. It is true t hat neither the petitioner nor the r espondent has any right to enter into a contract but they are entitled to equal treatment with others who offer tenders or quotations for the purchase of the goods. This privilege arises because it is the Government which is trading wit h the public and the democratic form of Government demands equality and absence of arbitrari ness and discri minati on in such transactions. The activities of the Government have a public element and, therefore, there should be fairness and equality. The State need not enter into any contract with any one but if it does so, it must do so fairly without discrimination and without unfair procedure. Reputation is part of a person's character and personal ity; blacklisting tarnishes one's reputation. Exclusion of a member of the public from dealing with a State in sales transactions has the effect of preventing hi m from purchasing and doing a lawful trade in the goods discri minating against hi m in favour of ot her people. The State can impose reasonable conditions regarding rejection and acceptance of bids or qualifications of bidders. Just as exclusion of the lowest tender can be arbitrary, similarl y exclusion of a person who offers the highest price from participating at the public auction would also have the same aspect of arbitrariness. Where the State is dealing with indi viduals in transactions of sales and purchase of goods, the two important factors are that an individual is entitled to trade with the Government and an indi vidual is entitled to a fair and equal treatment with others. A dut y to act fairly can be interpreted as meaning a dut y to observe certain aspects of rules of natural j ustice. A body may be under a duty to gi ve fair consi deration to the facts and to consider the repr esentations but not to disclose to those persons details of information in its possession. Someti mes dut y to act fairly can also be sustained without providing opportunity for an oral hearing. It will be dependent upon the nat ure of the interest to be affected, the circumstances in which a power is exercised and the nature of sanctions involved therein. The Supreme Court of India in one case obser ved :

242

"Blacklisting has the effect of preventing a person from the privilege and advantage of entering into lawful relationship with the Government for purpose of gains. The fact that a disability is created by the order of blacklisting indicates that the relevant authority is to have an obj ective satisfaction. Fundamentals of fair play requires that the person concerned should be gi ven an opportunity to represent his case before he is put on the 242 243

E. E. & C. Ltd. v. State of W.B. AIR 1975 SC 266. Also see T.P. Yakoob v. Kerala State Civil Supplies Corporation Ltd., AIR 2004 NOC 38(Kerala). BSBK (P). Ltd.v.Delhi State Industrial Development Corporation Ltd, 2004(1) CTLJ 217 Delhi.

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blacklist". 2 4 3 The decision of the Supreme Court was followed by the Delhi High Court in S.P, Timber Industries v. Union of India . Before the Delhi High Court, it was argued on behalf of the Union of India that the petitioners' name had not been blacklisted and all that had happened was that the petitioner had been deregistered. It was held by the Delhi High Court that this action amounted to blacklisting the petitioner and the principles enunciated by the Supreme Court in the above case were applicable. ILLUSTRATIONS (1) In a case a contractor registered in Class 'A' was removed from the approved list because of his having participated only in three tenders and failed to secure a contract though a large number of tenders were floated during the said period. It was held that there was no illegality in removing the petitioners name from the list. 244 (2) An order blacklisting a contractor for three years on account of failure to eliminate deficiencies pointed out in a rate contract, which contract was not formally executed, was held as illegal. It was observed that till due execution of the rate contract, there was no relationship binding the parties 245 . A petitioner in a case had challenged the decision of an authority of not opening the tender, because FIR had been filed against him and others by the CBI, alleging commission of certain offences in connection with earlier works contracts, executed by the Petitioner. The plea of the petitioner was that the action amounted to virtual blacklisting of the petitioner without affording to him an opportunity of being heard. The Single Judge by an Interim Order directed the authority to give the petitioner an opportunity. The authorities rejected the representation made by the petitioner. The Ld. Single Judge dismissed the writ holding " .......... I am however, of the view that this is a matter which has to be left for the decision of the respondent, a decision which has to be taken bona fide and in public interest. When several other qualified bidders, without any allegations against them, are available, the respondent might have felt that it is not desirable in public interest to consider the bid of the petitioner against whom a premier investigating agency like the C.B.I, has registered a case and the investigation in that behalf is pending. It cannot be said that such a conclusion is so perverse or shocking that no reasonable person would have come to such conclusion. On an overall view of the matter, I am not persuaded to agree with the contention of the learned counsel for the petitioner that the impugned action suffers from the vice of arbitrariness or discrimination." (3)

The petitioner filed an appeal before the Division Bench. In the course of hearing of the appeal, the report submitted by the Police (CBI), indicated that the appellant did not commit any criminal act or make any misrepresentation. Declining to accept

244 S. P. Timber Industries v Union of India, AIR 1990 Del. 312. 24 5 Hotel Ridge View, New Delhi v. Union of India, 2004(1) CTLJ 565(P&H).

and act on the basis of the Police Report alone, the Division Bench directed the authority to take fresh decision in respect of the tender of the appellant strictly in

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accordance with the law and before doing so inform the appellant of the materials upon which it proposes not to consider the appellant's tender. 246 (4) A Director of contracting Company physically assaulted an employee of the authority with a sharp weapon causing an injury near the right eye. An FIR was lodged. The Director also submitted a letter to the Commissioner of Police making allegations against the officials. The Enquiry Officer submitted a report observing that the employee's version was correct and the Director's allegations appeared to be in retaliation. Show cause notice was issued to the firm as lo why it should not be blacklisted. Reply was submitted. In the meantime tender submitted by the firm was not considered though found lowest. A writ petition was filed. It was held by the High Court that the Director of the Company and the Company itself are two separate legal entities and even if any unbecoming act was done by the Director, that should not stand in the way of the contract being awarded to the Company. The Contractor Registration Board debarred the Company and its Director for five years. The learned Single Judge allowed a writ petition. However the Authority was allowed to issue a detailed and reasoned order. The authority issued a fresh order debarring the Company and the Director for 5 years. The writ filed against the said order was allowed by the High Court. An appeal was filed by the Authority before the Supreme Court. In the course of judgement, it was observed that one can conveniently classify under three heads the grounds on which administrative action is subject to control by judicial review. The first ground is 'illegality' the second "irrationality", and the third 'procedural impropriety'. The Supreme Court further observed: "Though in the legalistic sense an incorporated body like a company and Its Directors are separate entities for certain purpose, in many companies they act as alter ego. For the acts of the Director, the concept of vicarious and constructive liabilities exist so far as the company is concerned. The acts of the companies are done primarily through the Directors or employees. Thus it is evident that a strained relationship between the contractor and the contractee can have implications in working out the contract." The Supreme Court while setting aside the judgement of the High Court stated that if the Authority felt that in view of the background facts, it would be undesirable to accept the tender, the same is not open to judicial review in the absence of any proved mala fide or irrationality. 247 (5) A clause in the works contract in a case stipulated : " 7.1 The contractor may subcontract any portion of work, up to a limit specified in Contract Data with the approval of Engineer but may not assign the contract without the approval of the Employer in writing. Sub-contracting does not alter the Contractor's obligations." The Contract Data provided the limit of sub-contracting up to 50 % of initial contract price with prior approval of the Engineer. 246

Majijit Sales Corporation v. State of Punjab, 2002(3) Arb. LR 430 (P & H).; M/s Navayuga Engineering Company Limited v. Visakhapatnam Port Trust, AIR 1998 AP 222. 247 DD Authority v. M/s. UEE Electricals Engg (P) Ltd. AIR 2004 SC 2100; 2004(1) CTLJ 345 SC.

The contractor had engaged a sub-contractor for executing a portion of the work. The engineer on the spot was aware that, subcontractor was executing a part of the work. Neither the Engineer nor the Employer was satisfied with the progress of the work and in the notice issued sought whether prior permission was taken for subcontracting. The

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letter warned that the Employer would not agree for a time over run and directed to make efforts to make up the time loss. Subsequent to complaint the sub-contractor was removed. Subsequently when the contractor was found to be lowest tenderer for another package, a show cause notice was issued as to why the contractor should not be debarred from further award of work for one year. The contractor replied taking the stand that the agency was given the work on trial basis and if its performance was found satisfactory permission would be obtained to subcontract part of the work. The engineer was fully aware of this arrangement and raised no objection. Only when the employer's representative objected to the said arrangement the subcontractor was removed. No action was taken thereafter and even extension of time was recommended. However, the contractor was debarred from participating in any bidding process and the entire bidding process of the other package was cancelled. A writ petition by the contractor followed in respect of the orders cancelling the tendering process and blacklisting. The learned Single Judge accepted the defence of the employer and upheld both the orders. An appeal was submitted. Interpreting the provisions, the Division Bench did not accept the contention raised by the Employer throughout that prior approval of the employer ought to have been taken. The provisions of the clause speak about " the approval of the engineer" for subcontracting and the approval of the Employer in writing. The subcontracting did not alter the contractor's obligations. The Division Bench interpreted the provisions as follows : 1. In the first place, there is no user of the words 'prior approval' either in respect of the sub-contract or in respect of the assignment of contract.

"2. Then, there is a definite difference in the concept of sub-contracting of the portion of the work and assigning the original contract itself. While for subcontracting only the approval of the Engineer is required, for assignment of the contract itself, the approval of NAHI that too in writing , is necessary. There is undoubtedly a dichotomy in the concepts of 'sub-contracting' and 'assignment of contract'. It is therefore, obvious that for such sub-contracting, there would be no need of the approval of NHAI though unfortunately, the parties have understood otherwise." In result the blacklisting order was set aside however, the relief of acceptance of the bid for the other package was declined on the ground that the Employer had an absolute right to accept or reject any bid without assigning any reason.248 248 M/s. P.T.Sumber Mitra Jaya v. N.H. Authority of India, AIR 2003 Mad. 221.

(6) In a case a petitioner contractor was debarred for three years on the ground that the contractor had gone back on the promise to lower the rates during negotiations orally and subsequently insisted on the tendered rates as the correct price all before the acceptance of the tender. The order was set aside by the P. & H. High Court on the ground that it was not a speaking order and that the petitioner had clearly admitted that the representative had made a mistake which was corrected at the first opportunity and thereafter the contract was awarded to another party and therefore, the respondent did not suffer in any manner whatsoever. 249

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(7) A contractor after negotiating with a Municipal Corporation for supply of iron obtained the acceptance of the Corporation but failed to enter into contract or to supply the material and even did not reply to a show cause notice. The corporation issued an order blacklisting the contractor for two years. The Delhi High Court declined to interfere with the said order. The Supreme Court upheld the decision of the Delhi High Court. 250 (8) An action of debarring the contractor from tendering in future for alleged failure to commence the work, when given due publicity by sending copies to other departments and organizations, it was held that it was a misuse of power with an ulterior motive; the order amounting to blacklisting the contractor without giving him a notice and the punishment disproportionate to the offence alleged. The said order was quashed. 251 (9) A Division Bench of Patna High Court had held that if there was allegation of fraud and breach of the terms of the agreement, the department can pass an order of blacklisting provided the rule of natural justice has been complied with. 252 (10) The Gujarat High Court upheld an order blacklisting a contractor for ten years for having submitted fake bank guarantees. The contractor was issued show cause notice and given an opportunity to present his case. 253 (11) Where the government terminated the contract of an approved contractor who failed to complete a work within the stipulated time limit, forfeited his security deposit and black-listed his name without hearing him, the Madras High Court held that the blacklisting did not relate to any particular contract and hence could not have been ordered without hearing the contractor. 354 (12) In a case, indisputably no notice was given to the appellant of the proposal of blacklisting the appellant. It was contended on behalf of the State that there was no requirement in the rule of giving any prior notice. Although the Supreme Court 249 250 251 252 253 254

Ives Drugs (India) Pvt. Ltd. v. State of Haryana, AIR 2004 P. & H. 250.; 2004 (1) CTLJ 622 (P&H) (DB). M/s Nova Steel India Ltd. v. M.C.D. AIR 1995 S.C. 1057. M/s V. K. Dewan & Co. v. Muncipal Corporation of Delhi, AIR 1994 Delhi 304, Also see: M/s Unibros v. All India Radio, AIR 1995 Delhi 368. Om Metals and Minerals Ltd. v. State of Bihar AIR 2002 Pat. 71; also see Pat. 112. Asif Enterprises v. O.N.G.C. Ltd., AIR 2002 Guj 264. Preetam Pipes Syndicate v. T.N.Slum Clearance Board. AIR 1986 Mad.310.

accepted the said contention and held: 255

"But it is an implied principle of the rule of law that any order having civil consequence should be passed only after following the principles of natural justice. It has to be realized that blacklisting any person in respect of business ventures has civil consequence for the future business of the person concerned in any event. Even if the rules do not express so, it is an elementary principle of natural justice that parties affected by any order should have the right of being heard and making representations against the order. In that view of the matter, the last portion of the order in so far as it directs blacklisting of the appellant in respect of future contracts, cannot be sustained

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in law." It was clarified that after following the due process the State was at liberty to take appropriate action. 256 (13) Registration of a contracting firm was cancelled because complaint by one of its directors against the Chief Engineer was found by the government to be incorrect. The record showed that the concerned authorities had decided to teach a lesson lo the contracting firm. The Chief Engineer against whom the complaint was made attended the meeting of Board of Chief Engineers to decide the action to be taken. The Andhra Pradesh High Court held that such a course is not permissible in law. 257 In a case, 2581 the petitioner was a registered contractor with the Government. The Government invited tenders for the construction of a work. The tenders were to remain open for acceptance for a period of sixty days. The petitioner submitted his tender and which on opening was found to be the lowest. The tender was not accepted within the validity period but the petitioner was requested to extend the validity up to December 19. On November 30, the petitioner withdrew the tender. According lo the Government on December 2, the Executive Engineer in-charge of the work was informed by the Government that the tender of the petitioner had been accepted. This however, was too late. The Executive Engineer refunded the earnest money after deducting 10%. On June 20, of the next year, the petitioner was served with a memorandum, which inter alia stated that the petitioner's above action amounted to the petitioner having behaved in an un-businesslike manner, which had caused delay in the execution of the work. On this ground the petitioner was asked to show cause as to why he should not be removed from the list of approved contractors. (14)

A detailed reply was sent by the petitioner justifying his action on the ground that there was a steep rise in the prices and further that the acceptance of December 2, was never communicated to him. On October 16, the blacklisting order was passed against the petitioner. This order was challenged under Art. 226 of the Constitution on the 255 256

257 258

Raghunath Thakur v. State of Bihar. AIR 1989 SC 620. Also see:M/s Saraswati Dynamics Pvt. Ltd. V. Union of India, AIR 2003 Del. 146; M/s Southern Painters v. Fertilizers & Chemicals Travancore Ltd., AIR 1994 SC 127; M/s D.C. Bhura and Sons v. Hindustan Paper Corpn.Ltd., AIR 1996 Gau. 86. M/s Elite Engineering Co. v. Bihar State Electricity Board, AIR 2000 Pat. 170. Sri S.S. Constructions Pvt. Ltd.,v. Engr - in - Chief, I & CAD Deptt., Hyderabad, AIR 1999 A.P.270. Bhim Sain v.Union of India, AIR 1981 Del. 260.

ground that the impugned order was completely arbitrary and violative of the petitioner's fundamental right under Art. 14 of the Constitution.

It was observed by the Delhi High Court 259 : "It has no doubt been held that the State is free to choose any person with whom it wishes to enter into contract. No person has fundamental right for insisting that the state must enter into a contract with him. Nevertheless a person has a right to claim equal treatment to enter into a contract. "The aforesaid right of equal treatment cannot be taken away by the State acting in an arbitrary manner. By arbitrarily blacklisting a contractor, the effect would be that he is deprived of an equal opportunity of being able to compete with other tenderers. It

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is true that the order of blacklisting has been passed after giving an opportunity to show cause to the petitioner. A mere formal compliance with the requirement of law of giving an opportunity cannot offer real justice to the petitioner if the order which is passed is arbitrary." Relying upon the decision of the Supreme Court

260

it was held :

"It must follow, therefore, that if the decision which is arrived at by the government is arbitrary, and the decision not being objective then as held by the Supreme Court in M/s. Erusian Equipment case (AIR 1975 SC 226) (supra), the Court under Article 226 of the Constitution would have the jurisdiction to strike down such an arbitrary order. "The next question which arises for consideration is as to whether in the present case order which was passed was arbitrary or not. I have no manner of doubt that the impugned order was completely arbitrary. In the conditions contained in the invitation of tender it was specifically stated that in the event of default, the tenderers, would be liable to forfeit 10 per cent of the security amount. No other liability could be fastened on the tenderer as per the terms and conditions thereof. The petitioner was not obliged to have extended the validity of his tender after I8th November, 1978. Had the petitioner been informed that in case he withdraws the offer he was liable to be blacklisted, the petitioner would not have extended the validity of the tender. He was not obliged to extend the validity. He extended the validity of the tender on a specific request having been made to him by the respondents. By withdrawing the tender the petitioner had not committed breach of any contract. A contractor being blacklisted on the ground of committing a breach of the contract is understandable. Where, however, no concluded contract had come into existence, like in the present case, a tenderer cannot be blacklisted if he is not informed previously that such a penalty can be imposed if the offer made by him is withdrawn. In other words a new condition, not previously known to a tenderer, cannot be inserted in effect, with retrospective effect, in the invitation of tender. The new condition being that if the 259 260

AIR 1981 Del. 260. AIR 1979 SC 1628.

tender is withdrawn it would result in the tenderer being blacklisted. The action of the respondents therefore, in removing the petitioner's name from the enlisted Class III contractors with the respondents is clearly arbitrary and unsupportable in law."

(15) In May, 1985 the DDA floated tenders for three works. The petitioner quoted the lowest rates. It was stated that the petitioner was verbally instructed lo commence the work by the then Superintending Engineer. Another person was appointed as the Superintending Engineer who asked the petitioner to extend the validity of his tender and later on negotiated with the second lowest tenderer and awarded the work to him. Aggrieved by this the petitioner fded a writ in the Delhi High Court. It was admitted without granting a stay on a limited point, namely, whether the action amounted to blacklisting which could not have been done without giving an opportunity to the petitioner. It was held by the Delhi High Court 261 that the mere fyct that a particular contract was not awarded to a party did not mean that the said party had been blacklisted and that there was no bar placed on the way of the petitioner submitting tenders in future.

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In M/s. Amarchand Shanna v . Union of India 202 was alleged that the authority called the second lowest tenderer to negotiate and to reduce the rales with the result that the lowest tender of the petitioner was rejected. In the writ petition it was also alleged that the officer concerned had always been antagonistic towards the petitioner. The High Court observed: "...it is not possible to hold thai every refusal to award a particular contract would amount to blacklisting. The rejection in the case on hand is based upon non-performance of lhe petitioner in the previous work and, therefore, it was based on comparative unsuitability, whereas blacklisting is based on positive act of the affected party and does not involve any comparison. Blacklisting is like passing a Bill of Attainder. This certainly does not ensue in the case of refusal of award 'or' a contract. On comparative scrutiny 'Blacklisting brings about disability not with reference to any particular contractual venture but generally in relation to an occupation. It brings about a practical metamorphosis of ineligibility over the contractor". This is wholly different from a contractor being rejected on the ground that he was less suitable for a particular work compared with some other; or the contractor because of his previous performance was rejected even though lowest and in turn the second lowest was accepted on comparative merit. In such case, the rejected contractor is still eligible and continues to be eligible in future works. ..." (16)

It was held:

263

"...The acceptance of the second lowest tender on comparative considerations and suitability of the performance does not violate the principles of natural justice and, therefore, no notice and opportunity to the party, whose lowest tender was rejected, is 261 262 263

R. K. Aneja v. Delhi Development Authority, AIR 1989 Del. 17. AIR 1988 A.P. 45. AIR 1988 A.P. 45.

necessitated. What has to be examined in such circumstances in accepting any tender other than the lowest is whether the lowest tender has been treated fairly and honestly in rejecting the same." 3.21.1

Reasons f or blacklisting need to be recorded 264

The Supreme Court of India in a case held : "Keeping in view of the expanding horizon of the principles of natural justice, the requirement to record reason can be regarded as one of the principles of natural justice which govern exercise of power by administrative authorities....Therefore, except in cases where the requirement has been dispensed with expressly or by necessary implication, an administrative authority exercising judicial or quasi-judicial functions is required to record the reasons for its decision." Relying upon the above decision the Punjab and Haryana High Court quashed a nonspeaking order blacklisting a firm. It was also held that the sister concern cannot be blacklisted without giving notice though some of the partners in both the firms are common. 265 3.22 BREACH OF CONTRACT - WRIT P ETITIO N NOT MAINTAINABLE

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As already stated in the first two chapters once a tender is validly accepted it results into a binding contract. Subsequent breach of contract by the public authority will not attract Art. 226 or Art. 1 4 of the Constitution of India. Appropriate remedy is a suit for damages in an appropriate court or in arbitration proceedings if the contract contains an arbitration clause. Relying upon a few Supreme Court decisions, 266 the Delhi High Court has held: 267 "It is a settled principle of law for a writ of mandamus that the petitioners must have a legal right to enforce the performance of alleged duty by the respondent." In commercial contracts the breach of contract can be properly adjudicated upon in a civil suit or arbitration if the contract contains an arbitration clause and not in a writ petition. 267 However, where a tender is accepted but acceptance is invalid and earnest money or security is attempted to be forfeited, a writ will be maintainable. Similarly, in a full Bench decision the Patna High Court, held that when termination of contract 264 265 266

S. N. Mukherjee v Union of India, AIR 1990 SC1984 (1996). M/s Pritam Singh and Sons v. State of Punjab, AIR 1996 P.& H. 260. C. K. Achutan v. State of Kerela, AIR 1959 SC 490; M/s Radhakrishna Agarwal v. State of Bihar, AIR 1997 SC 1496; Life Insurance Corporation of India v. Escorts Ltd., AIR 1986 SC 1370.

2 67 M/s Mahabir Auto Stores v. Indian Oil Corpn. Ltd., AIR 1989 Del. 315. Also see E. Venkatkrishna v. Indian Oil Corporation Ltd Bombay AIR 1989 Kant. 35 Ramit Enterprises v. Hindustan Petroleum Corporation Ltd., 2004 (1) CTLJ 202 (Delhi). Also see: Prem Chand v. Union of India, 2004 (1) CTLJ 200 (Delhi).

is for reasons de hors the contract an application under Art. 226 is maintainable. (See Illustration No. 2 below). However, it was held by Delhi High Court that a writ petition is not maintainable for enforcement of a contract qua contract. In other words contract considered as contract simply citer may not attract Art. 226. 268 ILLUSTRATIONS (1) The petitioner under Art. 32 of the Constitution held contracts for the supply of milk to the Government hospitals of Cannanore ever since 1946 and prior to this his brother held similar contracts from 1936. In 1957 the petitioner and a cooperative society submitted their respective tenders for supply of milk. After scrutiny, the tender of the petitioner was accepted. Later on the contract was cancelled and given to the Co-operative Society. The petitioner sought protection of Art. 14, 16(1), 19 (1) (g), 31 and 32. It was held by the Supreme Court: 269 "The petition under Art. 32 of the Constitution is wholly misconceived. No fundamental right is involved. At best, it is a right to take the matter to a Civil Court, if so advised, and to claim damages for breach of contract, if any." (2) The State of Bihar invited tenders for construction of a spillway of Reservoir Project. A tender submited the Petitioner was duly accepted and the order for commencement of the work was given. A formal agreement was also signed by the parties on 9.3.1990. By a communication dated 17.5.1990 the Superintending Engineering cancelled the work order and the agreement on the basis of orders of the Engineer in-chief and the Chief Engineer. The Petitioner filed representation

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before the competent authorities making a grievence that the agreement was cancelled without giving any reasons. The State's case as pleaded High Court was that the original design and therefore the estimate was proposed to be modified, bringing down the cost from Rs. 31.40 crores to Rs. 15.2 crores because the possible discharge itself was changed from 8217 cusecs to 4600 cusecs as advised by the Central Water Commission. Because of these later developments, in public interest and in order to safeguard the public revenue the work order and the agreement were cancelled. On these facts the High Court held: 270 "In other words, even according to the respondents, the ground for cancellation of the work order and the agreement is not referable to any one of the terms of the agreement but is de hors the said agreement." The Full Bench reviewed the observations of the Supreme Court in earlier relevant decisions and observed : "The judgments of the Supreme Court referred to above have repeatedly impressed that every action of the executive Government must be informed with reason which is part of the rule of law and its bare minimal requirement. In the present case the work order and the agreement in favour of the petitioner has been cancelled without assigning any reason, on a ground which did not exist on the date 268 269 270

G.Ram v. Delhi Development Authority, AIR 2003 Del. 120. C. K. Achutam v. State of Kerela AIR 1959 SC 490. M/s Pancham Sing v. State, AIR 1991 Pat. 168 (F.B.)

the impugned order was issued. The step for the cancellation of the contract is said to have been taken with an object to save the public exchequer. But rule of law as interpreted by Courts require the State Government to inform the petitioner that the drawing, design, and the estimated cost were likely to be changed on the basis of fresh data to be received. As such, it has to be held that the action of the State does not satisfy the test of reasonableness and fair play. In my view, apart from the three categories mentioned by the Supreme Court in the judgment of Radhakrishna Agarwal (AIR 1977 SC 1496) (supra), under the changed circumstances, there should be a fourth category of cases :- "Where the contract entered into between the State and the person aggrieved is nonstatutory and purely contractual but such contract has been cancelled on ground, de hors any of the terms of the contract, and which is per se violative of Article 14 of the Constitution."

It was held: "Even in such cases applications under Article 226 of the Constitution are maintainable....I am quite conscious that this Court while exercising jurisdiction under Article 226 of the Constitution which is discretionary in nature cannot issue a writ of mandamus in the nature of 'a decree for specific performance of a contract', when a doubt has been raised about the original drawing, design and the estimated cost of the project." It was finally held: "This writ application is, accordingly, allowed. The impugned order dated 17.5.1990 is quashed. It will be open to the State Government to inform the grounds for cancellation to the petitioner. It will be also open to the State Government to furnish

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the revised drawing, design and estimated cost in respect of the project in question as approved by the Commission, to the petitioner. Thereafter, the respondents shall proceed in accordance with the law." (3) A tender for collection and purchase of Gum in lot mentioned estimated quantity. After the tenders were accepted and during the period of the contract Gum in excess of the estimated quantity became available. The agreement contained a provision that if the production of Gum exceeds the notified quantity, the purchaser was bound to take the same on the agreed price. However the Department refused to allow the contractors to lift the additional quantity. In writ petition filed the High Court allowed the contractors to lift the additional quantity during the relevant period at the contract price. In the mean time the Government sold of the excess Gum. The Supreme Court in appeal directed the State to supply the excess quantity from the fresh lot. The prayer of the contractor that he be paid the money with interest was dismissed, as that was not the original prayer. 271

271 State of Madhya Pradesh v. Ramswaroop Vaishya, AIR2003 SC 1067

4.0

INTRODUCTION

Interpretation is the method by which the sense or meaning of the word or provision is understood. The question of interpretation can arise only if two or more possible constructions are sought to be placed on a provision - one party suggesting one construction and the other, a different one. 1 It is, therefore, in the best interest of all parties to a contract that they express their intention without ambiguity. However, the meaning of a contract or some of its terms is often obscure. More often than not this becomes a source of dispute between the parties. In order to settle such a dispute, the disputed term or provision has to be interpreted or given a proper meaning. In this Chapter the distinction between construction and interpretation and certain commonly used rules of interpretation have been outlined. Oral evidence rule and conflict of laws are other topics briefly discussed.

4 .1

PROVISIONS OF THE LAW

Section of The Indian Evidence Act

S. 91 to 99 S. 115 The Indian Contract Act S.23, 24 Provisions of the Standard form Contracts FIDIC Clause: 62, 63 A.P.D.S.S/M.D.S.S. Clause 59

4.2

Art No 4.25 4.22 .4.16 4.9 4.15

WHAT IS INTERPRETATION?

The dictionary meaning of the word 'interpretation' is "...expound the meaning of". Black's Law Dictionary gives the meaning of interpretation as: "The art or process of discovering and ascertaining the meaning of a Statue, will, contract or other written document." But this alone does not help. The word 'meaning' may 1

State J & K v. K. V. Ganga Singh. AIR 1960 SC 356 (359).

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mean the literal meaning of the words used or if we consider the question "what does the writer mean?"; it also means purpose or the intention he has in mind which is expressed through the words and phrases. Just like a man, the contract too has a body and a soul. It is the soul that gives a distinct personality to the individual and so also to a contract. So the interpretation of the contract almost always involves ascertaining the intention of parties to the contract - as conveyed by the words set out in writing or by the spoken words the parties used in case of an oral contract. When a contract has been reduced to writing we must look only to that writing for ascertaining the terms of the agreement between the parties but it does not follow from that it is only what is set out expressly and in so many words in the document that can constitute a term of the contract between the parties. If on a reading of the document as a whole, it can fairly be deduced from the words actually used therein that the parties had agreed on a particular term, there is nothing in law, which prevents them from setting up that term. The terms of a contract can be expressed or implied from what has been expressed. It is in the ultimate analysis a question of construction of the contract. And again it is well established that in construing a contract it would be legitimate to take into account the surrounding circumstances. 2

4.3

DISTINCTION BETWEEN INTERPRETATION AND CONSTRUCTION

Interpretation and Construction, the two lines represent the classic approach to the interpretation and construction of a written Constitution. Cooley explained the difference between them (Constitutional Limitations, p 9 7 ) by saying that interpretation "is the art of finding out the true sense of any form of words, that is, the sense which their author intended to convey", while construction is: "The drawing of conclusions, representing subjects that lie beyond the direct expression of the text, from elements known from and given in the text; conclusions which are in the spirit, though not within the letter of the text". 3 It is thus clear that in the strict usage, the term "construction" is wider in scope than interpretation. While the latter is concerned with ascertaining the sense and meaning of the subject matter, the former may also be directed to explaining the legal effects and consequences of the document in question. The interpretation, as such, must necessarily stop at the written text. The two are not the same. "A rule of construction is one which either governs the effect of an ascertained intention, or points out what the Court should do in the absence of express or implied intention, while a rule of interpretation is one which governs the ascertainment of the meaning of the maker of the instrument". 4 2 3 4

Khardah Company Ltd. v. Raymon Co. (India) Pvt. Ltd. , AIR 1962 SC 1810: (1963) 3 SCR 183. In re Sea Customs Act, AIR 1963 SC 1760 (1794). Union Trust Co. 89 Misc 69, 151, N.Y.S 246, 249.

The profession, however, has not accepted the distinction, and the two expressions are in practice synonymous. The more common term is construction.

4.4

KINDS OF INTERPRETATION

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The interpretation is of various kinds and includes:

1.Authentic interpretation: It is given by the legislator and is obligatory on the Courts. For example, each Statute gives an interpretation clause, which defines the meaning of certain words occurring frequently in the other Sections. 2. "Customary" or "Usual" interpretation; It is that which arises from successive or concurrent decisions of the Courts on the same subject-matter, having regard to the spirit of the law, jurisprudence, usages and equality.

3. "Close", "Strict" or "Literal" interpretation: It is adopted when, for just reasons, one is induced to take the words in their narrowest meaning. 4. "Extensive" or "Liberal" interpretation: It adopts a more comprehensive significance of the word. In addition to the above commonly used terms, there are others like: "extravagant interpretation" which substitutes the meaning beyond the true one, and "free or unrestricted interpretation" which proceeds simply on the general principals of interpretation in good faith but not bound by any specific or superior principle. While the former cannot be said to be the genuine one, the latter might help the development of new rules of interpretation. For example, while considering the requirement regarding experience of a contracting firm, it has to be borne in mind that the said requirement is contained in a document inviting offers for commercial transaction. The terms and conditions of such a document have to be construed from the standpoint of a prudent businessman. When a businessman enters into a contract where under some works are to be performed he seeks to assure himself about the credentials of the person who is entrusted with the performance of the work. Such credentials are to be examined from a commercial point of view, which means that if the contract is to be entered with a company he will look into the background of the company and the persons who are in control of the same in their capacity to execute the work. He would not go by the name of the company but by the persons behind the company. While keeping in view the past experience he would also take note of the present state of affairs and the equipment and resources at the disposal of the company. Indeed in a case it was held: 5 "In respect of a joint venture company, the experience of the company can only mean the experience of the constituents of the venture....". 5

New Horizons Limited v. Union of India, 1995(1) SCC 478. 1995 AIR SCW 275.

4.5

AUTHORITY WITH WHOM INTERPRETATION RESTS

A construction contract invariably provides that decisions of an architect or engineer as toquestions arising in respect of the following shall be final and conclusive: (1) (2) (3)

The interpretation of drawings and specifications. Quality of materials and workmanship. Sub-letting of the,contract.

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Where a construction contract embodies a stipulation such as the above the decisions of the engineer or of the architect have the effect of the award of an arbitrator. It has been held in several cases that in the absence of fraud or such gross mistakes as imply bad faith or failure to exercise an honest judgement, the decisions of the engineer or architect are conclusive and binding upon the parties. 6 All disputes or differences other than those in respect of which the engineer's or architects decision is expressed to be final and binding are referred for adjudication t o an arbitrator, if the contract contains an arbitration clause or to the Court. The interpretation of the contract then rests with the arbitrator or the Court. NATURE OF RULES OF INTERPRETATION

4.6

We have, to understand the principles of interpretation as judicially noted. Historically, these rules have evolved with the passage of time. These are not rules of law. These are only guiding principles. There are a number of rules of construction. Many of them are called golden rules. Many of these rules are artificial, some are contradictory, some are uncertain ones so much so, that no less a person than His Lordship Hon. Mr. Justice Krishna Iyer observed: 7 "The golden rule is that there is no golden rule". Whenever there is a dispute regarding interpretation of contract provisions, almost always each side will have its own interpretation fully supported by some rules of interpretation.

4.7

RULES OF INTERPRETATION

Besides the important doctrines of interpretation dealt with elsewhere in this chapter, it is considered desirable, to acquaint the reader with some of the general rules that have been evolved and followed in construing a contract. Many a times aid is sought by referring to English Court decisions. A word of caution at this stage will not be out of place.

6 7

Dandakaranya Project v. P.C. Corporation, AIR 1975 MP 152. C.J. Vaswani v. State of W.B.. AIR 1975 SC 2473 (2476).

4.7.1

English Law and Court Decisions how far and when relevant?

Before considering specific rules it is worthwhile noting that while interpreting the provisions of the Contract Act, it is not permissible to import the principles of English Law de hors the statutory provision unless the Statute is such that it cannot be understood without the aid of English Law. When a rule of English Law receives the statutory recognition by the Indian Legislature, the language of the Act determines the scope uninfluenced by the manner in which the principles laid down by the English Law and Courts. 8 ILLUSTRATION In a case, as per the terms and conditions of the appointment between the plaintiff and the defendant No.3, defendant No.3 was restrained from disclosing or divulging,

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publishing during the tenure of employment or subsequently any confidential or secret information, including secret process and formulae acquired in the course of his employment with the plaintiff company. He was further conditioned to return all papers and documents of the company and not to retain any copies or extracts there from upon termination of his services. On behalf of the defendants, it was urged that the said agreement itself is void in view of the provisions of Section 27 of the Contract Act, while, as per the plaintiff, in view of the cause of action on common law and equity, the said agreement is not affected by Section 27 of the Contract Act as Section 27 contemplated "lawful trade". In substance, it was contended on behalf of the plaintiff that if a person has no right in common law he cannot ask for that right since there is a negative covenant in the agreement. The question arose as to how far the principles laid down by the English Courts on common law and equity are applicable to the present case. The Supreme Court has considered this question and has ruled 9 that while The Contract Act, 1872, does not profess to be a complete code dealing with the law relating to contracts, to the extent the Act deals with a particular subject, it is exhaustive upon the same and it is not permissible to import the principles of English Law de hors the statutory provision, unless the statue is such that it cannot be understood without the aid of the English Law. When a rule of English Law receives statutory recognition by the Indian Legislature, it is the language of the Act which determines the scope, uninfluenced by the manner in which the analogous provision comes to be construed narrowly, or, otherwise modified, in order to bring the construction within the scope and limitations of the rule governing the English doctrine of restraint of the trade. In the said case, the Supreme Court has also ruled that under Section 27 of the Contract Act, a service covenant extended beyond the termination of the service is void. In view of this settled position of law, the question arose; was it open to the plaintiff to seek injunction against the defendants, especially when defendant No. 3 was not in the services with the plaintiff ? In other words, can defendant No. 3 be restrained for all times to come from using his knowledge and experience which he gained during the 8 9

Superindence Co. of India v. Krishan Murgai, AIR 1980 SC 1717 followed in Sandhya Organic Chemicals P. Ltd. v. United Phosphorous Ltd., AIR 1997 Ouj. 177. Superintendence Co. of India v. Krishan Murgai, AIR 1980 SC 1717.

course of his employment either with the plaintiff or for that matter with any other employer? The answer, it was held, is certainly in the negative. In that view of the matter, it was held, the plaintiff had failed to make out even a prima facie case in its favour and is therefore not entitled to the relief prayed for." 10

4.7.2

Conflict between Written and Printed Parts

Where some parts of the contract are written and the other parts are printed, in case of conflict, the written parts of the contract will prevail." If printed words on the form are rendered inconsistent by the written words and the former are not struck out they may be rejected. 12 Words deleted and initialed cannot be read again for the purpose of construing the contract. 13

4.7.3

Ignorance of Contract Terms

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Ignorance through negligence will not relieve a party from his contract obligations. "he who signs or accepts a written contract, in the absence of fraud or other wrongful act on the part of another contracting party, is conclusively presumed to know its contents and to assent to them ..." 14 This doctrine arises from the well-settled principle that affixing a signature to a contract creates a conclusive presumption, except as against fraud, that the signer read, understood and assented to its terms.

4.7.4

Words Given their Plain Meaning

The words that are free from ambiguity are to be construed according to their natural meaning, and no amount of acting by the parties can alter or qualify their meaning. A court is not authorized to construe a written contract in such a way as to modify the plain meaning of its words under the guise of its interpretation. Technical words used in a contract have their accepted technical meaning. Oral evidence as to their meaning may be given.

4.7.5

Conduct of Parties

Where the parties to a contract have given it a practical construction by their conduct, such construction is entitled to get weight in determining its proper interpretation, especially where such practical construction occurred before any controversy 1 0 Sandhya Organic Chemicals P. Ltd, v. United Phosphorous Ltd.,AIR 1997 Guj.177. 1 1 Consolidated Contracting Co.HOP. Supp 751 Affirmed 202 F. 2. d. 748. 12 Western Assurance v. Parle (1903) 1. K. B. 378. 13 Inglis v. Buttery (1878) 3 App. 552. 14 Level Export Corp. Wdz v. Aiken Co., 305 N.Y. 82 1 1 1 N.E. 2d 218.

McDaniel v. Georgia

arose. 15 The construction given by the parties may be considered and adopted even though the contract is susceptible to another construction. 16 ILLUSTRATION A tenderer having purchased tender documents for a project was approached by another company for joint participation. The tenderer sent a draft agreement for signature by the second company containing an arbitration clause. The said second company returned the agreement duly signed but with material variations converting the joint liability of the parties to unilateral liability of the tendering company. The tenderer did not communicate with the other company but unilaterally submitted tender and subsequently withdrew the same. The second company claimed damages and invoked die arbitration clause. The tenderer filed an application under Section 33 in Delhi High Court. The High Court held die agreement had come into force the moment it was signed and sent and the tenderer though he did not sign it acted on it, which amounted to indirect acceptance. A three Judge Bench of the Supreme Court in appeal, had to decide if the submission of unilateral tender amounted to acceptance of the counter-offer to bring into existence a concluded contract. It was held that the material alterations in lhe contract made a world of difference to draw an inference of a concluded contract The joint liability of the parties was made unilateral liability of the parties. A clause containing material part of the terms for performance of the contract was deleted. Thereby there was no consensus ad idem on the material terms of the contract. It was further held

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that the conduct of the appellant of submitting unilateral tender did not amount to acceptance of the counter-offer made by the respondents. 17 4.7.6

Intent of Parties

The paramount object in constructing contracts is to ascertain the intent of the parties at the time the contract was entered into and to give effect to their intention, if it can be done consistent with legal principles .The intent of the parties is to be gathered from the construction of a contract as a whole. 18 Where the parties to a contract have expressed their intention without ambiguity, the court may not alter their agreement although the bargain is hard or unwise. 19 ILLUSTRATION A contract construed on the basis of correspondence contained a letter stipulating as follows: "Mode of measurement:- We have based our price on the total built-up of one floor 15 16 17 18 19

United States v. Luther, 225, F, 2nd 499. Kelso v. Kelso, 225, F. 2nd 918. U.P.Rajkia Nirman Nigam Ltd. v. Indure Pvt. Ltd., AIR 1996 SC 1373. Kelso v. Kelso, 225, F. 2nd 918. Wooddard v. Wager, 131, N.E. 2d, 694.

[four flats] including stair-case and common corridor but excluding balconies only. Hence work should be measured on the built-up area, excluding balcony areas." The claim for balcony area was allowed by the arbitrator. In an appeal the Supreme Court observed and held as follows: 20 "The above stipulation clearly says that total built-up area of a floor shall include stair case and common corridor but shall exclude balconies. It expressly provides that "work should be measured on the built-up area excluding balcony area". It is undisputed that in the plan of flats attached to the Tender notice, balconies are provided. Shri Nariman contended that the said plans were modified later and that the fiats as finally constructed, did not have any balconies and, hence, no question of excluding the balcony area can arise. Shri Nariman could not, however, bring to our notice any agreed or sanctioned plan modifying the plan attached to the Tender notice. The appellant could not have constructed flats except in accordance with the plans attached to the Tender notice, unless of course there was a later mutually agreed modified plan - and there is none in this case. We cannot, therefore, entertain the contention at this stage that there are no balconies at all in the flats constructed and that, therefore, the aforesaid stipulation has no relevance. We must proceed on the assumption that the plans attached to the Tender notice are the agreed plans and that construction has been made according to them and that :-n the light of the agreed stipulation referred to above, the areas covered by balconies should be excluded. In this view of the matter we agree with the Division Bench that ify.: arbitrators overstepped their authority by including the area of the balconies the measurement of the built-up area. It is axiomatic that the arbitrator being a creature of the agreement, must operate within the four corners of the agreement and cannot travel beyond it. More particularly, he cannot award any amount which is ruled out or prohibited by the terms of the agreement. In this case, the agreement between the parties clearly says that in measuring the built-up area, the balcony areas should be excluded. The arbitrators could not have acted contrary to the said stipulation and awarded any in

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amount to the appellant on that account. We, therefore, affirm the decision of the Division Bench on this score..." 4.7.7

Every Word and Provision to be Given Effect

It is an elementary rule in the interpretation of contracts that whenever reasonably practical every word shall be given effect to. A contract is to be so interpreted as to give meaning to pertinent provisions thereof. It is not to be interpreted so as to render meaningless very important provisions of a written contract. 21 Where there is an inconsistency between a specific and a general provision the specific provision takes controls. 22 4.7.8

Law will not make a Better Contract

The law will not make a better contract for the parties than they themselves have seen fit to enter into; or alter it for the benefit of one party to the detriment of another, nor 20 21 22

New India Civil Erectors (P) Ltd. v. Oil & Natural Gas Corpn., AIR 1997 SC 9801. Balkshandeh v. American Cyanamid Co.; 144, N.Y.S 2d 148. Muzak Corp v. Hotel Taft Corp. 130 N.E. 2d 688, l.N.Y. 2d 148.

supply a term with respect to which it is silent. The duty of the Court is always interpretation; to find out not what really was the intention of the parties, as distinguished from what mere words expressed but merely to find out the meaning of the words used by them.

4.7.9

Erasures and Alterations

Erasures and alterations made prior to the signing of a contract are given effect to, but those made by one party, after signing by both parties do not affect the contract in any way. To avoid disputes, erasures and alterations, where they are really unavoidable, should be initialed by both parties before signing the contract. 4.7.10

Ambiguity in phrase - Evidence of subsequent conduct of both parties is relevant

Extrinsic evidence to determine the effect of an instrument is permissible where there remains a doubt as to its true meaning. Evidence of the acts done under it is a guide to the intention of the parties in such a case and particularly when acts are done shortly after the date of the instrument 2 '. 4.7.11

Intention - Surrounding Circumstances when considered

In construing a document whether in English or vernacular the fundamental rule is to ascertain the intention from the words used; the surrounding circumstances are to be considered but that is only for the purpose of finding out the intended meaning of the words which have actually been employed. 24 4.7.12

Departure from Literal Interpretation - When Permissible

The cardinal rule for construction of Statutes is to read the Statute literally, that is by giving to the words used by the Legislature their ordinary, natural and grammatical meaning. If, however, such a reading leads to absurdity and words are susceptible to

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another meaning the Court may adopt the same. But if no such alternative construction is possible, the Court must adopt the ordinary rule of literal interpretation. 25 The rule of interpretation is well-established that, "Where the language of a Statute, in its ordinary meaning and grammatical construction leads to a manifest contradiction of the apparent purpose of the enactment, or to some inconvenience or absurdity, hardship or injustice, presumably not intended, a construction may be put upon it which modifies the meaning of the words, and even the structure of the sentence." 26 2 2 2 2

3 4 5 6

Abdulla Ahmed v. Animendra Kissen, AIR 1950 SC 15 (21). Ram Gopal v. Nand Lai, AIR 1951 SC 139. Jugal Kishore v. Raw Cotton Co.,AIR 1955 SC 376. Tilth Singh v. Bachittar Singh, AIR 1955 SC 830 (833).

4.7.13

Interpretation put upon a document in one case - how far relevant in another case

Unless the language of two documents is identical, an interpretation put upon one document is no authority for the proposition that a document differently drafted, though using partially similar language, should be similarly interpreted. 27 Besides it is obvious that in construing documents, the usefulness of precedents is usually of a limited character; after all, Courts have to consider the material and relevant terms of the' document with which they are concerned; and it is on a fair and reasonable construction of the said terms that the nature and character of the transaction evidenced by it has to be determined.

4.7.14

Two Constructions possible

Now, it is a settled rule of interpretation that if there be admissible two constructions of a document, one of which will give effect to all the clauses therein while the other will render one or more of them nugatory, it is the former that should be adopted on the principle expressed in the maxim "ut res magis valeat quam pereat"2"

4.7.15

Conflict between Earlier and Later Clauses

If in fact there is a conflict between the earlier clause and the latter clause and it is not possible to give effect to all of them, then the rule of construction is wellestablished that it is the earlier clause that must override the later clause and not 'vice versa'. 29

4.7.16

Equitable Principle - When applicable?

The equitable principle only implements or effectuates the agreement of the parties, "This equity does not, however, take upon itself the task of making any new agreements for the parties either by filling up the lacuna or gap in their agreement or otherwise. If, therefore, there is no agreement between the parties to transfer the future decree the equitable principle cannot come into play at all." 30

4.7.17

Construction tending to make Part of a Statute Meaningless

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It is well settled that in construing the provisions of a Statute, Courts should be slow to adopt a construction, which tends to make any part of the Statute meaningless or ineffective; an attempt must always be made so as to reconcile the relevant provisions as to advance the remedy intended by the statute. 31 4.7.18

Severance of the Good from the Bad

27 Abdulla Ahmed v. Animendra Kissen, AIR 1950 SC 15. 2 8 Triveni Bani v. Smt. Lilabai, AIR 1959 SC 620 (626). 2 9 PC 209 (211). 3 0 Jugal Kishore v. Raw Cotton Co. AIR 1955 SC 376. 3 1 Siraj-ul-Haq v. SC Board of waqf, AIR 1959 SC 198 (204).

AIR 1921

The fact that a clause in a deed is not binding on the ground that it is unauthorized cannot ipso facto render the whole deed void unless it forms such an integral part of a transaction so as to render it impossible to sever the good from the bad. 32 4.7.19

Use of Marginal Note or Para Headings - When Permissible

Where the Section is unambiguous the marginal note may not be used as aid to its interpretation. 33 It is thus true that a heading cannot control the interpretation of a clause if its meaning is otherwise plain and unambiguous, but it can certainly be referred to as indicating the general drift of the clause and affording a key to better understanding of its meaning. 34 4.7.20

The Living Approach Theory

It is worthwhile to conclude the discussion on various doctrines and rules of interpretation of contracts by referring to the observations of his Lordship Hon. Mr. Justice Krishna Iyer, who observed: 35 "—Judicial interpretation is not bloodless and sterile exercise in spinning subtle webs, sometimes cobwebs, out of words and phrases otherwise simple, but to unfold the scheme of the legislation insightfully, sense its social setting and read the plain intendment. This living approach can do justice to law." The living approach theory is equally applicable to interpretation of contracts. If interpretation of contracts were to consist only of ascertaining the dictionary meaning of the words used, it could be done by a computer. But we need a human judge to divine the intention of the parties and discover the personality of the document. In the ultimate analysis the only limit to the interpretation of a contract is the limit the judge imposes on himself. It had been said that the Devil knows not the intent of man, but the Courts have endeavored to achieve what the Devil failed to do. To this end the judiciary evolved several doctrines / principles. Some important principles are considered in what follows. 4.8 THE CHOICE BETWEEN 'STRICT CONSTRUCTION v. LIBERAL CONSTRUCTION' AND 'LITERAL CONSTRUCTION v. LOGICAL CONSTRUCTION' In the good old days the Courts were, strict about the written words of a contract. They went by grammatical meaning. They refused to look at outside aids. They 32 33 34 35

K. D. Co v. K. N. Singh, AIR 1956, SC 446 (459). Shakuntala v. Mahesh, AIR 1989 Bom 353. Union of India v. Raman Iron Foundry, AIR 1974 SC 1265. Bar Council of Maharashtra v. M. V. Dhabolkar & Others, AIR 1975 SC 2092.

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refused to fill in any gaps. It was for the party to anticipate every contingency that might befall him then and insert a term to protect him. If he did not do so he was bound by his written words. The Court would not write in any exception or implication to protect him.

Those were the days when contracts were few and were indeed the outcome of negotiations and equal bargaining power. Under those circumstances, the process followed by the Court known as 'strict' construction, 'grammatical meaning', 'literal construction' could be said to be justifiable. But with the advent of the industrial revolution, development of commerce and trade, advancement of science, means of transport, etc. the number of contracts entered into multiplied manifold. The idea of an agreement freely negotiated between the parties has given way to the necessity of a uniform set of printed conditions, which can be used time and again. Such contracts are called, quite appropriately, the contracts of adhesion; wherein all the terms and conditions are prepared, printed and handed over by one party to the other. The role of the other party is reduced to merely adhering to these terms and conditions. The freedom of contract exists only to sign the agreement containing these terms or to go without. Nevertheless the Courts have been forced to apply to this situation the ordinary principles of the law of contract, which are not entirely capable of providing a just solution for a transaction in which freedom of contract exists on one side only. In particular the party preparing and delivering the printed documents is permitted to exempt himself unfairly from certain of his liabilities at the law and thus to deprive the other party of the compensation which he might reasonably expect to receive for any loss or damage arising out of the transaction. Under these changed circumstances, the attitude of the court, being strict about the written words, going by the grammatical meaning, etc., was not capable of providing a just solution. Therefore, as observed by Lord Denning 36 : ".. it was bound to change. Simple justice demanded that the buyer or the consumer should be protected, even though he did not insert an express term on his own behalf. So the Courts filled in the gaps. They did this by means of the doctrine of "implied terms." A number of such doctrines were evolved to find a just solution. These doctrines gave rise to a "liberal interpretation". Before we study these doctrines and their application to the standard from contracts in use in the construction industry, it would be interesting to see in a single case, the High Court adopting the strict construction rule and the Supreme Court adopting the libera] construction rule. This case incidentally shows the wisdom embodied in the saying " There is surer way to misread a document than to read it literally." 31 ILLUSTRATION A firm entered into a contract with the Union of India for the supply of sugar. The Ministry of Food and Agriculture was concerned with the subject of the contract. 36 37

The Discipline of Law, Pp.33. Massachusetts B. & Insurance Co. v. U.S. (1956) 352 US 128 at p. 138).

The contract contained an arbitration clause, which provided for disputes or differences to be referred to a single arbitrator. It further stipulated: "Such a single arbitrator shall be nominated by the Secretary to the Government of India in the Ministry of Food and Agriculture in the absolute discretion..."

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At the time the contract was entered into, there was one and only one Secretary in the Ministry of Food and Agriculture. In the meantime the ministry was bifurcated into two separate Ministries. The contractor claimed that the arbitration agreement was dead and unenforceable. Again the position changed and the Ministry of Food and Agriculture came into being as a result of integration of the two Ministries. However there were then two Secretaries in the Ministry. The Secretary, Department of Food in the Ministry of Food and Agriculture appointed the arbitrator. The Delhi High Court, accepting the argument that the new Ministry had two departments and there was a Secretary in charge of each department set the award of the arbitrator aside by holding that this position rendered the arbitration agreement vague and uncertain inasmuch as it did not specify which of the two Secretaries was to nominate the arbitrator in his absolute discretion. In appeal, it was observed by the Supreme Court: 38 "Though this argument appears attractive at first sight, a little scrutiny will reveal that it is unsound. It is based on a highly technical and doctrinaire approach and i s opposed to plain common-sense.. It must be remembered that a contract is a commercial document between the parties and it must be interpreted in such a manner as to give efficacy to the contract rather than to invalidate it. It would not be right while interpreting a contract, entered into between two lay parties, to apply strict rules of construction, which are ordinarily applicable to a conveyance and other formal documents. The meaning of such a contract must be gathered by adopting a common-sense approach and it must not be allowed to be thwarted by a narrow, pedantic and legalistic interpretation. Here, at the time when the arbitrator came to be nominated and the reference was made, there was a Ministry of Food and Agriculture and there was a Secretary in that Ministry, but the only difficulty, according to the High Court, was that there were, instead of one, two Secretaries and it could not be predicated as to which Secretary was intended to exercise the power of nominating an arbitrator. We do not think this difficulty is at all real. "The respondents relied strongly on the use of the definite article 'the' before the words "Secretary in the Ministry of Food and Agriculture" and urged that what the parties to the contract had in mind was not a Secretary in the Ministry of Food and Agriculture but the Secretary in the Ministry of Food and Agriculture and not one of two Secretaries in that Ministry. This is, in our opinion, a hyper technical argument which seeks to make a fortress out of the dictionary and ignores the plain intendment of the contract " It was further observed: 38

Union of India v. D. N. Revri & Co., AIR 1976 SC 2257.

"Let us consider, for a moment, why in clause (17) the power to nominate an arbitrator was conferred on the Secretary in the Ministry of Food and Agriculture and not on a Secretary in any other Ministry. The reason obviously was that on the date of the contract the Secretary in the Ministry of Food and Agriculture was the Officer dealing with the subject matter of the contract. If this object and reason of the provision of clause (17) is kept in mind it will become immediately clear that the "Secretary in the Ministry of Food and Agriculture" authorized to nominate an arbitrator was the Secretary in charge of {he Department of Food who was concerned with the subject matter of the contract. The Secretary in charge of the Department of

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Food filled the description "Secretary in the Ministry of Food and Agriculture" given in clause (17)." From the above judgement of the Supreme Court of India, the following rules emerge, it is submitted: (1) A contract must be interpreted in such a manner as to give efficacy to the contract rather than to invalidate it. (2) It would not be right to apply strict rules of construction to a contract entered into between two lay parties, which are ordinarily applicable to a conveyance and other formal documents. (3) The meaning of such a contract must be gathered by adopting a common-sense approach and it must not be allowed to be thwarted by a narrow, pedantic and legalistic approach. (4) The answer to the question "why this provision" would be permissible to be looked into to gather the intention of the parties to the contract. In other words 'object and reason' of the provision may be ascertained and taken note of while interpreting a contract. (5) The observation that "This is, in our opinion, hyper-technical argument seeks to make a fortress of the dictionary and ignores the plain intendment contract" stand confirmed by a subsequent pronouncement by the Supreme that while literal meaning can be ascertained from a dictionary, the Court subject to the dictatorship of the dictionaries 39 .

which of the Court is not

(6) Post conduct of the parties, which may throw light on the interpretation put upon by the parties themselves is relevant and can be looked into. 40 (7) That if two alternatives are possible, one each under strict or literal construction and 'liberal' or living approach' construction, respectively, the option to be exercised, because it is most likely to find favour with an arbitrator or Court in a judicial proceeding, will be to adopt the construction under liberal rule of construction. 39 40

Subhash Chandra v. State of U.P., AIR 1980 SC 800. Abdulha Ahmed v. Animendra Kissen, AIR 1950 SC 15 (21)

A few more illustrations involving important terms of construction contracts may be considered. 4.8.1

"Force majeure" Clause

In a case the "Force majeure" Clause read as follows: "Neither party shall be held responsible for any loss or damage or delay in or failure of performance of the contract if any to the extent, that such loss or damage or such delay in or failure of performance is caused by FORCE MAJEURE including but not limited to acts of God, restraint of State/Central Government, devastating fires, major accidents, declared or undeclared hostilities, riots, rebellion, explosion, strikes, epidemic, severe inclement weather like cyclone, gale etc. compliance with

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any request, ruling orders or decree or local or any Indian Government authorities and any other similar cause or causes which cannot with reasonable diligence be controlled or provided against by the parties hereto ............." The Arbitrator stated in his award that "generator break down could not be considered as covered under the force majeure clause which clearly stated that any cause or causes which cannot with reasonable diligence be controlled or provided against by the parties to the contract shall be considered covered under force majeure clause. In his opinion, the respondent could diligently control the situation by providing standby generator sets to avoid production loss and as such could not avoid its liability to compensate the loss the claimant suffered due to lack of diligence on the part of the respondent. It was held by Calcutta High Court that in view of the reason given by the Arbitrator, the Court has no occasion to interfere with it by substituting its own view.'" 41 4.8.2

Procedure for Reference of Disputes to Arbitration

The A contract contained provisions similar to FIDIC 63 containing procedure for reference of disputes to arbitration. The relevant provisions are reproduced below for ready reference:"62. All disputes or differences of any kind whatever arising out of or in connection with the contract, whether during the progress of the works or after their completion and whether before or after the determination of the contract, shall be referred by the Contractor to the Corporation and the Corporation shall within a reasonable time after the'receipt of the Contractors' representation make and notify decisions therein in writing. The decisions, directions and certificates given and made by the Corporation or by the Engineer on behalf of the Corporation, with respect to any matters, decision of which, is specially provided for by clauses 17, 21.5, 37, 43(a), 53.2, 60.2 and 61.1(b) of these conditions (which matters are referred to hereinafter as "excepted matters") shall be final and binding on the Contractor, provided further that "excepted 41

Oil & Natural Gas Commission Ltd. v. M/s Dilip Constructions, AIR 2000 Cal. 140.

matters" shall stand specifically excluded from the purview of the arbitration clause and shall not be referred to arbitration."

"DEMAND FOR ARBITRATION "63.1.1 In the event of any dispute or difference between the parties hereto as to the construction or operation of this contract, or the respective rights and liabilities of the parties on any matter in question, dispute or difference on any account or as to the withholding by the Corporation of any certificate to which the Contractor may claim to be entitled to or if the Corporation fails to make a decision within a reasonable time, then and in any such case, save the except matters referred to in clause 62 of these conditions, the Contractor after 90 days but within 180 days of his presenting his final claim on disputed matters shall demand in writing that the dispute or difference be referred to arbitration. "63.1.2 The demand for arbitration shall specify the matters which are in question, dispute or difference. Only such disputes or differences in respect of which the

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demand has been made shall be referred to arbitration and other matters shall not be included in the reference. "63.1.3 If the Contractor does not prefer his specific and final claims in writing, within a period of 90 days of receiving the intimation from the Corporation that the final bill is ready for payment, he will be deemed to have waived his claims and the Corporation shall be discharged and released of all liabilities under the contract in respect of these claims." Under the relevant clauses pertaining to settlement of disputes, two types of disputes or differences are contemplated between the parties. They are : 1. Disputes or differences in connection with the contract when the contract work is in progress. 2. Disputes or differences after the completion of the contract or its recession when the stage of final bill is reached and the disputes pertaining to the claims arising from such final bill. The first type of disputes are covered by clauses 62 and 63.1.1 while the second type of disputes, after the final bills are prepared and made available and served on the contractor, would be covered by the contingency envisaged by clause 63.1.3. In both these disputes and differences between the parties, the procedural gamut and the requirements of clauses 63.1.1 and 63.1.2 would be equally applicable. In the case under consideration the contractor had referred on 28-11-1994, 16 claims during the currency of the contract for decision by the authority. This could be said to be in compliance with the requirements of Clause 62 and which could attract first part of Clause 63.1.1. After relapse of 90 days, after 28-11-1994 on 6-3-1995 the contractor requested for demand in writing for reference of disputes to arbitration. The Authority failed to refer the disputes and the contractor on 28-8-1995 filed an application in the Court for appointing an Arbitrator. The contractor did not treat the claims raised on 28-11-1994 as final and submitted fresh statement of claims containing 16 items but comprising entirely new claims with enhanced rates/ amounts on 6-3-1995.There was no demand made in writing in respect of final claims for reference to arbitration. The High Court directed the authority to comply with the procedure of appointment of arbitrators and declined to appoint independent arbitrators as claimed by the contractor. The contractor filed an appeal in the Supreme Court of India. The contention raised on behalf of the contractor was that the word ' final' as found in clause 63.1.1 should be treated either as a surplus or may be read in the light of the contingencies contemplated by clause 63.1.3. Rejecting the said contention the Supreme Court of India held: " In the context of the said clause, it must be held that 'final claims' envisaged therein must be crystallised and complete claims on disputed matters to be lodged with the authorities by the contractor who wants the authorities to decide upon these claims and to consider whether they are worth granting wholly or in part or worth rejecting and that play would be available to the respondent-authorities for a period of 90 days

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from lodging of such final claims on disputed matters by the contractor for the consideration of the authorities. This locus paenitentiae of 90 days is essential for the authorities to consider whether the final and crystallised claims on disputed matters either during the pendency of the contract or after Its termination or even after the final bills get prepared are required to be granted wholly or partly or not at all and once the authorities do not respond favourably during these 90 days after the lodging of final claims, then it would be open to the contractor raising those claims to demand arbitration in writing in connection with these final claims within further three months, that is within the upper limit of six months from the date of raising of such final claims. It is also not possible to agree with learned senior counsel for the appellant-contractor, .., that 'final claims' mentioned in clause 63.1.3 have to be read into the phraseology of the term 'final claims' as mentioned in clause 63.1.1. It is easy to visualise that 'final claims' on disputed matters may arise during the pendency of contract as laid down by clause 62 or may arise at the end of the contract when final bills are submitted as contemplated by clause 63.1.3. In both these cases, which broadly are governed by clause 62, after lodging of final claims the time schedule laid down by clause 63.1.1 would obviously apply to cover both these types of final claims. In short, the final claims must be definite, certain and crystallised under diverse heads either flowing from the final bill or even earlier arising out of the working of the contract even when the final bill is still not prepared by the authorities. Therefore, instead of reading down the term 'final claims' on disputed matters as found in clause 63.1.1. to mean only 'final claims' arising out of final bills, it must be held that the term 'final claims' on disputed matters as employed by clause 63.1.1 would cover final claims on disputed matters either lodged during the currency or even after its termination or even after preparation and submission of final bills by the authorities. In all these cases, the final claims on disputed matters contemplated by clause 63.1.1 must be crystallised and firm final claims which are required to be considered by the authorities for giving their response. In other words, the claims should not be in a fluid state and the appellant-contractor should not consider them to be not final but tentative to be revised or reconsidered at his end in future for raising ultimate claims on the relevant heads of dispute. If the appellant-contractor himself treats these claims at an earlier stage to be in a fluid state and not final, neither he can expect the authorities to respond thereto nor can he treat the authorities to have failed to respond thereto so as to lose the benefit of the procedure of arbitration binding between the parties as per the contractual terms. "It is interesting to note that, after the final claims regarding disputed items as mentioned in the letter dated 6-3-1995 were lodged, when the Corporation in its reply dated 3-7-1995 turned them down, 90 days after lodging the final claims on 6-3-1995 were already over. Therefore, when the respondent-authorities rejected these claims on 3-7-1995 and, when the appellant-contractor naturally was aggrieved, thereby a stage was reached for him as required by clause 63.1.1 to have demanded in writing reference to arbitration for adjudication of all the final claims mentioned in the letter of 6-3-1995. He was required to do so within 180 days of raising of the final claims of 6-3-1995 meaning thereby, he could legitimately demand in writing from the respondent-authorities that they should prefer disputed claims referred to in the letter of 6-3-1995 for adjudication to the arbitrators as per the provisions of the relevant clause. He could have, therefore, followed the procedure as laid down by clause 63.1.1 and raised demand in writing for arbitration on or before 6th September 1995. Instead of doing so, he rushed to the Court on 24-8-1995 on the assumption that the respondent-authorities had not complied with the requirements of clause 63.1.1 and

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had not responded to the demand in writing as per the said provisions and, therefore, had lost the benefit of the said provisions and had committed breach of the relevant terms of the clauses of the arbitration agreement regarding the procedure for arbitration and, therefore, it was open to the Court to appoint independent arbitrators." 42 4.8.3 Distinction between assignment and sub-contracting A clause in the works contract in a case stipulated : " 7.1 The contractor may subcontract any portion of work, up to a limit specified in Contract Data with the approval of Engineer but may not assign the contract without the approval of the Employer in writing. Sub-contracting does not alter the Contractor's obligations." The Contract Data provided the limit of sub-contracting up to 50 % of initial contract price with prior approval of the Engineer." 4 2 M/s. Shetty's Construction Co. Pvt. Ltd., v. M/s. Konkan Railway Corpn. Ltd., AIR 2000 SC 122; also refer to Chapter 16.

The contractor had engaged a sub-contractor for executing a portion of the work. The engineer on the spot was aware that, the sub-contractor was executing a part of the work. Neither the Engineer nor the Employer was satisfied with the progress of the work and in the notice issued sought whether prior permission was taken for subcontracting. The letter warned that the Employer would not agree for a time over run and directed to make efforts to make up the time loss. Subsequent to complaint the main contractor removed the sub-contractor. Subsequently when the contractor was found to be the lowest tenderer for another package, a show cause notice was issued as to why the contractor should not be debarred from further award of work for one year. The contractor replied taking the stand that the agency was given the work on trial basis and if its performance was found satisfactory permission would be obtained to subcontract part of the work. The Engineer was fully aware of this arrangement and raised no objection. Only when the Employer's representative objected to the said arrangement the subcontractor was removed. No action was taken thereafter and even extension of time was recommended. However, the contractor was debarred from participating in any bidding process and the entire bidding process of the other package was cancelled. A writ petition by the contractor followed in respect of the orders cancelling the tendering process and blacklisting. The learned Single Judge accepted the defence of the Employer and upheld both the orders. An appeal was submitted. Interpreting the provisions, the Division Bench did not accept the contention raised by the Employer throughout that prior approval of the Employer ought to have been taken. The provisions of the clause speak about " the approval of the Engineer" for sub-contracting and the approval of the Employer in writing. The sub-contracting did not alter the contractor's obligations. 43

The Division Bench interpreted the provisions as follows : " 1. In the first place, there is no user of the words 'prior approval' either in respect of the sub-contract or in respect of the assignment of contract.

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"2. Then, there is a definite difference in the concept of sub-contracting of the portion of the work and assigning the original contract itself. While for subcontracting only the approval of the Engineer is required, for assignment of the contract itself, the approval of NAHI that too in writing, is necessary. There is undoubtedly a dichotomy in the concepts of 'sub-contracting' and 'assignment of contract'. It is therefore, obvious that for such sub-contracting, there would be no need of the approval of NHAI though unfortunately, the parties have understood otherwise." In result the blacklisting order was set aside. However, the relief of acceptance of the bid for the other package was declined on the ground that the Employer had an absolute right to accept or reject any bid without assigning any reason. 43 43

M/s. P.T.Sumber Mitra Jaya v. N.H. Authority of India, AIR 2003 Mad. 221.

4.8.4 Fluctuation in the rate of dollar - If amounts to Escalation in cost tendered? A tenderer had submitted tender for supply of Helium Diving Gas which was accepted after negotiations at the price of Rs. 149 per cu m, out of which US dollars 4.60 was to be the foreign exchange component. After the supplies were effected in terms with the agreement the contractor claimed the difference of price of US dollar as on the date of the contract and the date of supply. The claim though recommended by the Secretary of the concerned department as well as by certain senior officers was rejected. An arbitration followed and the arbitrators by non-speaking award allowed the claim. The challenge to the award failed in the trial Court but was upheld by the division Bench of the High Court. That is how the matter ended with an appeal before the Supreme Court. The contract contained two provisions which gave rise to the controversy. One clause provided that the price shall be firm and without any escalation on any ground whatsoever until the completion of the work. The second provision stipulated that the prices were to be given in the currency of the bidder and "if the bidder expects 10 incur a portion of this expenditure in currencies other than those stated in his bid, and so indicates in his bid payment of the corresponding portion of the prices as so expended will be made in these other currencies." The Supreme Court held 44 that the aforementioned two conditions must be so construed in such a manner so that effect to both of them may be given. The bid had two components, namely, Indian currency and US dollar component. It was observed that the second component involving fluctuation did not amount to an escalation of price and did not violate the first clause. The claim was for the foreign exchange component and no more. The surrounding circumstances which the arbitrators would be deemed to have taken into account from the pleadings of the parties and find mention in the Judgement of the Supreme Court included a circular letter issued by the Government of India showing that a decision had been taken to make such payments. The award was upheld and the decision of the Division Bench of the High Court was set aside. 4.9

DOCTRINES OF INTERPRETATIONS

44 Pure Helium India Pvt. V. Oil & Natural Gas Commission, AIR 2003 SC 4519.

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Some important doctrines of interpretation that are often required to be used in interpreting contract provisions in the standard forms are explained below with illustrations. At the outset, however, it is pointed out that in the process of interpretation, the question "what does the provision in the agreement or agreement itself mean?" may not necessarily be the same as "what did the parties intend when they executed the document?" They are presumed to have intended to say that which they have in fact said. In short "A contract is what the Court says it is." ILLUSTRATIONS (1) While submitting a tender for construction of prefabricated housing units, the tenderer wrote:"We have based our price on the total built up area of one floor(four flats) including staircase and common corridor but excluding balconies only. Hence work should be measured on the built up area excluding balcony areas." The tender condition was to the same effect. In the plan attached to the tender balconies were shown. The contractor claimed cost for the total area whereas the owner deducted the balcony area. In the arbitration proceedings the arbitrators awarded extra cost by including the balcony areas.The award was challenged and the matter had to be decided by the Supreme Court of India, It was contended before the Supreme Court that the plan was subsequently modified and no balconies were provided. However, no modified plan could be produced. The Supreme Court affirmed the decision of the Division Bench of the High Court that the award was in excess of the jurisdiction by travelling beyond the agreement. It was held: "We must proceed on the assumption that the plans attached to the Tender notice are the agreed plans and the construction has been made according to them and that in the light of agreed stipulation the areas covered by the balconies should be excluded." 4? A case involved a pure and simple question of interpretation of following escalation clause in the agreement between the parties which read: (2)

"Any increase in labour benefits, amenities consequent to legislation or Government Order or Labour Conciliation or adjudication or duly approved binding agreement, the same shall constitute an extra to the contract and the increase shall be paid in full on a labour component of 40% of the value of the balance work as on the date of such increase." The agreement included the minimum labour wages payable as per the Government Order then prevailing. Subsequent to signing of the agreement but before the commencement of the work the labour wages were revised by the Government. The contractor firm claimed a sum of Rs. eleven odd lakhs with interest, cost, etc. The Government disputed the claim allegedly on the ground that the subsequent Government Notification applied to the workers engaged in building or roads and not to a canal work. The notice inviting tenders, which subsequently formed part of the agreement, as in the usual practice, included a provision: "The contractor shall comply with local laws dealing with the employment of persons including. The Minimum Wages Act, 1984." Besides there was one more provision directing the contractor to pay higher wages from out of (i) Respective rates of wages as fixed by the PWD as fair wages, (ii) Those notified under the Minimum Wages Act, or (i'i) those notified by the collector. The agreement prohibited sub-letting. By reading these provisions collectively it was argued that even if the Notification under Minimum Wages were assumed as not to apply to the contract work under the Act, it was made applicable by the agreement between the parties. 45

New India Civil Erectors (P) Ltd. v. Oil & Natural Gas Corpn.,AIR 1997 SC 980.

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Both the Contractor and the department were at war on the difference payable on account of actual increase in the Minimum Wages payable to workers. However, when the reference was made to arbitration, the amount in dispute increased on the background that a contractor hardly gets workers at the Minimum Wages fixed. It was argued that the clause in the case, after interpreting the word "or" used after each alternative read:"Any increase in labour benefits consequent to duly approved binding agreement shall constitute an extra . . ." Quoting exhaustively from various authorities to explain the meaning of 'duly approved binding agreement' it was argued that the concept of employment of worker includes a binding agreement between the worker and the employer. Distinguishing approval from 'permission', and relying upon the fact that labour wage sheets were signed by the Government's authorized officers wherein wages paid by the contractor to the workers were shown, the binding agreement stood "approved" and therefore, the contractor deserved to be paid the difference between Minimum Wages prevailing at the time of agreement and the actual wages paid at the time of execution. The arbitrator accepted the above arguments. The Award was decreed by the Court of law upholding the above contentions. 4.10 CONTRA PROFERENTEM RULE This rule is of ancient origin but it has come to its own only recently, after the advent of the standard form contracts. This rule has been limping along, struggling for recognition but refuted and rejected, or at any rate not allowed to come into prominence or on par with other rules over the years, till it received blood transfusion when exemption clauses were introduced in standard form contracts. Under these clauses, as already stated earlier, the party drafting the agreement makes provisions, which exempt that party from legal liability to pay compensation to the other party. When interpretation of these exemption clauses came before the Courts and the judges felt that such clauses were a challenge to judicial conscience and had to be so interpreted as to keep them within reasonable limits, the rule of contra proferentum came into light and gained prominence. In Anson's Law of Contract, 46 this doctrine is explained in these words: "The words of written documents are construed more forcibly against the party using them. The rule is based on the principle that a man is responsible for ambiguities in his own expression, and has no right to induce another to contract with him on the supposition that his words mean one thing, while he hopes the Court will adopt a construction by which they would mean another thing, more to his advantage." There are two things worth noting about this rule: Firstly, it has to be called a rule of the last resort to be pressed into service where all other rules of construction fail to yield, and Secondly it is applicable only in cases of doubt and ambiguity. 46 24th Edition at page 150.

In simple words the rule is that where two interpretations are possible as a result of considering and invoking all permissible rules, then that interpretation will be preferred which is against the person using or drafting the words or expressions which have given rise to the difficulty in construction. The Supreme Court of India pressed into service this rule even when admittedly there was no ambiguity in the expression used by the parties. The first of the following illustrations is the case in question.

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ILLUSTRATIONS (1) An insurance policy of a property contained a clause stipulating inter alia that if the property insured or any part thereof be destroyed or damaged by the following: "1. to 4 ............ 5. Impact by any rail/road vehicle or animal." It was not in dispute that the damage to the building and the machinery was caused on account of bulldozer having been driven close to the building on the road for the purpose of road construction. The insurance company resisted the claim on the ground that the damage was not caused by any direct collusion of road vehicle. The claim was dismissed by the District Consumer Forum but allowed by the State Commission. In appeal the National Commission, accepted the decisions of the Stale Commission but reduced the quantum of damages. Against the said decision, the insurance company filed an appeal in the Supreme Court. The Supreme Court observed that the only point for consideration was whether the word "impact" contained in the Clause 5 of policy covered the damage caused or not. It was observed that the insurance company could have expressly excluded any damage or destruction caused by vehicles driven close to the structure. In the ordinary course, the question of a vehicle directly dashing the building or the machinery does not arise. Further " impact" by road vehicle found in the company of the other words in the same Clause 5 normally indicates that damage caused to the building on account of vibrations caused by driving the vehicle on road close to the building is also included. It was held: "In order to interpret this clause, it is necessary to gather the intention of the parties from the word used in the policy. If the word "impact" is interpreted narrowly the question of impact by any rail would not arise as the question of any rail forcibly coming to the contact of a building or machinery would not arise. In the absence of specific exclusion and the word "impact" having more meanings in the context, it cannot be confined to forcible contact alone...Although there is no ambiguity in the expression "impact", even otherwise applying the rule of contra proferentum, the use of the word "impact" ...must be construed against the appellant. The appeal was dismissed. 47

4.10.1 Clause 59 in M .D .S.S. or A .P.D .S. standard form contract The relevant provision in Clause 59 in M.D.S. or A.P.D.S. standard form contract used in Tamil Nadu and Andhra Pradesh for public works, respectively reads: 47

United India Insurance Co. Ltd. v. M/s Pushpalaya Printers, AIR 2004 SC 1700.

"59. Delays and extension of Time:- No claim for compensation on account of delays or hindrances to the work from any cause whatever shall lie, except, as hereinafter defined. Reasonable extension of time will be allowed by the Executive Engineer or by the officer competent to sanction the extension ..." The provision further stipulates the grounds on which and the extent to which the extension of time will be granted. The facts of a case involving the above provisions were as follows: A project involved the manufacture and laying of a pipeline for a water supply project. It stipulated a certain time limit for its completion. The contract included a provision whereby the Government had undertaken to make available to the contractor foreign exchange for importing 'know-how' and machinery. The foreign exchange could not be made available in time so much so that the entire work including

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erection of machinery, etc had to be carried out beyond the stipulated period. The contractor claimed damages for the losses due to delay. The State rejected the claim on the ground that the contract contained a provision which precluded the contractor from claiming damages due to delay in completion. The engineers of the Slate Government concerned were told and legitimately believed that the contractor having agreed to the above printed condition gave up his right to compensation for losses due to delay "from any cause whatever" which would include breaches of contract by the Government. The work, costing few crores to be completed in its entirety during the extended period at the rates agreed and valid two to three years ago, meant financial impossibility from the contractor's view point. Abandoning it meant call on bank guarantees, securities, etc. Interpretation of this provision attracts the rule of contra proferentum, it is submitted. The clause provides: "No claim for compensation on account of delays or hindrances to the work from any cause whatever shall lie, except as hereinafter defined ..." (emphasis supplied) The opening sentence suggests that the agreement defines circumstances under which claim for compensation "shall lie" but neither the relevant clause nor any provision subsequent to it stipulates the circumstances "when the claim for compensation shall lie". One of the rules of interpretation is that "every word or phrase must be given some meaning" which is based on the presumption that the drafter of a formal document does not waste Words. 48 The words, "except as hereinafter defined" cannot be reduced to silence. It only means that the subsequent provisions in the said clause make exceptions and allow "compensation" to the contractor. The subsequent provisions only allow "extension of time". That means the word "compensation" does not mean "money compensation". The dictionary meaning of the word "compensation" is "compensating". To compensate means "counter-balance, make amends for things". In other words to counter-balance the loss of any thing. The loss of time can be counter-balanced or amended by granting an "extension of time". Therefore, the entire provision deals with extension of time and does not refer to money compensation. So interpreted, the clause would read: "No claim for extension of time on account of delays or hindrances to the work form any cause whatever shall lie, except, as hereinafter defined. Reasonable extension of time will be allowed So read the words "except, as hereinafter defined" used by the drafter immediately find their rightful place and utility. Paragraph Heading Reference can be gainfully made to the Supreme Court decision wherein the Supreme Court has observed in Paragraph 7: 49 "The first thing that strikes one on looking at Clause 18 is its heading "Recovery of sum due". It is true that a heading cannot control the interpretation of a clause if its meaning is otherwise plain and unambiguous, but it can certainly be referred to as indicating the general drift of the clause and offering a key to better understanding of

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its meaning. The heading of clause 18 clearly suggests that this clause is intended to deal with the subject of recovery of sum due Relying on the above observations, if one looks at the heading of Clause 59, which reads "Delays and Extension of time", it becomes evident that the clause clearly suggests to be intended to deal with delays and extension of time and money compensation does not figure in it. It can be said that the State drafted the clause in such a manner as to make the contractor sign it believing that it only deals with delays and extension of time while believing that an Arbitrator or Court would construe it to mean "money compensation". This calls for adopting that interpretation which favours the contractor and is against the Government. The contractor got the award in his favour and the State honoured it without challenging it in the Court of law. This clause has in subsequent cases received interpretation by the High Courts and the Apex Court. 50 The interpretation as given by U> Courts is likely to result in injustice in some deserving cases. A brief reference to the facts of these cases will make this self evident, it is respectfully submitted. It has been held by a Division Bench of the Andhra Pradesh High Court in A.A.O. No. 677 of 1981 dated 19-4-1982 that by virtue of Clause 59, the contractor was precluded from claiming any compensation on account of the delays or hindrances arising from any cause whatever including those arising on account of acts or omissions of the departmental authorities. In State of A.P. v. Associated Engineering Enterprises, Hyderabad, 50 Jeevan Reddy, J. speaking for the Division Bench again referred to 49 50

Union of India v. Raman Iron Foundry, AIR 1974 SC 1265. AIR 1990 Andh Pra 294.

Clause 59 and observed at paragraph 26 as follows:

"Applying the principle of the above decision to the facts of the case before us it must be held that Clause 59 bars a claim for compensation on account of any delays or hindrances caused by the department. In such a case, the contractor is entitled only to extension of the period of contract. Indeed, such an extension was asked for and granted on more than one occasion. The contract was not avoided by the contractor, but he chose to complete the work within the extended time. In such a case, the claim for compensation is clearly barred by Clause 59 of the APDSS which is admittedly a term of the agreement between the parties". In State of A.P. v. S. Shivraj Reddy, it was held that for the work done beyond the contract period, the contractor must be paid as per the standard specification rates when the delay occurred on account of default in handing over the site at the agreed time, Jeevan Reddy, J. distinguished that Judgment stating that the claim in that case was for payment of rates as per the S.S.Rs. whereas in the case before them, the claim was a pure and simple claim for compensation. Therefore, it was held that the principle of the decision in A.A.O. No. 677 of 1981 governed the case. Moreover, a major portion of the claim in that case pertained to the period of contract itself and such a claim was held to be impermissible by virtue of Clause 59 of APDSS.

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In Govt, of A. P. v. P. V. Subba Naidu 51 , Jeevan Reddy, J. speaking for the Division Bench referred to P. M. Paul v. Union of India, AIR 1989 SC 1034 and distinguished the said decision on the ground that the cases involving breach of contract by the Government stood on a different footing. In Paul's case (supra), it was pointed out that once it was held that the arbitrator had jurisdiction to find that there was delay in execution of the contract due to the conduct of the respondent, the respondent shall be liable for the consequences of the delay, namely, increase in prices. The award on escalation charges was held to be incidental to the finding of breach of contractual obligation by the Government. Therefore, it was held that the arbitrator had jurisdiction to go into the question. In the recent case of Ch. Ramalinga Reddy v. Superintending Engineer "(supra), the Supreme Court approved the view taken by the Division Bench consisting of Jeevan Reddy andNeeladri Rao, JJ. in A.A.O. No. 1148 of 1986 and negativated the claim for escalation. The Supreme Court while dealing with the claim for "payment of extra rates for work done beyond agreement time at the schedule of rates prevailing at the time of execution referred to Clause 59 of the A. P. Specifications and held that the claim was impermissible in view of the said Clause. It was observed that the claim made in that case fell outside the defined exceptions in Clause 59. Paul's case (AIR 1989 SC 1034) (supra) was distinguished on the following two grounds:

5 1 (1989) 2 APLJ 362 : AIR 1990 NOC 90. 5 2 (5) SCALE 67 (SC).

(1994)

"There was in P.M. Paul's case no clause in lhe contract which provided that the respondent would not be liable to pay compensation on account of delay in the work from any cause nor was it stipulated, when extension of time was granted to the appellant to complete the work, that no claim for compensation would lie." Then, it was observed that the jurisdiction of the arbitrator was limited by the terms of the contract, "where the contract plainly barred the appellant from making any claim, it was impermissible to make an award in respect thereof and the Court was entitled to intervene. The Andhra Pradesh High Court posed the question in a case involving different factual matrix: 53 "9. The question is whether in the light of the aforementioned decisions, especially the latest decision of the Supreme Court, Clause 59 precludes claim No. 6 being raised and allowed by the arbitrator and whether the arbitrator can be said to have committed an error of jurisdiction or a patent error of law in granting extra rate based on Standing Schedule of Rates in force during the relevant year i.e., 1985-86. Before dealing with the question of applicability of Ramalinga Reddy's case (1994 (5) Scale 67) (SC) (supra) to the facts of the present case, we would like to advert to what the arbitrator has said vis-a-vis Clause 59. The arbitrator drawing support from the decision of this Court in V. Raghunadha Rao v. State of A. P., (1988)1 Andh LT 461 opined that clause 59 was totally inequitable and unreasonable. The learned arbitrator observed, "there ought to be some sense of proportion; the contract period of one year cannot be extended for two more years without paying any compensation for the extra cost involved." As the execution of the contract within the time-limit stipulated was

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clearly frustrated by a fundamental breach or failure on the part of the Deparment, Clause 59 cannot be put against the contractor. The arbitrator further commented, "payments were made at the increased rates for the work done in 1984 season after accepting a supplemental agreement. By the same argument, the respondent ought to pay at further increased rates based on S.S.R. of 1985-86 for the work done after May, 1985 since water was again released in July, 1984 irregularly without giving adequate time for the completion of the work. The argument of the respondent invoking Clause 59 is invalid in the light of his own acceptance of the breach in contract necessitating payment at increased rate and the claim as such cannot be resisted." It was observed and held: "As already noticed, the increased rates for the work done after May, 1985 were worked out based on the S.S.R. of 1985-86 and in conformity with Clause 6 of the Additional Conditions appended to the tender notice. Thus, the arbitrator awarded a sum of Rs. 1,09,908/- in addition to compensation of Rs. 84,000/-. We may mention 53

Govt, of A.P. and others v. V. Satyam Rao, AIR 1996 A.P. 288.;C.R.P. No. 2460 of 1993 and C.M.A. No. 891 of 1993, Dt. 8 -12 -1995.

that the reasoning of the arbitrator based on invalidity of Clause 59 cannot be sustained for the reason that the judgment of the learned single Judge in Raghunadha Roa's case (1988(1) Andh LT 461) (supra) has not become final and in the writ appeal filed against that Judgment, the operation of the same has been suspended. Though the Division Bench confirmed the said Judgment in State of A.R v. Raghunadha Rao, (sic) 1983 (1) ALT 242, the decision of the Division Bench was reversed by the Supreme Court in C. A. No. 530/ 1994 and the matter has been sent ba'ck to this Court for fresh consideration of the writ appeal. As already noted, the Supreme Court applied Clause 59 to negative the contractor's claim for escalation vide Ramalinga Reddy's case (1994 (5) Scale 67) (supra). In O.P. No. 4/ 1994 (vide Judgment dated 14-7-1995), a Division Bench of this Court (Lingaraja Rath and Sudershan Reddy, JJ.) after referring to Raghunadha Roa's case, held that the claim of the contractor for escalation of rates was beyond the arbitration clause in view of the decision of the Supreme Court in Ramalinga Reddy's case. We must, therefore, proceed on the footing that Clause 59 still holds the field and has to be given effect to if the facts and circumstances of the case warrant. Even then, the second reason given by the learned arbitrator commends itself for acceptance. At any rate, that reasoning which is to be found in the passage extracted supra at page 14 is not inconceivable or impossible to adopt...When once it was found by the arbitrator that there was a fundamental breach of obligation under the contract by one of the contracting parties, namely, the Government, it was within the incidental power of the arbitrator to quantify the loss that was caused to the contractor as a direct result of such breach. The arbitrator acted within his jurisdiction to determine this aspect and felt it proper to award extra amount for the work done during 1985 season based on the same principle that was adopted by the Department itself for the immediately preceding period. The ratio of decision in P. M. Paul's case (AIR 1989 SC 1034) (supra) which was explained by Jeevan Reddy, J. in P. V. Subba Naidu's case (AIR 1990 NOC 90) (Andh Pra) (supra) gets squarely attracted. In Ramalinga Reddy's case (supra), the Supreme Court distinguished P. M. Paul's case on two grounds: firstly, on the ground that there was no clause similar to Clause 59 excluding the claim for compensation and secondly the

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Department made it clear when extension of time was granted, that no claim for compensation would lie. As far as the applicability of Clause 59 is concerned, we have already held that the appellants themselves waived their right to enforce that clause and entered into a revised agreement, agreeing to pay extra rate for the work done in 1984 season...We, therefore, see no error of jurisdiction or an error of law apparent on the face of the award in allowing claim No. 6A partly."

Similar to the above case, the Courts will have to distinguish the decisions of the Supreme Court in Continental Construction Company v. State of Madhya Pradesh 54 and Associated Engineering Co. v. Government of Andhra Pradesh, 55 which are likely to be cited in support of exemption clauses. This was done in case in a which a clause the general conditions, of the agreement read as follows: "No compensation for 54 55

Continental Construction Company v. State of Madhya Pradesh, AIR 1988 SC 1166. Associated Engineering Co. v. Government of Andhra Pradesh, AIR 1992 SC 232.

alteration in or restriction of work to be carried out. The Engineer acting on the written orders of his immediate superior, may at any time by notice in writing to the contractor either stop the work altogether or reduce or cut it down. If the work is stopped altogether, the contractor will only be paid for work done and expenses legitimately incurred by him or preparation for the execution of the work up to the date on which such notice is received by him.... but in neither case will be paid any compensation whatever for the loss or profits which he might have made if he had been allowed to complete all the work included in the contract." The agreement further provided Clauses 7.06, 39.00 and 45.10 of special conditions shall prevail ever the general conditions in the event of conflict or inconsistency between the general and special conditions. The said clauses provided as follows:

"7.06 The Contractor will have to proceed with the work as and when drawings are released, At times it may be necessary for the contractor to retard his work. The contractor shall have absolutely no claim on the Board on this account and will not be entitled to any compensation whatsoever on account of delay in release or issue of drawings. In any case efforts will be made to release drawings progressively and ensure progress of construction. "39.00 ESCALATION The unit rates quoted shall be firm and shall remain applicable during the entire period of execution of work up to the completion and no escalation in rates will be permitted due to increase in prices of materials, rise in labour wages, railway freight or due to any other reasons. "45.10 If, for some reason, the purchaser is unable at any time to issue materials as mentioned hereafter, and the work has to be stopped for want of materials, the Contractor shall not be entitled to any monetary claim arising out of such circumstances, provided always that the work does not remain suspended due to reason stated above for more than three months. The Contractor shall, however, be granted time-limit extension to the extent of such period as his work remains suspended for want of materials to be issued by the Board. The Contractor shall bring such circumstances to the notices of the Engineer within 24 hours of arising of such a situation."

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According to the claimants the work was prolonged and could not be completed within the stipulated time because of delay caused by the U.P.S.E.B. in not making obstacle-free site available for erection work, failure to inspect fabricated components at contractor's workshop at Kota, making of unwarranted deductions from running bills and delay in reaching, making and communicating decisions, they further alleged resort to dilatory tactics resulting in virtual financial strangulation by the U.P.S.E.B. in different ways which ultimately delayed the completion of the work. According to the claimants, all these grounds of delay were wholly unrelated to clauses referred to above on which U.P.S.E.B. has placed reliance. Clause 16 of the additional conditions on which the claimant-respondents had placed reliance read as follows :"No delay in completion of Civil Works is anticipated. If there is any delay in completion of Civil Works the Contractor shall execute up to a maximum period of 16 months from the date of award of contract which is inclusive of four months as stated against Sr. No. 12 of this order." On behalf of the respondents it was submitted that two decisions of the Hon'ble Supreme Court on which reliance has been placed by the appellants were not at all applicable to the facts of the instant case for the reason that firstly the awards given by the arbitrators in both these cases were speaking awards and secondly, there was no clause like Clause 16 of the additional agreement as in this case which eclipsed other clauses prohibiting claims on the ground of delay. In this case, according to the respendent the claim No .l was based on such delays which is for other reasons than that provided in Clauses 7.06, 39.00 and 45.00 and thus there was no absolute bar for the arbitrators to grant relief on claim No . l . It was held : "We have perused both these decisions and come to the conclusion that the law as laid down in these two decisions (supra) is not applicable to the facts of the present case where Clause 16 is the distinguishing feature as also the fact that the award in the present case is a nonspeaking one whereas in the decisions referred to hereinabove the awards under challenge were speaking ones and the jurisdictional error was apparent on the face of the record. 57 " The facts of the above cases and the decisions thereon justify that if justice is to be rendered to the parties, the interpretation put on Clause 59 of APDSS by the Hon'ble Supreme Court of India deserves to be reviewed, it is respectfully submitted. There are many decisions of the Supreme Court which can be said to be directly applicable for such a review. Some such cases are dealt with in Art. 4.11 below. Even if the said decision is to hold ground till reviewed it must not be forgotten that no contract for public works as a rule stipulate the duration of maximum extension as in the above case and as such the extension can only be for a reasonable period vis-a-vis the originally stipulated time limit beyond which the provisions of CI.59 being an exemption clause will not be applicable. One may find similar "exemption clauses" though differently worded in many standard forms in use in construction contracts. In some forms, it is very clearly provided that no compensation for any loss caused due to defaults and delays by the Government will be allowed to the contractor and only extension of time will be sanctioned. In other words, many exemption clauses in standard form contracts show that the skill of the draftsman can prevail over the natural reluctance of the Courts to uphold an abuse of contractual freedom. Very gradually, therefore, the Courts developed new doctrines, which seemed to offer some escape from even the most carefully drafted exemption clauses. These doctrines are considered as follows:

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4.11 UNFAIR AND UNREASONABLE CONTRACT OR INTERPRETATION OF EXEMPTION CLAUSES Many building and engineering contracts are standard form contracts entered into with the State or large corporations on a 'take it or leave it' basis, without affording 56 57

AIR 1988 SC 1166 and AIR 1992 SC 232. U.P.S.E.B. Lucknow v. M/s. Om Metals and"Minerals (Pvt.) Ltd., AIR 1995 All. 246

the contractor a realistic opportunity to bargain or negotiate the terms of the contract. These contracts are called contracts of adhesion and the principles of interpretation of such contracts are based on the fact that the weaker party to such contracts did not have much choice but to accept one-sided and seemingly unfair terms of such contracts. Such unfair clauses generally seek to exempt a party from liability to compensate the other under the law, or to limit the liability there under, thus giving such clauses the names exemption or exclusion or limitation clauses. One rule of construction of exemption clauses propounded by Lord Denning, M. R. is that the Court would not allow a party to a contract to exempt himself from his liability at common law when it would be unconscionable for him to do so. 57 In England, the Unfair Contract Terms Act, 1977, governs the interpretation of exemption clauses. This act does not apply to contracts entered into before 1" February, 1978. It introduces clauses in certain classes of contracts andtorts and also lays down the guidelines for determining their reasonableness. The Supreme Court of India has laid down a principle of far-reaching effect in a landmark case decided in 1986. Although the case relates to service contract, the principle of law recognized and acted upon by. the Supreme Court is of general application, it is respectfully submitted. By reference to the development in the laws of several countries with respect to the exemption clauses, the Supreme Court deduced the following principle 58 : "... This principle is that the courts will not enforce and will, when called upon to do so, strike down an unfair and unreasonable contract, entered into between parties who are not equal in bargaining power. It is difficult to give an exhaustive list of all bargains of this type. ... One can only attempt to give some illustrations. For instance, the above principle will apply where the inequality of bargaining power is the result of the great disparity in the economic strength of the contracting parties. It will apply where the inequality is the result of circumstances whether of the creation of the parties or not, it will apply to situations in which the weaker party is in a position in which he can obtain goods or services, or means of livelihood only upon the terms imposed by the stronger party or go without them. It will also apply where a man has no choice, or rather no meaningful choice, but to give his assent to a contract or to sign on the dotted line in a prescribed or standard form or to accept a set of rules as part of the contract, however unfair, unreasonable and unconscionable a clause in that contract or form or rules may be. .. .The Court must judge each case on its own facts and circumstances." The Supreme Court also laid down that the principle might not apply in the following circumstances: a) 57 58

Where the bargaining power of the contracting parties is equal or almost equal; or

Gillespie Brothers & Co Ltd v. Roy Bowles Transport Ltd., (1973) 1. Q.B. 400. Central Inland Water Transport Corp Ltd v. Brojo Nath, AIR 1986 SC 1571 (1610 - 11).

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b) where both parties are businessmen and the contract is a commercial transaction. It is significant to note that the Supreme Court has recognized the fact that in today's complex world of giant corporations with their vast infra-structural organizations and with the State through this instrumentalities and agencies entering into contracts in almost every branch of industry and commerce, there can be myriad situations which result in unfair and unconscionable bargains between parties possessing wholly disproportionate and unequal bargaining power. The Supreme Court has further elucidated the principle by observing as follows:

59

"The types of contracts to which the principle formulated by us... applies are not contracts which are tainted with illegality but are contracts which contain terms which are so unfair and unreasonable that they shock the conscience of the Court. They are opposed to public policy and require to be adjudged void." The Supreme Court had applied Section 23 of the Indian Contract Act while declaring the contract void. The relvent part of Sections 23 and 24, which are self-explanatory read as follows: "SECTION 2 3 W ha t c o ns i dera t io n a n d o bj e ct s a rc la w f ul , a n d w ha t no t "The co n si de ra t io n o r o bj e ct o f a n a g r ee me nt i s la w f ul, u nl es s - It is forbidden by law; o r is o f such nature that, if permitted, it would defeat the provisions o f any law; o r is fraudulent; o r involves or implies injury to the person o r property o f another; o r the Court regards it as immoral or opposed to public policy..." "SECTION 2 4 Ag ree me nt s v o i d, if co n si de ra t io ns a n d o bj ect s u nla w f ul in pa rt If any part of a single consideration for one or more objects, or any one or any part of any one of several considerations for a single object, is unlawful, the agreement is void." In another case, basic question arising in the appeal concerned interpretation, applicability and legality of a printed condition on the reverse of "laundry receipts" issued by the proprietor of the laundry purporting to restrict his liability for quantum of loss to twenty times the laundering charges or half of the value of unreturned articles whichever was less whatever be the cause for non-return of the article entrusted by the customer to the laundry for purpose of laundering. It was observed that the following proposition of law appears to be well settled by this time: (1) Terms and conditions printed on the reverse of a receipt issued by the owner of the laundry or any other bailee do not necessarily form part of the contract of bailment in the absence of the signature of the bailer on the document relied upon. In absence of signature of the bailer on the document relied upon, the onus is on the bailee to prove that the attention of the bailer was drawn by the bailee to the alleged special conditions before the contract was concluded and the bailee had consented 59

AIR 1986 SC 1571.

thereto expressly or by necessary implication as a contractual term. It cannot be just assumed that the printed conditions appearing on the reverse of the receipt automatically become a contractual term or part of the contract of bailment. It is to befound on evidence in each case as to whether the alleged printed condition on the

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reverse of the receipt formed a part of the contract of bailment or not depending upon the conduct of the parties. (2) In certain situations, it may have to be held by the Court that a receipt acknowledging the entrustment of articles issued by the bailee like a laundry owner or any other bailee is merely a receipt or an acknowledgment in respect of entrustment of goods and it cannot be considered as a contractual document as such. If a receipt acknowledging entrustment of articles is issued by the bailee after the contract is already concluded, such a receipt may have to be considered as a mere acknowledgment or receipt and not as a contractual document. (3) It is necessary for the Court to consider in each case as to whether 'the alleged special term' was reasonably and properly communicated by the bailee to the bailer and as lo whether the bailer in fact assented thereto expressly or by necessary implication. (4) The burden of proof is always on the bailee to prove that the bailee took reasonable care of the goods entrusted lo him as a man of ordinary prudence would have exercised. Even in case of an assertion on the part of the bailee that the articles were lost as a result of alleged fire, it is for the bailee to prove that the suit articles were in fact lost as a result of fire and there was no negligence on the part of the defendants which resulted in the goods being destroyed by fire. The question of negligence is always a question of fact or at the most a mixed question of fact and law. (5) In a case governed by Sections 151 and 152 of the Conlract Act, the non-return of article entrusted by the plaintiff's to the defendant by itself is prima facie proof of negligence of the bailee. It is not for the bailer to lead positive evidence proving the negligence of the bailee in respect of unreturned articles entrusted by the bailer to the bailee. It is for the bailer to prove that the bailee is duly exempted from his liability to pay the reasonable amount of compensation for the value of the articles not returned or that his liability is restricted or reduced one and that the alleged stipulation is binding on the bailer under the law of the land. (6) No exemption clause, total or partial, can be invoked where the bailee has recovered 'insurance amount' from the insurance company in respect of articles entrusted to him by his customer, the bailer. No bailee is entitled to unjustly enrich himself by retaining the insurance amount recovered by the bailee in respect of his customer's articles. The defendant is not entitled to withhold the relevant information from the Court or from the plaintiff on this aspect and refuse to give inspection of relevant documents. (7) A stipulation to the effect that the concerned customer would be entitled to claim only 50% of the market price of the article or 20 times the laundry charges whichever is less is ex facie opposed to public policy and fundamental principles of law of contract. Such an alleged stipulation cannot constitute a valid defence in an action by the bailor against the bailee. 60 4.12 WHAT IS AN UNCONSCIONABLE CONTRACT?

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An unconscionable contract is such an agreement, as no reasonable and prudent man would make. Mere pecuniary inadequacy of consideration will not generally make the terms of a contract seem too unfair for enforcement unless the degree of inadequacy is extreme. The inadequacy must be so extreme as to call for application of equity. ILLUSTRATION (1) An agreement for extraction of mineral sand contained a provision that contractor cannot seek relief in payment of contract money on plea of non-extraction of sand The contract further provided that the contractor had to offer to pay compensation to an occupier or owner of land wherefrom minor mineral was to be extracted and had to approach the Mining Engineer to get amount of compensation determined by the Collector in case the occupier refuses his consent. The contractor had to and did approach the Collector for getting the compensation fixed. The collector failed to do the needful. Sand could not be extracted even on a single day. The agreement was terminated for failure to pay the contract money and the security deposit of over rupees two crores was forfeited. An appeal was partly allowed by an appellate authority converting the security money in to contract money and seeking the balance to be paid by the contractor. Writ petition filed in the High Court was partly allowed by reducing the contract money. In appeal, the Supreme Court observed that the High Court committed an error in not going into the principal issue involved in the matter namely: "....whether Clause 18 A of the agreement would remain enforceable despite the fact that the appellant allegedly could not extract any sand by reasons of omission and commission on the part of the concerned respondents." Similarly the plea of the appellant that the contract became impossible of performance was not considered. The High court had merely proceeded on the basis of the appellant having entered into contract with eyes wide open . It was observed:"..but, same would not , in our opinion, mean that they were bound to pay the contract amount , get its security amount forfeited , as also pay interest at the rate of 24 per cent, although it could not, by reason of acts of omission and commission on the part of the respondents, carry out the mining operation as per the terms of the agreement." 6 0 R.S. Deboo v. Dr. M.V. Hindlekar, AIR 1995 Bom 68. 6 1 Vinayakappa v. Dulichand, AIR 1986 Bom. 193.

It was further observed:"Whether in such a situation the doctrine of frustration will be invoked or not should have been considered by the High Court . (See M.D. Army Welfare Housing Organisation v. Sumangal Services Pvt. Ltd. (2003 (8) Scale 424). ". In result the High Court Judgement was set aside and the matter was remitted back to the High Court for consideration of the matter afresh in the light of the observations made. 62 In addition to the above doctrines of interpretation there is one more doctrine that can be pressed into service in a deserving case: the doctrine of Fundamental Breach of Contract. 4.13 FUNDAMENTAL BREACH OF CONTRACT

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There were, it was said, in every contract certain terms, which were fundamental, the breach of which amounted to complete non-performance of the contract. A fundamental term was conceived to be something more basic than a warranty or even a condition. It formed the 'core' of the contract and therefore could not be affected by any exemption clause. In other words no party to a contract could exempt itself from responsibility for a fundamental breach. Though the limits of this doctrine were not precisely defined it was said that a party could claim the protection of an exemption clause 'when he is carrying out his contract, not when he is deviating from it or is guilty of breach which goes to the root of it'. 6 - 1 In construction contracts, for the contractor's obligation to complete the work, the consideration payable by the owner is the cost of the work either lump sum or on the basis of agreed rates. The time-cost graph if plotted shows that the cost of the work changes with the time for its completion. As such it can be presumed that the sum or rates tendered by the contractor bear a definite relationship with the time limit for completion agreed to by the parties. Though it has been held by the Supreme Court of India that the time is not of the essence, 64 the injured party's right to claim damages due to delay is not affected by the said decision. In cases where the delay is abnormal, the agreed sum or rates become an inadequate consideration. In such cases, to get justice, this doctrine can be pressed into service. The exemption clauses would not be operable in cases where the delay is abnormal. ILLUSTRATION The brief facts of the case were that the contract work was to be completed within a period of one year, but due to financial difficulties, a smaller budget having been provided in the said year, the contractor was requested by the authorities to spread the work over two more years i.e. to complete the same in three years. In the same case 6 2 Jay Durga Finvest Pvt. Ltd. v. State of Haryana, AIR 2004 SC 1484. 6 3 Spurling (3) Ltd. v. Bradshaw, (1956), WLR 461 per Denning L.J. at p.4655. 6 4 Hind Construction Contractors v. State of Maharashtra, AIR 1979 SC 720.

besides 20% increase in the rates, the contractor had also claimed interest on the balance amount due to him but which the Department had wrongly retained. The contract contained an exemption clause worded as follows: "The contractor shall not be entitled to interest upon any payments in arrears or upon any balance which may on final settlement be found due to him". The following observations of the Supreme Court of India: clearly lay down the doctrine of fundamental breach, it is respectfully submitted. Their Lordships observed: 65 "In our view the reliance on this clause is of no avail to the appellant for the simple reason that this clause will be applicable provided the work was completed according to the specifications and time-schedule fixed in the original contract. Moreover in the instant case the plaintiff had issued notice claiming interest under the Interest Act and the High Court, has, in modification of the trial Court's decree awarded interest from the date of notice till payment. The claim for interest, therefore, was rightly allowed." Thus, where abnormal delay is caused on account of failure on the part of the owner in fulfilling one or more of the following obligations this doctrine can be used to render justice:

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(i) (ii)

Handing over the site of work in full within a reasonable time. Supplying working drawings and designs, which are the basis for execution of the work by the contractor. (iii) Supplying materials such as cement, steel, if agreed to be supplied by the owner and such materials are essential ingredients and without which substantial or essential part of the work cannot be carried out. (iv) Supply of special equipment or release of foreign exchange to purchase the equipment and the work cannot be carried out without the machinery or the equipment. (v) Material changes in the designs or specifications of the work from that originally agreed upon, made very late, so that the work could not be completed within a reasonable extended period also. (vi) Any other similar default, which causes abnormal delay in completion of the work.

A Word Of Caution A word of caution is necessary to those who enthusiastically invoke this doctrine. The doctrine of fundamental breach is a rule of construction. There is no rule of substantive law to the effect that a party cannot contract out of or limit his liability for fundamental breach. There is a new approach to this in English law. On a question of principal, the House of Lords appears to conclude that there is no difference in operation between a fundamental breach and a breach of a condition. The fundamental breach, simply, gives to the innocent party an option to affirm or repudiate. The 65

Hyderabad Municipal Corporation v. M. Krishnaswami, AIR 1985 SC 607.

innocent party, when faced with a fundamental breach can either repudiate on the spot, or he must affirm. 66 If the innocent party affirms the contract, the proposition is that the whole contract, including the exclusion clause, continues to apply and continues to govern the legal relationship between the parties.

I t follows, therefore, that in a case where the contract is affirmed and yet the exclusion clause is still held to be inapplicable, this is because, the exclusion clause, on its proper construction, does not cover the breach in question. There may be circumstances, wherein the exclusion clause covers the breach, and yet, it may be held incapable because it may be found to be unreasonable. The test of reasonability will be governed by the provision of Section 3 and 11 of the Unfair Contract Terms Act, 1977, in England. Section 3 of the Unfair Contract Terms Act, 1977 reads as follows:

"3 (1) This section applies as between contracting parties where one of them deals a s consumer or on the other's written standard terms of business. (2)

As a ga i ns t t h at p ar t y, t he o t her p ar t y ca n no t b y r e fer e n ce to a n y co ntr act ter m ( a) wh e n himself i n breach o f contract, ex cl ud e o r r es tr ic t a n y l iab i li t y o f h is in respect of the breach; or ( b ) cla i m to b e entitled -

(i) to render a contractual performance substantially different from that which was reasonably expected of him, or

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(ii) in respect of the whole or any part of his contractual obligation, to render no performance at all, except in so far as (in any of the cases mentioned above in this sub-section) the contract term satisfies the requirement of reasonableness". In India, however Section 23 of the Indian Contract Act may apply. There are circumstances, the principle notwithstanding, where an exclusion clause on its construction does not apply. They include: (i) where the clause is so worked as to be held not wide enough to cover the kind of breach committed; (ii) where the terms of the Clause are, so wide that it is unreasonable to apply them literally; (iii) where the Clause leads to absurdity; (iv) where there is a "strong though rebuttable presumption" that the parties did not intend the clause to cover fundamental breach. 6 6 Photo Production Ltd v. Securicor Transport Ltd (1980) A.C. 827. 6 7 (1967) 1, AC 361; (1966) 2 ALL ER 61.

Suisse Atlantique -

It is not however, suggested that the doctrine is dead and buried by the decision of the House of Lords. The Legislation of the Unfair Contract Terms Act, 1977, seems to have made the difference. In India, the Supreme Court would continue to follow the trend set in the absence of amendment of the Indian Contract Act on the lines of. the Unfair Contract Terms Act 1977. There is an advantage in pleading breach of a fundamental term or fundamental breach in the matter of incidence of the burden of proof. The burden lies on the party inserting the exclusion clause in the agreement to prove that the loss was not due to fundamental breach, if the innocent party has specifically pleaded a fundamental breach. 68 4.14

THE DOCTRINE OF IMPLIED TERMS

When one party alleges a breach of contract in respect of the breaches mentioned in Art. 4.18 above, the defence can raise the contention that the contract does not include any terms such as:(i) full and complete possession of the site will be handed over within a reasonable time, or (ii) working drawings will be supplied at proper time or times, or (iii) material vvill be supplied as and when needed/demanded by the contractor, or (iv)change orders will be given at such time as not to affect the planned progress of the contractor's work, etc. and therefore, there is no breach committed. The very fact that the contract provides for completion of the work within the stipulated period, which is one of the factors on which the contractor's rates are based, the above or similar terms which reason and justice demand, require to be written in the contract. Therefore, though there is no express term in the contract, the

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law itself, which means the Court/Arbitrator, will imply a term. This is the doctrine of 'implied terms'. 4.15

THE DOCTRINE OF "PRESUMED INTENT"

The doctrine of "implied terms" involves asking the question whether the parties implicitly agreed on a term. Instead of asking whether the parties implicitly agreed on a term,.the Court recognizes that they never agreed on it at all; because they never envisaged that such a situation would arise. In such cases the Court seeks to find their 'presumed intent', that is, what they presumably would have agreed if they had envisaged the situation. The Court then presumes that the parties would have agreed upon a fair and reasonable solution and the Court then declares what that fair and reasonable solution is. This whole process is said to be merely 'the construction of the 68

Woolmer v. Delmer Price Ltd (1955) 1 QB 291; J. Spuring Ltd v. Bradshaw (1956) 1 W.-.R 461 (466).

contract'. The court construes the contract so as to give effect to 'presumed intent' and is very useful in rendering justice in cases of 'exemption clauses' also. His Lordship Lord Denning, in "The Discipline of Law" on page 46 observed: "It is important to notice that, in order to decide whether the exemption or limitation clause applies, you must construe the contract, not in the grammatical or literal sense, or even in the natural and ordinary meaning of the words but in the wider context of the "presumed intention" of the parties - so as to see whether or not, in the situation that has arisen the parties can reasonably be supposed to have intended that the party in breach should be able to avail himself of the exemption or limitation clause." His Lordship further suggested the test to be applied in these words: "In other words, in order to ascertain the "presumed intention" of the parties, you must ask this question: If the parties had envisaged the situation which has happened, would they, as reasonable persons, have supposed that the exemption or limitation clause would apply to protect the wrongdoer?" The spokesman of the far and reasonable man is, and must be the Court itself, or the arbitrator himself. ILLUSTRATION In a case the contention was raised before the Supreme Court that the Court should interfere with the arbitral award on grounds that the arbitrators could not have gone into the question of construction of contract. Briefly stated the facts involved were as follows: A contract for supply of helium diving gas was awarded on the basis of a global tender invitation. Three different categories of rates were to be quoted by tenderers both foreign and Indian. The appellant before the Supreme Court of India had opted for bid quoting the Indian price with foreign exchange component therefor. The appellant's bid was found to be the lowest in that the appellant had bid a price of Rs. 150/- per cubic meter out of which US$ 5 was to be the foreign exchange component. On increase in price of US dollar the appellant claimed the difference in price of US dollar as on the date of contract and the date of supply.

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One of the conditions of the contract read: "Bidder shall quote firm price without any escalation for any ground whatsoever until they complete the work against this tender or any extension thereof.". It also included another condition which read: "23. In the event of any change or amendment of any Act or law including Indian Income Tax Acts, Rules or Regulations of Govt, of India or Public Body or any change in the interpretation or enforcement of any said Act or law, rules or regulations by Indian Govt, or public body which becomes effective after the date as advised by the Commission for submission of final price bid for this contract and which results in increased cost of works under the contract, through increased cost by the Commission subject to production of documentary proof to the satisfaction of the Commission to the extent which is directly attributable to such change or amendment as mentioned above. Similarly, if any change or amendment of any Act or law including Indian Income Tax Acts, Rules or Regulation of any Govt, or Public Body or any change in the interpretation or enforcement of any said Act or law, rules or regulations by Indian Govt, or public body becomes effective after the date as advised by the Commission for submissions of final price bid for this contract and which results in any decrease in the cost of the project through reduced liability of taxes, (other than personnel taxes) duties, the Contractor shall pass on the benefits of such reduced costs, taxes or duties to the Commission. "Notwithstanding the abovementioned provisions, Company shall not bear any liability in respect of: Personnel taxes, customs, duty and corporate tax." The claim was rejected. Arbitration ensued. Before the arbitrator the case was pleaded briefly as follows: That apart from the reason that the said amounts were due to the claimant under the contract terms itself, the same was also supported by virtue of a notification of the Government of India dated 25th of September, 1989 issued by the Ministry of Petroleum and Natural Gas. Its relevant contents read:"It has now been decided that.............. the Indian bidder's foreign exchange component may be allowed to be quoted in foreign currency for purposes of actual payment and the actual payment made in rupee equivalent to the foreign exchange component as per the BC selling rates on the date of actual payment for the imported supplies." Subsequently, the respondent issued a Circular in compliance of the above said Ministerial Notification, that the said Circular was to be implemented in all regions and be applicable to all contracts. It was further submitted that the foreign exchange rate fluctuations did not and cannot result into a price variation/increase. It is submitted that the firm price relative to this contract was a composite price stated in Rupees and Dollars and it was that which was and has been held firm, by the claimant. The claimant is not seeking additional benefit or profit but is merely seeking to recover a specified contract consideration. The arbitrator by a non-speaking award held the appellants to be entitled to the exchange rate fluctuations. The Division Bench of the High Court of Bombay set aside the award holding that the award was without jurisdiction. An appeal was filed in the Supreme Court of India. The Apex Court held " It is trite that the terms of the contract can be express or implied. ..

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"The appellant quoted the foreign exchange component in its bids in terms of the notice inviting tenders. The same was asked for by the respondent itself for a definite purpose. A contract between the parties must be construed keeping in view the fact 68

Pure Helium India Pvt. Ltd. v. Oil & Natural Gas Commission, AIR 2003 SC 4519 = 2003 AIR SCW 5274.

that the fluctuation in the rate of dollar was required to be kept in mind by the respondent having regard to the fact that the tender was global in nature and in the event the respondent was required to pay in foreign currency, the same would have an impact on the cost factor. "Clauses 2.6 and 2.7 aforementioned must be construed in such a manner so that effect to both of them may be given. Whereas clause 2.6 prohibits escalation, Clause 2.7 makes the bidder liable for exchange fluctuations which does not amount to an escalation of the price or disturb their cost evaluation...." It was held that the bid of the appellant had two components, namely, Indian currency component and US Dollar Component. The appellant merely claimed foreign exchange component at the rate of US dollars and nomore. The claim did not violate Clause 2.6. It was further held : "Furthermore, the circular letter dated 25-9-1989 issued by the Government of India itself clearly shows that a decision had been taken to make such payments. The contract having not been entered into by the parties herein as on the said date, the decision to include the said term would mean that the same shall be incorporated in the contracts, which were to be executed in future. The arbitrators were called upon to determine a legal issue, which included interpretation of the contract. The arbitrators, therefore, cannot be said to have travelled beyond jurisdiction in making the award." 4.16 EJUSDEM GENERIS RULE The rule which is laid down with reference to the construction of Statutes, namely, that where several words preceding the general word point to a confined meaning, the general word shall not extend in its effect beyond subjects ejusdem generis (of the same class), applies to construction of contracts as well. "The true scope of the rule of ejusdem generis is that words of a general nature following specific and particular words should be construed as limited to things which are of the same nature as those specified and not its reverse, that specific words which precede are controlled by the general words which follow." 69 In construction contracts, for example, provision is made exempting the owner's liability to pay compensation to the contractor on account of delay in the supply of materials, etc., where such delay is caused by "force majeure, act of God, act of enemies of the Republic of India or any other reasonable cause". This provision will attract application of this rule for interpreting the scope and nature of "any other reasonable cause". This rule is an important aid in interpretation of contracts and can be useful in a number of situations; the above example is just an illustration of its applicability. ILLUSTRATIONS (1) A construction contract contained a commonly found force majeure clause providing that neither party would be liable to the other for any loss or damage 69

Aniar Singji v. State of Rajasthan, AIR 1955 SC 504.

occasioned by or arising out of an act of god, such as unprecedented flood, etc. The

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contractor claimed compensation on account of loss caused due to flooding of work area. The arbitrator allowed the claim holding that the flood was not caused by unprecedented rain and the award was upheld by the High Court. The Supreme Court dismissed the appeal on the ground that no evidence was laid by the appellant State to prove that the damage was caused by unprecedented rains (2) The defendants in a case pledged their stock of food grains with the Bank and obtained loan from time to time. In reply to the demand of the Bank to liquidate the accounts, the defendants repeatedly requested the Bank to sell away the stocks and release the outstanding balance. The Bank did nothing and the stock became worthless. The trial Court dismissed the suit filed by the Bank for recovery of dues with interest on the ground that the Bank was not in a position to redeliver the goods pledged. On the First appeal to the High Court the Bank submitted that the dismissal of the suit was illegal because Clause 9 of the agreement granted total exemption to the Bank from liability in the event of loss, deterioration or damage to the pledged goods "whether caused by theft, fire, rain, flood, earthquake, lightning or any other cause whatever". A catena of cases was cited in support of the proposition that it is open to the bailee to contract himself out of any liability due to his own negligence 70

The Madhya Pradesh High Court raised the question: "...The question arises whether in the present case, the Bank has contracted out of its liability due to the negligence of its servants. Clause 9 of the pledge agreement (Ex P. 23) exonerates the Bank from any liability for the loss, deterioration or damage whether caused by theft, Fire, rain, flood, earthquake, lightening or any other cause whatever. This clause nowhere exempts the Bank from liability for negligence of its servants. The cases enumerated in the agreement are natural causes without the human intervention and which could not be prevented by any amount of foresight or care. The contract also contemplates loss of goods on account of theft which is an act of a third party despite the care taken by the bailee. The Bombay High Court laid down in Hirji Khetsey and Co. v. B. B. and C. I. Railway Co. AIR 1914 Bom 154 that a bailee is absolved of liability. "(a) where despite his care the cause was external to himself and beyond his control; "(b) or the cause was of such a nature, he could not have forseen it and availed by the same by exercise of reasonable care and protection." "In Hollandia Pinmen v. H. Oppenheiner, AIR 1924 Rang 356, it was held that a clause intended to safeguard against the negligence of employees must be explicit in the contract. The special condition which is to limit the liability of the bailee must be made known to the bailor and assented to by him. We are therefore of the opinion that the C19 of the agreement does not exonerate the Bank from the liability for the loss on account of the negligence of its servants. With utmost respect, we are 69 70

State of U.P. v. Allied Constructions, AIR 2004 SC 586. Central Bank of India v. M/s Grains and Gunny Agencies, AIR 1989 M.P. 28.

unable to endorse the liberal interpretation put in words" and other cause" by the Bombay High Court in Balkrishna's case (supra). In Cooch Bihar Commercial Co. v. Union of India AIR 1960 Cal 455 the bailee was held liable for the damage caused by the negligence of his servants."

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4.17 DOCTRINE OF ESTOPPEL Estoppel is a rule of evidence. It is a personal disqualification laid upon a person peculiarly circumstanced from proving peculiar facts. It is embodied in Section 115 of the Indian Evidence Act. The Section reads: "When one person has, by his declaration, act or omission, intentionally caused or permitted another person to believe a thing to be true and to act upon such belief, neither he nor his representative shall be allowed, in any suit or proceeding between himself and such person or his representative, to deny the truth of that thing. Illustration A intentionally and falsely leads B to believe that a certain piece o f land belongs to A, and thereby induces B to buy it and pay for it. The land afterwards becomes the property o f A, and A seeks to set aside the sale o n the ground that, at the time of the sale, he had no title. He must not be allowed to prove "his want of the title." Under the Section, before a party is precluded from, denying the truth of his declaration, act or omission, all the three conditions mentioned below must be satisfied: (i) There must be a representation by a person to another; (ii) the other shall have acted upon the said representation; and (iii) such action shall have been detrimental to the interests of the person to whom the representation had been made. ILLUSTRATION The petitioners in a couple of cases had willingly entered into agreements for mining of semi-precious stones for six months with eyes wide open. The contracts were worked and benefit derived.. The petitioners thereafter sought extension of the contract for 20 years under the Mines and Minerals Act and Rules by filing writ petitions. The authority agreed to extend the time for further six months on the same terms and conditions. The petitioners accepted the said offers and sent cheques towards the franchise amounts. The authority refused to extend the time on the ground that the acceptance of extension was made conditional subject to the results of the writ petitions. The writs were disposed off by holding that the contracts do not enure for 20 years. However, the authority was directed to consider granting of extension by six months and to pass appropriate orders in that behalf. 70 70 Navayuga Exports Ltd. v. Mineral Development Corporation, AIR 1998 A.P.391. It is necessary to mention yet another problem situation. Many times promises are given to the contractor or assurances are made either orally or in writing, which the Government officers subsequently find difficulty to fulfill. In such a situation it should be checked whether the case is coming under promissory estoppel or estoppel. 4.18 THE DOCTRINE OF PROMISSORY ESTOPPEL The Supreme Court has explained and summed up this doctrine in a couple of cases. It was observed: 71

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"The law may, therefore, now be taken to be settled as a result of this decision, that where the Government makes a promise knowing or intending that it would be acted on by the promisee and, in fact, the promisee, acting in reliance on it, alters his position, the Government would be held bound by the promise and the promise would be enforceable against the Government, at the instance of the promisee, notwithstanding that there is no consideration for the promise and the promise is not recorded in the form of a formal contract as required by Art. 299 of the Constitution. It is elementary that in a republic governed by the rule of law, no one, however high or low, is above the law. Everyone is subject to the law as fully and completely as any other and the Government is no exception. It is indeed the pride of constitutional democracy and rule of law that the Government stands on the same footing as a private individual so far as the obligation of the law is concerned. The former is equally bound as the latter. It is indeed difficult to see on what principle can the Government, committed to the rule of law, claim immunity from the doctrine of promissory estoppel? Can the Government say that it is under no obligation to act in a manner that is fair and just or that it is not bound by considerations of 'honesty and good faith'? Why should the Government not be held to a high "standard of rectangular rectitude while dealing with its citizens"? In a subsequent decision 72 the doctrine was summed up in these words: "The scope of the plea of doctrine of promissory estoppel against the Government may be summed up as follows:(1)

The plea of promissory estoppel is not available against the exercise of the legislative functions of the State.

(2)

The doctrine cannot be invoked for preventing the Government from discharging its functions under the law.

(3)

When the officer of the Government acts outside the scope of his authority, the plea of promissory estoppel is not available. The doctrine of ultra vires will come into operation and the Government cannot be held bound by the unauthorized acts of its officers.

71 72

M. P. Sugar Mills v. State of U. P. AIR 1979 SC 620. M/s Jit Ram Shiv Kumar v. State of Haryana, AIR 1980 SC 1285.

(4)

When the officer acts within the scope of his authority under a scheme and enters into an agreement and makes a representation and a person acting on that representation puts himself in a disadvantageous position, the Court is entitled to require the officer to act according to the scheme and the agreement or representation. The officer cannot arbitrarily act on his mere whim and ignore his promise on some undefined and undisclosed grounds of necessity or change the conditions to the prejudice of the person who had acted upon such representation and put himself in a disadvantageous position.

(5)

The officer would be justified in changing the terms of the agreement to the prejudice of the other party on special considerations such as difficult foreign exchange position or other matters which have a bearing on the general interest of the State."

An illustration will help further clarify the above concept.

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ILLUSTRATION M S T C being the selling agent of SAIL, invited offers for disposal of a wagonload of C.l Skull, which the original purchaser did not take delivery of. The petitioner before the Calcutta High Court, had purchased the said quantity at the listed price of Rs '3745/- on the tacit understanding that the seller in turn will sell 240 MT of CIS Roll above 11 MT per piece and 300 MT of rejected steel rolls above 20 MT per piece at the prevailing prices on certain terms and conditions. In implementation of the above transaction, MSTC issued two sale orders for 240 MT and 352 MT of the respective two categories and the Petitioner lifted the entire wagonload of the damaged C.I. Skull on payment of Rs. 1,12,000/- on account of demurrage charges thereon, allegedly suffering a loss of Rs. 2,00,000/-. After some deliveries were made there was neglect to effect further deliveries of C.I.S Rolls and rejected steel rolls. Rather than honouring the commitment in terms of the sale order of MSTC, further attempts were made to auction the contracted goods. On these grounds the petitioner sough intervention of the Court under Art. 226 of the Constitution on the ground that the action of MSTC and SAIL was violative of Art. 14 of the constitution. It was observed by the Calcutta High Court: 73 "... The governmental agency must act in a commercial venture to earn more profit but that does not obviously clothe the governmental agency to affect persons who have already entered into transactions with the Government on the basis of the declared policy. Law Courts shall not permit affectation of an individual by reason of an attempt to be wiser after the event. It must act on the basis of a declared policy. There cannot possibly be any objection if the persons manning the Government become wiser but this would have its effect only in the future and not at present. The common man acts on the basis of the declared policies. Change of policy cannot 73

Steel Crakers v. M.S.T.C.AIR 1992 Cal. 86 (91).

affect the present transaction though it may have its due effect on the future transaction.

"While it is true that the doctrine of promissory estoppel may not be said to be strictly applicable in the fact and circumstances of the matter under consideration but the principles akin thereto cannot, however, altogether be ignored. Governmental participation in every day trade and commerce is no longer in the realm of consideration but a practical reality of which the Court cannot shut its eyes. When a governmental agency has made a representation to an ordinary individual of a particular set of facts of circumstances, wherefore the individual concerned was willfully induced to act upon that representation, the governmental agency is estopped as against that individual from contending otherwise. The process of refinement of law in this branch commenced in the decision of the Supreme Court in Anglo Afghan Agency, AIR 1 9 6 8 SC 7 1 8 and the M. P. Sugar Mill case, AIR 1 9 7 9 SC 6 2 1 . The two subsequent decisions of the Supreme Court in Jutram Shivkumar, AIR 1 9 8 0 SC 1 2 8 5 and the Gujarat State Finance Corporation, AIR 1 9 8 3 SC 8 4 8 and the decision of this Court in t he case o f Central Group v. C.M.D ( 1 9 8 2 ) 2 Cal HN 9 0 and the subsequent decision o f th i s Court i n Surendra Prasad v. Oi l and Natural Gas Commission, AIR 1 9 8 7 Calcutta 1 lend support to t he v ie w expressed above."

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In result the wr it petition was allowed. 4.19 THE DOCTRINE OF PUBLIC POLICY The Concept of public policy is illusive, varying and uncertain. It has also been described as "untrustworthy guide", "unruly horse," etc. 74 "With a good man in the saddle, the unruly horse can be kept in control. It can successfully jump over obstacles. Public policy connotes some matter which concerns the public good and the public interest. The concept of what is for the public good or in the public interest or what would be injurious or harmful to the public good or the public interest has varied from time to time." 75 Public Policy is a vague and unsatisfactory term and calculated to lead to uncertainty and error, when applied to the decision of legal rights; it is capable of being understood in different senses; it may, and does, in its ordinary sense, mean 'political expediency' or that which is best for the common good of the community; and in that sense there may be every variety of opinion, according to education, habits, talents and dispositions of each person, who is to decide whether an act is against public policy or not. To allow this to be a ground of judicial decision would lead to the greatest uncertainty and confusion. It is the province of the system and not the lawyer, to discuss, and of the Legislature to determine what is best for the public good and to provide for it by proper enactments. It is the province of the Judge to expound the law only; the written from the statutes; the unwritten or common law for decisions of our predecessors and of our existing 7 4 Gherulal Parakh v. Mahadeodas, AIR 1959 SC 781 (793). 7 5 See Paragraph 93 of Central Inland Water Transport Corporation Ltd. v. Brojo Nath, AIR 1986 SC 1571.

Courts, from text writers of acknowledged authority, and upon the principles to be clearly deduced from them by sound reason and just inference; not to speculate upon what is the best, in his opinion, for the advantage of the community. Some of these decisions may have no doubt been founded upon the prevailing and just opinions of the public good; for instance, the illegality of covenants in restraint of marriage or trade. They have become a part of the recognised law, and we are therefore bound by'them, but we are not thereby authorised to establish as law everything which we may think for the public good, and prohibit everything which we think otherwise. Different High Courts of the country have had also occasion to express their views on this concept in their judgments. 76 In Colapatri's case, it was stated that the term public policy is not capable of a precise definition and whatever tends to injustice of operation, restraint of liberty, commerce and natural or legal rights; whatever tends to the obstruction of justice or to the violation of a Statute and whatever is against good morals can be said to be against public policy. These decisions have also pointed out that the concept of public policy is capable of expansion and modification. In a judicial sense, public policy does not mean simply sound policy, or good policy, but it means the policy of a state established for the public weal, either by law, by Courts, or general consent. 77 Where in Indian Statutes the words "public policy" only are used without indicating whether they refer to public policy of India it must be taken that reference is intended to Indian public policy. The words "public policy" used in Arbitration and Conciliation Act, 1996 expressly refers to the public policy of India in respect of domestic awards and the recognition and enforcement of the award under New York Convention, an award of the Arbitral Tribunal cannot be questioned on the ground

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that it is contrary to the public policy of other country such as the State of New York. However, in respect of the Geneva Convention awards, the words used are: "Enforcement of the award is not contrary to the public policy or the law of India". Since the expression "public policy" covers the field not covered by the words "and the law of India" which follow something more than contravention of law is required. The words "public policy" must necessarily be construed in the sense the doctrine of public policy is applied in the field of private international law. Applying the said criteria it appears that the enforcement of a foreign award would be refused on the ground that it is contrary to public policy if such enforcement would be contrary to (i) fundamental policy of Indian law or (ii) the interests of India or (iii) justice or morality. The need for applying the touchstone of public policy has been thus explained by Sir William Holdsworth : "In fact, a body of law like the common law, which has grown up gradually with the growth of the nation, necessarily acquires some fixed 7 6 Bhagwant v. Gangabishan, AIR 1940 Bom 369; Mafizuddin v. Habibuddin, AIR 1957 Cal 336; Colapatri v. Colapatri, AIR 1964 Andh Pra 465; and Ratan Chand v. Ashkar, AIR 1976 Andh Pra 112. 7 7 P. Rathinam v. Union of India, AIR 1994 SC1844.

principles, and if it is to maintain these principles it must be able, on the ground of public policy or some other like ground, to suppress practices which, under ever new disguises, seek to weaken or negative them". 78

Since the doctrine of public policy is somewhat open-textured and flexible, there are two conflicting positions, which are referred as the 'narrow view' and the 'broad view'. According to the narrow view Courts cannot create new heads of public policy whereas the broad view countenances judicial law making in this area. The earlier trend of the decision in India, favoured the narrow view 79 when it said: "though the heads are not closed and though theoretically it may be permissible to evolve a new head under exceptional circumstances of a changing world, it is admissible in the interest of stability of society not to make any attempt to discover new heads in these days." In later decisions, the Supreme Court has, however, leaned towards the broad view. 80 In the field of private international law, Courts refuse to apply a rule of foreign law or recognize a foreign judgment or a foreign arbitral award if it is found that tne same is contrary to the public policy of the country in which it is sought to be invoked or enforced. 81 A distinction is drawn while applying the said rule of public-policy between matters governed by domestic law and a matter involving conflict of laws. The application of the doctrine of public policy in the field of conflict of laws is more limited than that in the domestic law and the Courts are slower to invoke public policy in cases involving a foreign element than when a purely municipal legal issue is involved. 82 The approach of the American courts to the doctrine of public policy in its application to recognition and enforcement of foreign arbitral awards under the New York Convention is reflected in the decision of the US Court of Appeals wherein it has been observed 8J :

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"... An expansive construction of this defence would vitiate the Convention's basic effort to rempve pre-existing obstacles to enforcement. We conclude, therefore, that the convention's public policy defence should be construed narrowly.

78 79

History of English Law, Vol. Ill p. 55. In Gherulal Parakh v. Mahadeodas Maiya, 1959 Suppl (2) SCR 392(440); AIR 1959 SC. 781(795). 8 0 See Murlidhar Agarwal v. State of U.P. (1975) 1 SCR 575 at p. 584 : (AIR 1974 SC 1924 at p. 1930) ; Central Inland Water Transport Corporation v. Brojo Nath Ganguly (supra) (1986 (2) SCR 278 at p. 373 : (AIR 1986 SC 1571 at p. 1612); Rattanchand Hira Chand v. Askar Nawaz Jung (1991)3 SCC 67 at pp. 76-77 : (1991 AIR SCW 496 at pp. 502-03). 8 1 see Halsbury's Laws of England, IV Ed., vol. 8, para 418. 8 2 SeeVervaeke v. Smith, (1983) 1 AC 145 at p. 164 Dicey and Morris, Conflict of Laws. 11th Ed., Vol. I p. 92; Cheshire and North, Private International Law. 12th Ed., pp. 128-129. 8 3 Parsons and Whittemore Overseas Co. Inc. v. Societe Generale De L Industrie Du Papier (Rakta) and Bank of America, (1974) 508 F 2d 969,

Enforcement of foreign arbitral awards may be denied on this basis only where enforcement would violate the forum State's most basic notions of morality and justice". While dealing with arbitration agreements in international business transactions, the U. S. Supreme Court observed: "We cannot have trade and commerce in world markets and international waters exclusively on our terms, governed by our laws, and resolved in our Courts 84 " In another case. 85 , it was observed: "We conclude that concerns of international comity, respect for the capacities of foreign and transnational tribunals, and sensitivity to the need of the international commercial system for predictability in the resolution of disputes require that we enforce the parties' agreement, even assuming that a contrary result would be forthcoming in a domestic context". In France, a distinction is made between international public policy and the national public policy. 'Under the 'new French Code of Civil Procedure, an international arbitral award can be set aside if the recognition or execution is contrary to international public policy. In doing so it recognizes the existence of two levels of public policy - the national level, which may be concerned with purely domestic considerations, and the international level, which is less restrictive in its approach. 86 This would imply that the defence of 'public policy' which is permissible under S. 48(2)(b) of the Arbitration and Conciliation Act, 1996 should be construed narrowly In this context, it would also mean that under Section 34(2)(b)(ii) of the Arbitration and Conciliation Act, 1996, the same phrase could be given wider meaning. Indeed the Supreme Court of India has so held in ONGC's Judgement. 87 When the legislature in their wisdom couched the grounds of challenge in respect of both the foreign and domestic awards, using the very same words, there seems to be no justification to interpret the identical provisions in the same enactment differently, it is respectfully submitted. The said Judgement if continues to hold the field the scope and ambit of challenge to an award under S.34 would be very much enlarged. The said widely criticized Judgement deserves examination by a larger Bench of the Supreme Court, it is submitted with respect. 4.20

ORAL EVIDENCE RULE

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Where all the terms of a contract have been reduced into writing, the document is assumed to express the full intent of the parties concerned. This is obvious because any evidence tending to change such expressed intent would defeat the purpose of writing. Once a contract is reduced to writing, by operation of Section 91 of the 8 4 Fritz Scherk v. Alberto-Culver Co., (1974) 4 1 L.Ed. 2d, 270 at Pp. 279 and 281. 8 5 Mitsubishi Motors Corporation v. Soler Chrysler-Plymouth Inc., (1985) 87 L.Ed. 2d, 444. 8 6 See Redfern and Hunter, Law and Practice of International Commercial Arbitration, 2nd Ed. P.445. 8 7 Oil and Natural Gas Corpn Ltd. v. SAW Pipes Ltd.2003(2) Arb. LR 5 SC; AIR 2003 SC 2629.

Evidence Act it is not open to any of the parties to seek to prove the terms of the contract with reference to some oral or other documentary evidence to find out the intention of the parties. Under Section 92 of the Evidence Act where the written instrument appears to contain the whole terms of the contract then parties to the contract are not entitled to lead oral evidence to ascertain the terms of the contract. It is only when the written contract does not contain the whole of the agreement between the parties and there is any ambiguity then oral evidence is permissible to prove the other conditions which also must not be inconsistent with the written contract. Under Section 91, when the terms of a contract have been reduced to the form of a document; or where any matter is required by law to be reduced to the form of a document, the document itself or secondary evidence of its contents must be put in evidence. Explanation 1 to the section further states that the Section is applicable to cases in which the contracts are contained in one document or more than one document. Section 92 declares that when the terms of any such contracts have been proved according to Section 91, that is either by the production of the document itself, o r by the production of the secondary evidence to it, "no evidence of any oral agreement o r statement shall be admitted, as between the parties to any such instrument o r their representative in interest, for the purpose of contradicting varying, adding to, or subtracting from its terms." In view of the above provisions, it is to be noted that conversations held between the parties, or declarations made by either of them, whether before, or after, or at the time of the completion of a contract will be rejected and the written contract will be given effect to. Care must, therefore, be taken to see that all material terms settled in negotiations are expressly included in the written contract. Where terms have been negotiated by correspondence between the parties and a formal document (particularly when it is a standard printed form) is to be signed, the terms should be incorporated in the formal document or the letters should be included to form a part of the contract. ILLUSTRATION The plaintiffs' case was that along with the tender, the plaintiffs appended a letter and in that letter inserted certain terms by writing in ink to establish the case that the acceptance of the plaintiff's tender would be tantamount to the acceptance of the terms contained in the letter in which there was insertion in writing to the effect that

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it was on multi slab basis. There was no signature either by the persons submitting the tender or by the persons receiving the same on the hand written portion of the letter. It is in this context the question whether such hand written portion was originally there or was subsequently inserted assumed great significance. The learned Trial Judge had noticed that the certified copy, which was issued by the Board on 1 1-71978 of the aforesaid letter, clearly contains the hand written portion and therefore he came to the conclusion that the hand written portion was there at the time of submission of the tender. The Division Bench of the High Court allowed variance of the terms of the written contract relying upon the statement of defence witness and granted the decree on multi slab basis. In appeal this conclusion was set aside by the Supreme Court of India on the grounds as follows" : "The tender itself was submitted on 12-7-1978 and we fail to understand how the Board could grant a certified copy of the letter on 11-7-1978 when the plaintiffs' case itself is that along with the tender he had appended the letter in question. On this ground alone it can be safely held that hand written portion in Exhibit P-l was not there at the time of submission of the tender but was subsequently inserted obviously with the connivance of the officers of the Board. The Board in its rejoinder affidavit filed in this Court has stated that the attested copy was actually received on 28-121978, much later than the finalisation of the tenders and agreement and in order to build up a case the aforesaid interpolation has been made. In the facts and circumstances of the present case the aforesaid stand of the Board appears to us to be wholly justified and at any rate we have no hesitation to come to the conclusion that the hand written portion in Exhibit P-l was not there initially and has been inserted subsequently The main basis of the plaintiffs' case-on which a multi slab rate was claimed therefore fails. The written agreement between the parties nowhere indicates that the rate to be paid to the plaintiffs was on multi slab basis and the terms and conditions of the written contract is not susceptible of such a construction." It was further held: "It is no doubt true that DW-1 a witness of the defendants in his evidence had admitted that after submission of tender there was certain discussion between the contractor and the authorities and in that discussion contractor had expressed to charge for the job on multi slab basis and same was accepted by the authorities. We are afraid a decree cannot be granted in favour of the plaintiffs on the aforesaid statement since the contract in hand was a written one. There is no document whatsoever in support of the aforesaid so called after tender discussion and the acceptance of the terms in the said discussion to the effect that rate would be charged on multi slab basis. Then again if the plaintiff had appended the letter to the tender indicating that he would be charging on multi slab basis there was no occasion to have any after tender discussion or to raise the issue of rate being accepted on multi slab basis. The so-called statement of DW-1 therefore is wholly unacceptable and in the eye of law also cannot be taken into account to vary the terms of the written contract. The Division Bench of the High Court committed obvious error in allowing variance of the terms of the written contract relying upon such statement of DW-1 and granted the decree on multi slab basis." 88

T. N. Electricity Board v. N. Raju Reddiar, AIR 1996 SC 2025.

4.20.1 Oral Evidence When Admissible

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To the general rule, which forbids the admission of oral evidence, there are six exceptions. These are embodied in Section 92 itself. These provisions are reproduced below: PROVISO (1) "Any fact may be proved which would invalidate any document, or which would entitle any person to any decree or order relating thereto, such as fraud, intimidation, illegality, want of due execution, want of capacity in any contracting party, want or failure of consideration, or mistake in fact or law". Under this proviso evidence is admitted to prove that there was no agreement between the parties, and therefore no contract. PROVISO ( 2 ) "The existence of any separate oral agreement as to any matter on which a document is silent, and which is not inconsistent with its terms, may be proved. In considering whether or not this proviso applies, the Court shall have regard to the degree of formality of the document." Under this proviso evidence of any collateral oral agreement which does not interfere with the terms of the contract may be given. PROVISO ( 3 ) "The existence of any seperate oral agreement, constituting a condition precedent to the attaching of any obligation under any such contract, grant or disposition of property, may be poved." Under this proviso a contemporaneous oral agreement to the effect that a written contract was to be of no force or effect and that it was to impose no obligation at all until the happening of a certain event, may be proved. PROVISO (4) "The existence of any distinct subsequent oral agreement to rescind or modify any such contract, grant or disposition of property, may be proved, except in cases in which such contract, grant or disposition of property is by law required to be in writing, or has been registered according to the law in force for the time being as to the registration of documents." Under this proviso a prior written contract may be modified by a subsequent written or oral agreement and this modification may be shown by writings, by words or by the conduct of the parties, or by all three. Where the original contract is of such a nature as that the law requires it to be in writing, subsequent modification of it must also be in writing. PROVISO (5) "Any usage or custom by which incidents not expressly mentioned in any contract are usually annexed to contracts of that description, may be proved: Provided that the annexing of such incident would not be repugnant to, or inconsistent with, the express terms of the contract."

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Under this proviso oral evidence may also be accepted to confirm the existence of custom if custom gives a special meaning to special words in the contract document. It will not, however, be admitted to vary or contradict the written contract. PROVISO (6) "Any fact may be proved which shows in what manner the language of a document is related to existing facts." Where the terms of the document themselves require explanation, oral evidence can be led, under this proviso, to show in what manner the language of the document is related to existing facts. ILLUSTRATION I n a c as e 8 9 t he d e scr i p tio n o f a n e x ca va tio n ite m, i n t he co ntr a ct, in cl ud ed t he wo r d s " i n a n y so il, mu r u m, so c k etc . I t wa s ar g ued o n b e hal f o f t he o wner t ha t i he exp r e ss io n 'so c k ' wh i c h ad mi tt ed l y h a s no mea n i n g wit h r e f er e nc e lo s uc h en g i nee r i n g co n tr ac t i s a t yp i n g mi s ta k e fo r t he ter m 'r o c k ' a nd c a n b e so co r r e ct ed b y i n vo k i n g t h e p r o vi so to Se ct io n 9 2 o f the I n d ia n E vid e nce Ac t. T hi s co n te n tio n wa s up h eld b y t he G u j ar at H i g h Co ur t, a nd co n f ir med b y t he S u p r e me Co ur t, alt ho u g h t he co r r ec tio n wa s no t a llo wed b eca u s e t her e wa s no o r al e v id en ce p l ead ed to t ha t e f f ec t.

4.20.2 Interpretation Of Documents By Oral Evidence Sections 91 and 92 of the Indian Evidence Act define the cases in which documents are

exclusive evidence of transactions, which they embody. Sections 93 lo 99 deal with rules for construction of documents by oral evidence. The rules are summarized below:Section 93 deals with patent ambiguities. It prohibits the admission of oral evidence to make the language of a document certain, if on its face, the language is ambiguous or defective. For example, if in a written contract blank spaces have been left, the court will not admit oral evidence to determine how such blanks were intended to be filled up.

1.

2. Section 94 forbids the admission of oral evidence, to show that common words,

whose meaning is plain, not appearing from the context to have been used in a peculiar sense, have been in fact so used. 89

Gujarat Electricity Board v. S. A. Jais & Co. AIR 1972, Guj. 192 (193); confirmed in AIR 1988 SC 254.

3. Section 95 reads: "When language used in a document is plain in itself, but is meaningless with reference to the existing facts, evidence may be given to show that it was used in a peculiar sense." This Section is illustrated thus: "A sells to B, by deed, "my house in Calcutta." A has no house in Calcutta, but it appears that he had a house in Howrah, of which B had been in possession since the

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execution of the deed. These facts may be proved to show that the deed related to the house at Howrah." 4. Section 96 modifies the rule laid down in Section 94 by providing that where the language of a document correctly describes two sets of circumstances but could not have been intended to apply to both, evidence may be given to show to which set it was intended to apply. The section gives two illustrations one of which reads: "A agrees to sell to B, for Rs. 1000/-, "my white horse". A has two white horses. Evidence may be given of facts which show which of them was meant." 5. Section 97 reads: "When the language used applies partly to one set of existing facts, and partly to another set of existing facts, but the whole of it does not apply correctly to either, evidence may be given to show to which of the two it was meant to apply." Illustration "A agrees to sell to B "my land at X in the occupation of Y". A has land at X, but not in the occupation of Y, and he had land in the occupation of Y, but it is not at X. Evidence may be given of facts showing which he meant to sell." Provisions of this Section apply to a case, where land within boundaries is sold and is wrongly described as containing a certain area. The error in area is regarded as a mere misdescription and does not vitiate the deed. 6. Section 98 permits evidence to be given as to the meaning of illegible characters or of foreign, obsolete, technical, local and provincial expressions and of words used in a peculiar sense. For example, evidence was allowed in a case to define meaning of the term "working days". The contract in that case provided for completion of the work in 125 working days. Evidence of the meaning which the words "working days" or the like bear in construction contracts can be given under this section because such evidence only explains the meaning of expressions and cannot properly be said to vary the written contract. 7. Section 99 provides that persons who are not parties to a document may give evidence tending to show a contemporaneous agreement varying the terms of the document. It is clear from this section that the principle of Section 92 does not apply to third persons. The illustration given below the Section helps in understanding this provision. It reads: "A and B make a contract in writing that B shall sell a certain type of cotton, to be paid for on delivery. At the same time they make an oral agreement that three months credit shall be given to A. This could not be shown as between A and B, but it might be shown by C, if it affected his interest." 4.21 CONFLICT OF LAWS/THE DOCTRINE OF PROPER LAW With the increase in the number of construction contracts involving Indian companies undertaking construction works in other countries and vice versa, it is essential that parties to the contract understand the doctrine of proper law.

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Definition The proper law has been defined as, that law which the Court is to apply in determining the obligations under the contract. It must, however, be appreciated that not all the matters affecting a contract are necessarily governed by one law, and the circumstances sometimes require different questions to be submitted to different laws. For example, the question whether an agreement has been reached, competency of the parties, validity of the contract and interpretation to be put upon a particular clause in the contract may not necessarily fall to be governed by the same law. Nevertheless, the court will not readily and without good reason split a contract in this respect, 90 and it can be said that in all cases there is a primary system of law called the proper law, which usually governs most matters affecting the formation and substance of the obligations. The problem of ascertaining the proper law is more perplexing in the case of contracts than in almost any other topic. In the world of today several different situations have been reached. In a given case one can visualize three possible situations namely: i.

Express choice by the parties.

ii. Where there is no express choice of the proper law there may be a possibility of determining an inferred choice of the proper law by the parties. iii. Absence of any choice either express or inferred. 4.21.1

Express Choice By The Parties

The determination of the proper Law of Contract may not normally involve any difficulty if the parties have recorded expressly which legal system is to apply to their agreement. 91 90 91

Kahler v. Midland Bank (1950) AC 24 (42). Acrow (Antomation) Ltd v. Rex Chainbelt, Inc. (1971) 1 WLR 1676.

The difficulty in this case, however, arises due to the fact that parties are not free to submit the validity of their contract to any law of their own choosing. Thus, the express intention of the parties is subject to certain limitations, designed, in the main, to prevent the misuse of the discretion conferred on the parties to select the law to govern their contract. If the express choice is bona fide and legal and there is no reason for avoiding the choice on the ground of public policy, the choice will be conclusive. 4.21.2 Inf erred Choice of the Proper Law Where the parties have failed to lay down expressly in their contract the law applicable to it, the Court may be able to infer the law, which the parties intended to apply. There are two approaches to ascertain the intention of the parties. Some Courts emphasize the presumed intention of the parties and declare that the task of the Court is to infer from the terms and circumstances of the contract what the parties' common intention would have been had they considered the matter at the time when the contract was made 92 . Others say that the Court must determine'ior the parties what

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they ought to have intended had they considered the matters. There is a clear difference between these two views. In the first view the doctrine of implied term is used, while in the second view it conjectures no probabilities, but ruthlessly applies the external standard of the reasonable man under the doctrine of presumed intent. The second approach is more realistic and recommends itself. According lo this theory, the proper law is the legal system with which the contract has the most substantial connection. 93 On this view of the matter, every term of the contract, every detail affecting its formation and performance, every fact that points to its natural seat is relevant. No one fact is conclusive. The matters which need to be taken into account include: 1. The form of the documents made with respect to the transaction.

94

2. The style and terminology in which the contract is drafted. 95 As for instance, the language is appropriate for one system of law, but inappropriate for other. 3. The use of a particular language. 96 This, however, is a factor of minor importance. 97 4. The currency in which payment is to be made.

98

9 2 Llyod v. Guibert (1865), L.R., IQB., 115 (120); Rex. V. International trustee (1937) AC 500 (529). 9 3 Tomkinson v. First Pennysylvania Banking & Trust CO. (1960) 2 WLR 969. 9 4 Compagjiie d' Armejimejit Maritime S. A. v. Compagnie Tunisienne de Navigation S. A. (1971) 572, 583. 9 5 James Miller and Partners Ltd v. Whitworth Street Estates (Manchester) Ltd (1970) AC 582 603, 608, 611, 612. 9 6 St. Pierre v. South American Stores (Gath and Chaves) Ltd (1937) 2 ALLER 349 9 7 Coast Lines Ltd. v. Hudig and Veder Charterung N.Y. (1972) 2, QB 34 47 50. 98 Sayers v. International Drilling Co. N.V (1971), 1, WLR 1176, 1183, 1186.

5. The nature and location of the subject matter of the contract." 6. The residence of the parties

100

, and their nationality.

7. A connection with a preceding transaction. 101 8. The fact that one of the parties is a government. 102 9. If the contract contains a clause whereby the parties agree that any dispute shal be submitted to arbitration in a particular country, there is a powerful, though notconclusive, inference that the parties have selected the law of the country of arbitration as the proper law. 103 10. Whether any inference can be made as to the intention of the parties from the fact that the contract, or one of its terms, is valid under one relevant system of law but not under another. If yes, the parties may be taken to have intended that their contract should be governed by the system of law by which it was valid. 104 . However, such a fact is only evidence and not conclusive evidence as to the intention of the parties. 11.

The place where the contract is made. 105

12.

The place where the contract is to be performed.

106

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4.21.3 Neither Express Nor Inferred Choice of Proper Law: It is probable in some cases that the possibility of a conflict of laws was absent in the minds of the parties. When the Court is faced with the problem of deciding the proper law of the contract, in such cases the older authorities indicated that the Court should adopt a subjective approach viz the doctrine of implied term. More recently, however, the Courts have come to accept an objective approach viz. the doctrine of presumed intent. 107

99 100 101 102 103 104 105 106 107

British South Africa Co. v. De Beers Consolidated Mines Ltd (1910) 1 Ch. 354, 383 Keiner v. Keiner (1952) 1 All ER 643. The Metamorphosis (1953) 1 WLR 543. R. v. International Trustee for the Protection of Bond Holders A.G. (1937) AC 500. Tzortzis v. Monark Line A/B (1968) 1 WLR 406 411; International Tank & Pipe SAK v. Kuwait Aviation Fuelling Co. KSC (1975) QB 224. Coast Lines Ltd. V. Hudig and Vender Chartering N. V, (1972) Q.B. 34, 47, 50. The St. Joseph (1933) P. 119. Kremezi v. Ridway (1949) I ALL E.R. 662. The Avssizione (1954) P. 150., Also see 104 above.

Variations and Deviations 5.0

INTRODUCTION

A construction contract differs from other business contracts, inasmuch as its subject matter invariably involves an element of uncertainty. No matter how much precaution and trouble is taken during investigation, planning and preparation of contract documents, a large and complex work is rarely completed exactly in accordance with the original drawings and specifications. The extra work can be ordered by the employer and executed by the contractor under a separate agreement either oral or in writing. However, the general practice is to make suitable provision in the agreement itself. The contract price in such agreements having been generally agreed on the estimates based on such drawings and designs, changes invariably necessitate adjustments in the agreed cost no matter in which form the agreement is made. As a matter of fact the entire or lump sum form of contract may require elaborate provisions for valuation of additions and alterations generally called variations as stated in Chapter 2. The construction contracts, for the reasons stated above, invariably include a stipulation: empowering the engineer or architect to effect changes in the drawings, specifications and quantities, often resulting in omissions, alterations or additions to the original work, and further evaluation of the changes for the purpose of adjusting the contract sum. Probably no clause in a contract gives rise to discussion so often as does that relating to additions and alterations. This is obvious because the owner as well as the contractor may try to exploit this provision in the contract for their own respective benefit. The disputes may involve the basic question as to whether the change made, amounts to an extra, which justifies adjustment of the price. This

Chapter contains the analysis of provisions made in commonly adopted standard form contracts, illustrated with decided cases.

5.1

PROVISIONS MADE IN STANDARD FORMS

The relevant provisions of General conditions of some standard form contracts are considered including the following: (1) (2) (3) (4) (5) 5.2

Clause 12 & 13 of the C. P.W.D. form. There are similar provisions in M.E.S. and Railway forms. Clause 14 of the P.W.D. form B-l & B-2. Clause 51.1, 51.2 of FIDIC form 1992 Reprint and Clause 12 and 13 of 1999 Edition. Clause 13 of FIDIC form 1999 Edition. Clause Nos. 38, 39 and 40 of MOS&PI Government of India. EXTRA WORK AND ADDITIONAL WORK DISTINGUISHED

Additions and alterations made by an engineer or architect generally result into either two distinct categories of extras or omissions. The first category of extras includes: the works which are not expressly or by implication included in the original contract, and therefore, are not included in the original contract price, provided the work is done within the framework of the original contract.' U is the w'ork afisffig~oniside"df and entirely independent of the contract and not required in its performance. Such a work is called 'extra work'. The second category of extras includes work necessarily required in the performance of the contract, not intentionally omitted from the contract and evidently necessary for the completion of the work. Such a distinction is made by the Courts because extra work as defined above when ordered by the engineer or architect, and accepted and carried out by the contractor forms a new contract. Sucrmew contract is binding, even if, for any reason, the original contract is unenforceable. As against this, additional work is a part of the original contract and is subject to the original terms and conditions. However the distinction between extra work and additional work is often not easy to draw. A contractor may always raise the question whether deviations ordered resulting in extras or omissions on a large scale do not radically change the original nature of the contract so as to demand the total novation of contract. Apart from the problems caused by the extent of the architect's/engineer's authority to order variations and the effect of any contractual requirements of form there is little doubt that most frequent and difficult questions of construction that arise in construction contracts relate to whether particular items of work are in fact a variation of the work undertaken. The description of the item in a bill of quantities and the detailed description of the work in the specifications have to be examined. Whether a particular work described in contract documents such as bill of quantities or specifications includes ancillary work is a question of construction, which must often depend upon the circumstances of the case. A carefully drawn bill of quantities prepared by the owner's advisors omits to make any mention of ancillary items or as sometimes happens some ancillary items are mentioned in the bills and others are not

mentioned. It is possible to construe that the ancillary work, though described in the specifications but not having been mentioned in the bill of quantities may amount to extras. To avoid this some authorities, like the National Highways Authority of India, incorporate reference to the standard specifications in the description of the item and the specifications include mode of measurement and payment which lists the ancillary activities which are required to be carried out but which will not be separately payable. However, there is a remarkable lack of authority on this kind of problem. A contractor will be advised to include in his price ancillary works, which are mentioned in the specifications of a given item while quoting his price against that item. 1

5.3

State of U.P. v. Chandra Gupta & Co. AIR 1977, All 28 (32).

PROVISIONS IN STANDARD FORM CONTRACT OF CENTRAL AND STATE PUBLIC WORKS, RAILWAYS & OTHER DEPARTMENTS

The provisions made in contract by the Government and public bodies include provision reading some what as follows: "The Engineer-in-charge shall have the power to make any alterations in, or additions to the original specifications, drawings, designs and instructions that may appear to him to be necessary or advisable during the progress of the work, and the contractor shall be bound to carry out the work in accordance with any instructions in this connection, which may be given to him in writing signed by the Engineer-in-charge and such alteration shall not invalidate the contract and any additional work which the contractor may be directed to do in the manner specified above as part of the work shall be carried out by the contractor on the same conditions in all respects on which he agreed to do the main work, and at the same rates as are specified in the tender for the main work. And if additional and altered work includes any class of work for which no rate is specified in this contract then such class of work shall be carried out at the rates entered in the Schedule of Rates of the Division or at the rates mutually agreed upon between the Engineer-in-charge and the contractor, whichever is lower. If the additional or altered work, for which no rate is entered in the Schedule of Rates of the Division, is ordered to be carried out before the rates are agreed upon, then the contractor shall, Within seven days of the date of receipt by him of the order to carry out the work, inform the Engineer-in-charge of the rate which it is his intention to charge for such class of work, and if the Engineer-incharge does not agree to this rate he shall by notice in writing be at liberty to cancel his order to carry out such class of work, and arrange to carry it out in such manner as he may consider advisable; provided always that if the contractor shall commence work or incur any expenditure in regard thereto before the rates shall have been mentioned as lastly hereinbefore mentioned then in such case he shall only be entitled to be paid in respect of the work carried out or expenditure incurred by him prior to the date of the determination of the rate as aforesaid according to such rate or rates as shall be fixed by the Engineer-in-charge. In the event of dispute, the decision of the Superintending Engineer will be final. Where, however, the work is to be executed according to the designs and specifications recommended by the contractor

and accepted by the competent authority the alterations above referred to shall be within the scope of such designs, drawings and specifications appended to the tender. "The time for the completion of the work shall be extended in the proportion that the increase in its cost occasioned by alterations or additions bears to the cost of the original contract work, and the certificate of the Engineer-in-change as to such proportion shall be conclusive." The condition as reproduced above empowers the engineer: 1. To increase the quantum of work under each item in the bill of quantities to any extent without need to work out the new rate. 2. To order additions and alterations in the work for which no rate is specified in the contract at the mutually agreed rates not exceeding the rates entered in the Schedule of Rates of the Division. 3. To order items of work for which no rates are entered into in the Schedule of Rates of the Division in which event the contractor has to intimate within seven days, the rates he intends to charge for such works. If the engineer does not accept the rates he shall by written notice cancel the work and the contractor's entitlement will be restricted to the amount/rates as decided by the engineer for the work carried out before the cancellation of the order. 4. To accept recommendations for changes submitted by the contractor in designs and specifications where the work is to be executed according to the designs and specifications recommended by the contractor and accepted by the competent authority which changes shall be within the original scope ol designs, drawings and specifications. The above provisions give rise to the following questions: (1)

Whether the power to order additional work under the above stipulation is unlimited?

(2)

If the work is executed by the contractor after submitting rates expected by him, the engineer does not cancel the order and after completion the engineer decides rates different from those claimed/demanded by the contractor, which rates would the contractor be entitled to?

(3)

When may a contractor not be bound to execute variations?

Answers to the questions above and provisions made in the standard form contracts to overcome shortcomings of the above provisions are considered below: 5.4 RIGHT TO CHANGE IS LIMITED The concept of variation of the quantity of work is a common feature of works contracts. This is because in contracts relating to major works, the estimates of work

at the time the tenders are invited can only be approximate. A variations, and deviations clause, though apparently, allows the engineer to order changes, it does not authorize him to change radically the original nature of the contract. The law on this point, simply stated, is that the engineer has no power to change the essential nature or main purpose of the contract, but he may make changes incidental to the primary object of the contract. The construction of such clauses is not only in accordance with their obvious purpose, but is also strongly supported by public policy. If the Government were empowered by such clauses to alter materially the object of the contract, after construction has started, all bidders would have to take such possibility into consideration and materially raise their bid in anticipation of such losses, thus increasing the cost of public work. 1 It was realized that the power of the employer to vary the terms relating to the quantum of work cannot be unlimited. In Hudson's Building and Engineering Contracts (10th Ed.) (Pp. 549) it has been pointed out that this power "although apparently unlimited, must in fact be limited to ordering extras of a certain value and type". Thus where a contract for the construction of additional runways on a cityowned airport empowered the engineer to make such changes in the work as he might consider necessary or advisable to complete the work provided that such changes did not change the estimated cost of the work by more than 25 per cent it was held that the engineer could not eliminate part of the work linking the existing runways and the proposed runways. This created a gap between the existing and proposed runways; the gap made access to the proposed work more difficult and greatly increased the cost o f the work. The contractor brought an action to recover the increased cost. 'The contractor's claim was resisted o n the ground tha t the engineer had the right to effect changes to the extent o f 2 5 % o f the estimated cost; whereas the estimated cost o f the part o f the work that was eliminated amounted to only 2 0 per cent. The Court, allowing the contractor a recovery, stated: "The power vested in the engineer to effect changes in the quantities of the work is not so extensive as to enable him to abrogate or change the contract which the parties executed nor does it authorize the defendant to employ such right to defeat the object of the contract which is reasonably deducible from its terms." . 3 The changes which may be ordered have to be viewed against the background of the work described in the contract and the language used in the specifications. The changes must clearly be directed either to the achievement of a more satisfactory improvement or the elimination of work not integrally necessary to the project. The purpose of such power is to maintain a degree of flexibility' in adapting conditions to the end sought. As such the discretion committed to the engineer must be exercised within the framework of the contract and for the purpose of implementing the work originally intended. It cannot be used in an arbitrary manner, diverged from .the object and intention of the contract. For example, both the following cases the contractors were denied recovery o f loss of profit because the deletion in these cases subserved the purpose of the contracts and came within the language and spirit of the alteration and omission clause. 4 2

Boomer v. Ahbel, 263, p. 2d, 476, Court of Appeals of Calf. 1953.

3

Hansler v. City af Los Angeles. 268, p. 2d, 72 District Court of Appeals of Calf. 1954. N.E. 2d 559. 15. Kinser Construction Co. v. State, 204, N.Y. 381,97, N.tE. 871; Dc Belso Construdion Corp v. city of New York, 278, N.Y. 154.

4

In one case Lhe contract granted the engineer sweeping unrestricted power '...to omit any portion of work, without constituting grounds for any claim by the contractors for payment or allowances for damages'. Further, the work deleted in the case did not detract from the ultimate purpose of the contract, which was a completed subway. In the second case, the contractor undertook the work of building a section of a lock, which was to be built at a particular point. The State reserved the right to make such additions or deductions from work or changes in the plans and specifications covering the work as may be necessary. It was found that the conditions of the soil made it impossible to construct the lock at the designated site; consequently this work was deleted from the contractor's contract and the lock was relocated in an area where another contractor was performing the work. It needs to be noted that under the general law of contracts, once the contract is entered into, any clause giving absolute power to one party to override or modify the terms of the contract at his sweet will or to cancel the contract even if the opposite party is not in breach, will amount to interfering with the integrity of the contract. 5

5.4.1

Limit on Variation in Quantities

There is thus good reason as to why, in modern works contract, a limitation up to 20% to 25% has been put on this power of alteration, both plus and minus. Such a limitation up to 20% or 25% is now imposed under Clause 12-A of the Standard Terms of CPWD Contracts which is considered below at length. A typical representative provision is contained in 'Standard Contract Clauses for domestic Bidding Contracts ' published by the Ministry of Statistics and Programme Implementation, Government of India, 2001. Clause 40.1 of the said conditions / limits the right to change the quantities of each individual item to plus/minus 25% and total contract price to 10%. Clause 40.2 and 40.3 provide for payment for items not in the BOQ or substituted items, and for quantities in excess of BOQ quantities plus variation limit. Three alternatives are given and the rates are to be worked out in the order mentioned, namely, (i) Contract rates plus escalation or (ii) Rates and prices in the Schedule of Rates applicable to the contract plus ruling percentage or (iii) Market rates of materials, labour, hire charges of plant and machinery used plus 10% for overheads and profit. Clause 40.3 makes it clear that the new rate is to apply to quantities in excess of variation limit that is to 125% of BOQ quantities. However, there are still some contracts entered into wherein the engineer's power to order extra quantities is seemingly unlimited by use of words such as "any variation." In some contracts, it is stipulated that the limit on variation will not apply to foundation items. In both these cases, it is necessary to put an implied limitation such that one party is not put so completely at the mercy of the other. 6 5 6

Maddala Thathiah v. Union of India, AIR 1957 Madras 82; Also see: AIR 2001 SC 53 discussed in Art. 5. Hudson's Building and Engineering Contracts, 10th Ed. Pp. 549.

W her e I h e l a n g ua ge o f I h e co n tr a ct i s cap ab l e o f a li ter a l a nd wi d e b ut a lso o f a le ss l it er a l and a mo r e r es tr i cted me a ni n g, a ll r ele v a nt cir c u ms t a nce s ca n b e ta ke n

in to ac co u nt i n d ec id i n g wh e t her t h e li ter al o r a mo r e l i mi ted me a ni n g s ho u ld b e asc r ib ed to it. 7

Applying this rule, to the provisions which state that the "variation limit" agreed between the parties will not apply to foundation items, it is possible to argue that foundation items being more difficult of valuation, due to unknown and uncertain working conditions, the parties agreed that even 25% extra quantity will not b e governed by the original rate and any extra beyond the originally estimated quantity may attract new rate(s).The decision of the Supreme Court of India 8 supports this view so long as the Court or the arbitrator considers some "limited" excess quantity over and above the agreed quantity being payable at the originally agreed rate(s). This is so because the conditions normally stipulate that the quantities shown in the Bill of Quantities are approximate and likely to vary. It can be said that the contractor, relying upon the provisions incorporated in public works contract can seek relief in cases of excessive variation of quantities. 8 Sometimes while interpreting the provisions of the contract the question arises as to whether certain items in Bill of Quantities amount to different items or a single item. For Example, in a case, under the heading "Concreting", three sub-items were included consisting of M 150, M200 and M-250 grade concrete, with separate quantities and rates shown against each. The Division Bench of the H.P. High Court, setting aside the judgement of the learned single Jugde upheld the award treating them as different items. 5.4.2 Clause 12 of the C.P.W.D. Form Clause 12 of the C.P.W.D. form stipulates that the rates for additional, altered or substituted work shall be worked out in accordance with the five sub-clauses in their respective order as follows: (i) Rates stipulated in the contract (ii) Rates to be derived from the contract rates (iii) Rates entered into in P.W.D. Schedule of Rates plus/minus the tender percentage above or below the estimated cost (iv) Rates to be derived from Schedule of Rates plus/minus the tender percentage above or below the estimated cost of the sub-work (v) Rates to be submitted by the contractor within 7 days. .

7 8 9

T he

i

Sir Lindsay Parkinson & Co. Ltd. v. Commissioners of works (1950) I All ER 208. S. Harcharan Singh v. Union of India, (1990) 4 SCC 647 : (AIR 1991 SC 945) M/s. Hydel Construction Ltd. v. H.P. State Electricity Board, AIR 2000 HP 19. Also see Art. 5.4.2, illustration (2) cl aus e a t t he e nd pr ovi des:

" Excep t i n case o f it e ms rela ti ng to f ou nd at io ns, provis i ons co nta i ne d i n sub-cl aus es (i) t o (v) a bov e sh al l no t ap ply to con tract or su b stit ut ed it ems as in div id ua lly exce ed the

p erce nt ag e

set

out

in

t he

te n der

d ocu me nts

(ref erred

to

her ei nb el ow

as

"d evi at io n li m it "), s ub jec t to th e fo ll ow in g r estric t io ns. " Th e c la use th en p rovid es f our restrict i ons: (a)

The d evi at i on li m it ref err ed t o a bove

is

th e n et e f fect o f (a lg ebr aic al su m) of

additions and deductions ordered. In no case shall the additions and deductions (arithmetical sum) exceed twice the deviation limit. The deviations ordered on items of any individual trade included in the contract shall not exceed plus/minus 50% of the value of that trade in the contract as a whole or half the deviation limit, whichever is less. The value of additions of items of any individual trade not already included in the contract shall not exceed 10% of the deviation limit." al l

(b)

(c)

(d)

After defining individual trade to mean trade sections such as excavation and earthwork, concrete, wood work, etc. the Clause ends thus: "The rates of any such work except the items relating to foundations which is in excess of deviation limit shall be determined in accordance with the provisions contained in clause 12 A." form contains Clause 12 A for determining the rates for the work in excess of deviation limit, which reads as follows: The

the

Clause 12-A : the case of contract or substituted items which individually exceed the quantity stipulated in the contract by more than the deviation limit, except the item relating t o foundation work, which the contractor is required to do under CI. 12 above, the contractor shall within 7 days of the receipt of the order, claim revision of the rates supported by proper analysis of items for quantities in excess of the deviation limit, notwithstanding the fact that the rates for such items exist in the tender for the main work or can be derived in accordance with the provisions of sub-cl. (ii) of CI. 12 and the Engineer-in-charge may revise their rates, having regard to the prevailing market rates and the contractor shall be paid in accordance with the rates so fixed. The Engineer-in-charge shall, however, be at liberty to cancel his order to carry out such increased quantities of work by giving notice in writing to the contractor and arrange to carry it out in such a manner as he may consider advisable. But under no circumstances, the contractor shall suspend the work on the plea of non-settlement of rates of items falling under this clause. All the provisions of the present paragraph shall equally apply to the decrease in the rates of the iten\s for quantities in excess of the deviation limit, notwithstanding the fact that the rates for such items exist in the tender for the main work or can be derived in accordance with the provisions of subclause (ii) of the preceeding CI. 12 and the Engineer-in-charge may revise such rates having regard to the prevailing market rates." In

<

A si mi l ar p r o v is io n is t o b e fo u nd i n t he f o r ms i n u se b y t h e Mi li tar y En g i neer i n g Ser v ice s o f Go ver n me n t o f I nd ia a nd i n I nd ia n Ra il wa y co ntr a ct s. T hi s p r o v is io n i s al so no t fr ee fr o m d o u b t and i n var i ab l y gi v es r ise to a d i sp u te. T he fo l lo wi n g ill u s tr a tio n s wi ll h i g hl i g ht so me o f t he p r o b le m ar ea s.

ILLUSTRATIONS (1) Where in a case the total contract sum exceeded by 20% and the contractor's claim for revised rates was resisted on the ground that clause 12 A is attracted only when quantities of individual items increase and not the overall cost, the matter was referred to arbitration. The arbitrator allowed the relief. It was held by the Supreme Court that the contract did visualize the contractor raising the claim for revision of rates. The dispute was as to when such a claim could be raised and clearly related to the interpretation of the terms of the contract. The construction placed upon the contract by the contractor cannot be said to be an implausible one and the decision of the arbitrator was held to be final and binding. 1 " (2) The real controversy in a case was whether cement concreting M-150 grade and cement concreting M-200 Grade were separate items or these along with cement concreting M-250 grade constituted one item. The conclusion arrived at by the Arbitrators with reference to Clause 12A and Schedule of quantities and rates was as under :"A cursory glance of this clause shows that the revised rates are admissible in respect of the item(s) which "individually exceeds the quantity stipulated in the contract by more than twenty per cent. " It is also evident that in the "Schedule of Quantities and Rates" (Ex. R-65 Vol. I (pp. 9-16)) and items (iii) and (iv) i.e. cement concrete Grade 150 and M-200 have been shown as "individual items" with different rates and in fact the respondent itself invited separate rates fox all the items listed therein (including the items under dispute). The Items (iii) and (iv) in the Table reproduced at page 28 hereinabove are distinct and separate from each other and qualify for revised rates in terms of Clause 12-A as the deviation in each case exceeds twenty per cent." The above findings of the Arbitrators were set aside by the learned single Judge in the following terms :"On the basis of the agreement between the parties, the contention put forth on behalf of the Board appears to be correct. At this stage, Item No. IV of the Schedule of Quantity and Rates attached with the Agreement can safely be referred. This item deals with the term "Concreting". Thus, Item No. IV is an individual Item of Concreting comprising of various grades of concreting. In those various grades, as per table put in by the Board, the deviation was only to the extent of 8%. In the appeal against the above decision reliance was further placed upon clause "5.01 Scope of work.which inter alia stipulated "The items of concrete will have to 10 Himachal Pradesh State Electricity Board v. R.J. Shah & Co., 1999(2) Arb. LR 316 (S.C.)

b e sp li t up i n to se ver al ite ms acco r d i n g lo t h e c la s s o f co ncr ete lo b e us ed a nd i ts lo ca tio n, a nd wi l l b e me as ur ed a nd p a id fo r ac co r d i n g l y. T he ge ner al d esc r ib ed h er e i na f ter s h all, ho we v er , i n sp ec i fi ca tio n s r el e va nc e ap p l y to al l co n cr e te ite ms. I t wa s held :"

"In view of the law laid down in Municipal Corporation of Delhi v. M/s Jagan Nalh Ashok Kumar; Jagdish Chander v. Hindustan Vegetable Oils Corpn. and S. Harcharan Singh v. Union of India (supra), we are of the view that it was not for the learned

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Variations and Deviations

single Judge to interfere with the interpretation given by the Arbitrators, one of whom was a technical expert, that cement concrete Grade M-150, M-200 and M-250 are separate individual items and come to his own independent conclusion that these constitute single individual item of concreting. Therefore, we set aside the findings of the learned single Judge in respect of claim No. 1 by rejecting the Objections of the Board in this regard and accept the award of the Arbitrators for Rs. 23,38,840.73 against Claim No. 1 as correct and make it rule of the Court." (3) An item in a contract read: "Reinforcement for RCC work including cutting, bending and binding and placing in position, etc. complete (b) Cold Twisted Bars." The quantity as per the agreement worked out to 2,64,453 kg. and the rate was Rs. 7.50 per kg. Drawings were to be supplied by the respondent. On the basis of the drawings it transpired that the quantity of the said agreement as provided for in the contract would be inadequate and the same was exceeding the deviation limit provided for in the contract. The deviation limit provided under the contract was 25%. As per the terms of the contract, the rates for individual item executed beyond 25% were to be paid in accordance with Clause 12-A of the agreement reproduced above. It was the case of the petitioner that as per Clause 12-A the petitioner requested the respondent to revise the rates for this item of work executed beyond the deviation limit. Rates claimed were @ Rs. 8.68 per kg. The rate quoted by the petitioner for the excess work executed beyond the deviation limit was according to the prevalent market rate at that point of time. It was further contended by the petitioner that the respondent never denied the rate of Rs. 8.68 per kg. as the market rates, nor denied the claim of the petitioner under Clause. 12-A of the agreement. The only defence taken by the respondent, before the arbitrator was that the petitioner had not fulfilled other conditions required under the said clause for making this claim. What those conditions were, the respondent never specified before the arbitrator. It is the grievance of the petitioner that the arbitrator behind the back of the petitioner/objector took into consideration the rate of other alleged contemporary agreements. The arbitrator against Claim No. 1 stated as under: I uphold the contentions of the respondent in this regard in fact keeping in view that the reinforcement was being issued by respondents at a fixed cost of Rs. 6.50 per kg. comparing with the agreement rates of other contemporary agreements. 1 am ol" 11 M/s. Hydel Construction Ltd., Appellant v. H.P. State Electricity Board, AIR 2000 HP 19.

the view that the agreement rate of Rs. market rate." It was held:

7.50

per kg. of the item already reflected its

12

"From the reading of these observations it is apparent that the arbitrator did consider some contemporary agreements. There is nothing on the record lo show that these agreements were relied by respondent or were shown to the petitioner by the arbitrator. Hence, reliance by the arbitrator on contemporary agreements to arrive at market rates behind the back of the petitioner tantamount to misconduct of the proceedings. The respondent has not been able to show even today that contemporary agreements were placed before the arbitrator to prove that Rs. 6.58 per kg, was the prevalent market rate. Therefore, ... the award against Claim No. 1 is liable to be set aside. Order accordingly."

298

Building and Engineering Contracts

Though the case was decided on technicalities, the right to get paid for at new rate stands vindicated, it is submitted. (4) In a case 13 the contract stipulated hard rock excavation to the extent of 7,54,530 eft. at the rate of Rs.. 129/- per thousand eft. plus two per cent. The actual quantity executed was 18,18,704 eft. The contractor claimed payment for. additional work at Rs. 200/- per thousand eft. The matter was referred to an arbitrator who awarded a sum of Rs. 52,800/- allowing the claim partly. The award was filed in the High Court. The learned Single Judge rejected the objections filed and the award was made rule of the Court. The Division Bench of the Delhi High Court, in appeal against this order, was of the view that under clause 12 of the Agreement provision with regard to fixing of the rate the Engineer-in-charge and the Superintending Engineer of the Circle comes into play only when the additional item of the work does not form part of the main work and the rates for such works were not specified in the schedule of rates. It was held that since the additional hard rock cutting was part of the main work and the agreement provided for the rates, the action of the arbitrator in allowing the rate in excess of the agreed rate was against Clause 12 of the agreement and thereby the arbitrator had exceeded his jurisdiction. An appeal was filed in the Supreme Court on the above decision of the Division Bench after obtaining special leave. Although in the course of its judgment, the Supreme Court took note of the facts that (i) the Executive Engineer and the Superintending Engineer had recommended payment at enhanced rate for quantities in excess of 20% of the agreed quantity and, (ii) the C.RW.D. Standard Form was amended in the mean time to limit deviation up to a maximum of 20%, the following view expressed is the correct view, it is respectfully submitted, even in the absence of the above two facts : The Supreme Court allowing the appeal held : "...While considering the claim of the appellant the arbitrator was required to consider the terms of the contract and to construe the same. It was, therefore, 12 13

M/s. Kirpal Singh Khurana and Sons v. Union of India, AIR 1996 Delhi 84. S. Harcharan Singh v. Union of India.AIR 1991 SC 945.

permissible for the arbitrator to consider whether CI. 12 of the contract enables the Engineer-in-charge to require the appellant to execute additional work without any limit or a reasonable limit should be placed on the quantity of the additional work, which the appellant may be required to execute at the rate stipulated for the main work under the contract. ...The arbitrator did not accept the said claim of the appellant in full and has partly allowed the said claim by awarding Rs. 52,8007which means that the arbitrator has awarded the increased rate only for a part of the additional work of hard rock cutting which the appellant was required to execute. The arbitrator was entitled to do so on the construction placed by him on CI. 12 of the contract and, therefore, it cannot be said that in awarding the sum of Rs. 52,800/ - for the additional work the arbitrator has exceeded his jurisdiction and the award is vitiated by an error of jurisdiction. ..." (5) An appeal arose out of an award passed under the Indian Arbitration Act, 1940 concerning the interpretation of a 'variation' clause in the contract which allowed the appellant, to issue directions to the contractor varying the extent of the contract work, both upwards and downwards up to 25%. Question was whether (as contended by the appellant) the said .25% is to be arrived at by taking into account the net overall increase in the work i.e. by adding up the increases in work and 'deducting there from the decreases in work or whether (as contended for the respondentcontractor) the 25% was to be computed by adding up the total variations, both

CJiapter-5

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299

involving the increase in the work and the decrease in the work. The importance of the point is that if the variations exceed 25% of the contract price, the contractor is not confined to the contract rates but can claim market rates. The relevant clause read as follows : "The contract price has been arrived at on the basis of your quoted rates in your tender and the enclosed schedule of quantities, your quoted rates shall hold good for a variation of ± 25% (plus/minus twenty five percent) of the contract price stated in this work order, beyond which your quoted rates will be suitably revised subject to mutual agreement." In the appeal, it was contended that the arbitrator acted without jurisdiction in granting extra amount or higher rates for the work done up to the extended date 3010-86. This was prohibited by several clauses of the NIT, Special and General Conditions and under annexure attached to the work order. The variation limit of plus/minus 25% of the contract price was applicable on the 'total contract price' and not on any individual quantities or items. Any revision of rates would be permissible only after the total contract price stood increased or decreased beyond 25% on actual execution and completion of the contract project. In any event, the arbitrator could not have allowed a uniform increase of 50% for all items. On the other hand, the respondent-contractor contended that the question was not one of increase or decrease in total contract value. If the sum total of the variations i.e. both plus and minus exceeded 25%, the contract rates were no longer binding and market rates had to be paid. The learned trial Court had found, as a fact, that the su m to ta l o f t he ad d i tio n s a n d d elet io n s i n t h e wo r k ex ceed ed 1 0 0 %. A tab u l ar st at e me n t in t hi s b e ha l f wa s al s o fi led b e fo r e t he S up r e me Co ur t to s ho w t h at t he to ta l var ia tio n, b o t h up war d and d o wn wa r d i n t h e wo r k wa s o f a v al u e o f mo r e t ha n 2 5 % o f t he co ntr a ct p r ic e, a n d in fa ct it wa s more t ha n 1 0 0 %. O n t h e ab o ve contentions, the following points arose for consideration: ( 1 ) Whether, in view of the various clauses in the NIT, special and general

conditions, schedules and Annexure R, the arbitrator acted without jurisdiction in revising the rates and in ignoring the contract rates which were to be "firm" up to date of extension of the contract? (2) Whether, the case fell within the exception of escalation of "± 25% of contract price". If so what was the meaning of. that clause? Did it mean the overall net increase in contract price after deducting the value of the reduction in work from the value of the additional items of work (as contended by the appellant) or did it mean that the plus and minus variations had to be added or pooled together (as contended by the contractor) to find out if they were together above 25% of the contract price? (3) Was the arbitrator wrong in granting 50% out of the escalation claimed by the respondent? On the above points it was observed: " It is true that there are various conditions in the NIT, the Tender Form and the Special and General Conditions that no extra amount or higher rates will be allowed

300

Building and Engineering Contracts

under any circumstances whatsoever. These have been strongly relied upon by the appellant. We shall refer to them. After referring to the relevant conditions, it was observed: "The question therefore is as to what is the meaning of this clause. The arbitrator, as already stated,, granted 50% of the extra rates obviously on the basis that the case fell within the above exception. The District Court found that the total variations both plus and minus - exceeded 100%. The rival contentions were summed up thus: "The contention of the appellant is that the above exception is applicable only to the net difference between the increases and decreases and if it works out to more than 25% of the contract value, then rates can be revised. For example if the contract value is Rs. 50 lakhs, the increases are of a value of Rs. 15 lakhs and the reductions are of a value of Rs. 10 lakhs, the net difference according to the appellant, in the overall contract value is only Rs. 5 lakhs and being 10% of Rs. 50 lakhs, there can be no escalation in rates. "O n ihe other hand, the respondent contends thai one has to add up the total variations both plus and minus and hence, in the above example, the value of total variation, both plus and minus amounts to Rs. 2 5 lakhs which works oul to more than 2 5 % (in fact 5 0 %) of the contract price and the enhanced rates will be applicable. Il was observed: "The point raises certain important issues concerning integrity of the contract. The concept of variation of the question of work is no doubt a common feature of works contracts. This is because in contracts relating to major works, the estimates of work at the time the tenders are invited can only be approximate. But, it was also realised that the power of the employer to vary the terms relating to the quantum of work cannot be unlimited. In Hudson's Building and Engineering Contracts (8th Ed.) (Pp. 294-296) it has been pointed out that this power "although unlimited, is in fact limited to ordering extras up to a certain value." Reliance was placed on the decision by a three Judge Bench of the Supreme Court and it was observed: "We are of the view that the above said clause"25%±"was understood by the arbitrator in a reasonable manner as being applicable to a case where the value of the sum total of the additions and deletions exceeded 25% of the contract price. That construction, in our view, cannot be said to be vitiated by any serious error of law. The following are our reasons. "When a contractor bids in a contract, he has to offer reasonable rates for the works which are both difficult to perform and other works which are not that difficult to perform. Every contractor tries to balance his rates in such a manner that the employer may consider his offer reasonable. In that process the contractor tries to get a reasonable margin of profit by balancing the more difficult (and less profitable items) and the less difficult (and more profitable items). His bid is, normally, a package. If the employer is permitted in law to make variations upwards and downwards even if it be up to a limit beyond which market rates become payable then the interpretation of the clause must be one which balances the rights of both parties. For example, if the plus and minus variations go beyond 25% and are made in

14 In S. Harcharan Singh v. Union of India, (1990) 4 SCC 647 : (AIR 1991 SC 945). National Fertilizers v. Puran Chand Nangia, AIR 2001 SC 53.

1

CJiapter-5

Variations and Deviations

301

a manner increasing the less profitable items and decreasing the more profitable items, and if the net result of the contract is to be the basis, as contended by the appellant, then it may work out that the contractor could be made to perform a substantially new contract on the same contracted rates. In fact, if the said reasoning of the appellant is accepted and if, in a given case, the value of the increases in unprofitable items is 50% of the contract value and the value of the reductions of the remaining more profitable items is 50% of the contract value, it could still be contended for the appellant that the net variation was nil, even though that was a situation where the contract had been substantially modified and was almost a different contract from the one stipulated. Such an unreasonable construction is to be. avoided and was rightly avoided by the arbitrator. "The additions and decreases in work are, in our opinion, therefore both independent for the purpose of finding out the ± 25% variation and have to be pooled together. The arbitrator was right in thinking that the case fell within the exception. Obviously, he must have felt that the plus and minus variations are more than 25% and that the contract rates are no longer binding. His construction of the clause appears to be rational and just and cannot be said to be unreasonable. As a result, the appeal was dismissed." 14 The Claimants had made the extra claim on the ground that the quantity of excavation of hard rock being abnormally high and much beyond the anticipated quantity indicated jn the agreement and even much in excess of the so-called 25 per cent of the work as per the GOMS No. 2289 dated 12-6-1968, the claimants were entitled to a separate rate for such extra excavation and the arbitrators failed to exercise their jurisdiction in not granting the claim and on the other hand, rejecting the same. The trial Court remitted the claim to the arbitrator for reconsideration. The High Court in the impugned judgment however, referring to clause 59 of the agreement, which deals with delay and extension of time and in view of the letters of the Superintending Engineer dated 15th July, 1980 and 19th May, 1983, rejecting the claim, came to hold that the contractor-claimant would not be entitled to be paid at any higher rate for such additional excavation work and. accordingly set aside the order of the learned trial Judge, remitting the claim item No. 1 for being re-disposed of by the arbitrator.

(6)

Clause 59 of A.P.D.S.S. has absolutely no application to the monetary claim and deals with extension of time as already submitted in Chapter 4. 15 As regards the absence of provision similar to clause 12 of the C.P.W.D. form, reliance was placed upon the GOMS No. 2289-dated 12-6-1968. Even otherwise, a provision giving unrestricted power to vary the quantity has to be limited to the reasonable excess. Variation up to 20% to 25% of the originally stipulated quantity can be considered to be reasonable if not as a custom or usage in the construction industry. The decision of the High Court, it is respectfully submitted, did not lay down the good law. However, the Supreme Court upheld the said decision. Before the Supreme Court the case was presented by placing reliance on the provision of the agreement in Clause 63. This is what the Supreme Court observed: "Let us now examine the contention ..the contractor would be entitled to at a higher rate in accordance with Clause 63 of the agreement. ... this contention had never been raised either before the arbitrator or before the subordinate Judge or even before the High Court. In fact the claim petition filed before the arbitrator is rather cryptic and absolutely vague, not indicating on what basis the additional claim is made, though the foundation for the claim was there, namely there had been an increased amount of excavation work beyond the agreement. It is in this connection, Mr. Rao had relied upon the two decisions of this Court in the case of S. Harcharan Singh v. Union of India (1990) 4 SCC 647 : (AIR 1991 SC 945) and National Fertilizers v/Puran Chand Nangia (2000) 8 SCC 343 : (2000 AIR SCW 3860 : AIR 2001 SC 53). But before

15 See Art. 4.10.1.

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examining the said contention, it would be appropriate for us to extract Clause 63, ..reads as under : "Clause 63. Payment for additions and deductions for omissions : ( A) T he co n tr a cto r i s b o u nd to exe c ute a ll s up p l e me n tal i te ms t h at ar e fo u n d es se nt ia l, in cid e nta l a nd i ne v it ab l e d ur i n g t he e xe c ut io n o f t h e wo r k, a t t he r a te s t o b e wo r k ed o ut a s d e ta iled b elo w : ( a) Fo r al l i te ms of work i n e x ce ss of t he quantities shown in schedule A of the te nd er t he rates payable for su c h items shall b e ei t her t he tender rates or th e standard schedule of rates for the items plus or minus the overall tender percentage

accepted by the competent authority which ever is less. ( b ) For items directly deducible from similar items in the agreement, the rates shall be derived by adding to or substracting from the agreement rate of such similar items, the cost of difference in quantity of material or labour between the new items and the similar items in the agreement, worked out with reference to the Schedule of rates adopted in the sanctioned estimate plus or minus the overall tender percentage.

(c) For new items which do not correspond to any items in the agreement, the rates shall be standard schedule rate plus or minus the over all tender percentage. The terms 'standard schedule of rates' used in the above sub-clauses (a), (b) and (c) means the schedule of rates on which the sanctioned estimate was prepared. (d) In the event of the Executive Engineer and the Contractor failing to agree on a rate for such additional work, the Executive Engineer may, at his option either: (i) employ other parties to carry out the additional work in the same manner as provided for under clause 48, or (ii) the contractor shall execute the work upon written orders from the Executive Engineer and the cost of labour and materials plus 10 per cent thereon shall be allowed therefor, provided that the vouchers for the labour and materials employed shall have been delivered to the Executive Engineer or his representative within seven days after such work shall have been completed. If the Executive Engineer considers that payment for such work on the basis of the vouchers presented is unduly high, he shall make payment in accordance with such valuation as he considers fair and reasonable and his decision to the matter shall be final, if the amount involved in additional payment is Rs. 1000 or less, for each occasion on which such additional works shall have been authorised. If such amount exceeds Rs. 1000, the contractor shall have the right to submit the matter to arbitration under the provisions of the arbitration clause 7 3 . (e) If, in the opinion of the Executive Engineer a rate for the additional work is hot capable of being properly arrived at prior to execution of work, or if the work is not capable of being properly measured, then the cost and payment thereof shall be dealt with as provided for in the preceding sub-clause (d)(ii)." Referring to the decision in. S. Harcharan Singh v. Union of India (1990) 4 SCC 647: (AIR 1991 SC 945), it was observed: "We fail to understand how the aforesaid decision will be of any assistance to the claimant in the present case, where there is no clause like Clause 12A nor is there any letter from the competent authority agreeing to payment at a higher rate for the additional work beyond the limit of 25

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per cent as provided under the GOMS No. 2289 dated 12-6-1968. Arbitrator being a creature of the agreement, unless agreement either specifically or inferentially provides for a higher rate to be awarded for any additional or excess work done by the contractor, it would not be permissible for the arbitrator to award for the socalled additional work at a higher rate. ... But such recommendation of the Executive Engineer, who was not competent to decide the question of awarding a higher rate for the excess quantity of excavation will not clothe any jurisdiction on the arbitrator to award the contractor at a higher rate nor would it entitle the contractor to get a higher rate for the claim in question on the basis of agreement. Now coming to the very clause, upon which Mr. Rao relied upon, we find that the said clause relates to supplemental item, which have been found essential, incidental and inevitable during the execution of the work. The excavation of hard rock cannot be held to be a supplemental item and on the other hand, is an item of work tendered and accepted, and as such clause'63 will have no application to the claim item No. 1..................... The appeal fails and is dismissed but in the circumstances there will be no order as to costs." 16 The above case is an excellent illustration of interpretation or construction of a business contract in which the dictates of the Supreme Court that meaning of such contracts must be gathered by adopting a commonsense approach and it must not be allowed to be thwarted by a narrow pedantic and legalistic interpretation 17 are not followed. The author with great respect submits that this judgement does not lay down a good law. The provisions of clause 63 (a) read as follows: "(a) For all items of work in excess of the quantities shown in schedule A of the tender the rates payable for such items shall be either the tender rates or the standard schedule of rates for the items plus or minus the overall tender percentage accepted by the competent authority which ever is less." Clearly, the opening words of the provision show that the provisions of clause 63 are not restricted to supplemental items alone but "For all items of work in excess of the quantities shown in schedule A of the tender." Supplemental items of work are not anticipated at the time of signing the contract but likely to arise during the construction of the work and their quantities do not reflect in the Schedule of quantities. The para heading is also general and reads: "Payment for additions and deductions for omissions". Eliminating an item of work from the Schedule of quantities resulting in omissions is not the same thing as to order execution of the supplemental items "that are found essential, incidental and inevitable during the execution of the work". In fact for all practical purposes the said clause is a provision similar to clause 12 of CPWD contract form, it is respectfully submitted. 16

Ramachandra Reddy and Co. v. State of A.P..AIR 2001 SC 1523.

17

Union of India v. D. N. Revri & Co., AIR 1976 SC 2257.

Cl a u se 6 3 , a s ( he he ad i n g gi v es t he ge n er a l d r i ft o l ' t he i nt e nt io n o f th e p ar tie s, co u ld b e p r e s sed to s u p p o r t t h e c la i ms o f q u an ti ti es ''i n e x ce ss o f t h e q ua n tit ie s s ho wn i n sc hed u le A o f th e t e nd er " wi t ho ut s tip ul at i n g a n y p e r ce n ta ge - li mi t u n le ss th e ab o v e r e f er r ed to cir c ular i s i nco r p o r a ted i n t h e co n tr a ct. U nd er t he cir c u ms t a nc es r e l yi n g o n t he e ar l ier d ec i sio n s a nd o b ser v at io n s of th e S up r e me Co ur t a r ea so n ab le li mi t is r eq uir ed to b e p ut up o n i n co n str u in g t he sa id p r o v is io n, it i s s ub mi tte d . I n a ca se d ec id ed b y th e B o mb a y High Court, p r o vi s io ns of CI . 14 i n a co n tr a ct 18 we r e i nt er p r e ted . It was held:

(7)

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" In clause 14, it is clearly provided that, "the Engineer-in-charge shall have power to make any alteration in or additions to the original specifications, drawings, designs and instructions that may appear to him to be necessary or advisable during the progress of the work, and the contractor shall be bound to carry out the work in accordance with any instructions in this connection, which may be given lo him in writing signed by the Engineer-in-charge and such alteration shall not invalidate the contract and any additional work which the contractor may be directed to do in the manner above specified as part of the work shall be carried out by the contractor o n the same conditions in all respects on which he agreed to do the main work and at the same rates as are specified in the tender for the main work." From this clause, it would be manifest that when the extra work in contemplation at the time of tender is done, for which the rates are provided in the original tender, the contractor cannot claim any extra rate. He can claim extra rate only if that class of work is not provided in the tender." (Emphasis supplied). The words emphasized in the above judgement show that the originally agreed rates will be binding to the extra work in contemplation at the time of submission of tender. If the work were in contemplation of the parties at the time of tendering it would have been reflected in the agreed scope of the contract and the contract sum. It would cease to be extra. The work is extra because when the contract was signed it was not within the contemplation of the parties. This judgement needs to be seen in the light of the facts of the case wherein the work of construction of bridge was involved and the depth of . foundation got increased thereby increasing the quantities of the items of work. It appears that the clause in question did not provide for any limit on variation. tt"■ "■ " ■

5.4.3 Work Executed By The Contractor After Submitting Rates, The Engineer Does Not Cancel The Order Under CI. 12 A- Effect? The plain intendment of the above quoted provision of clause 12 A in the C.P.W.D. Standard Form Contract 19 is that for the variation ordered, if there is neither agreed rate nor rate entered in Schedule of Rates of the Division, the contractor is to inform the engineer the rate he intends to charge for the type of work ordered within seven days of his having received the variation order. If the engineer neither accepts the rate nor by notice in writing cancels the variation order and the contractor executes the work, can the contractor be paid for at his quoted rate or in some other manner? 18 19

State of Maharashtra and others,Appellants v.Saiftiddin Mujjaffarali Saifi,AIR1994Bom 48. See Art. 5.4.2 pp. 282 for the wording of the clause.

T he wa y l he la n g ua g e is us ed , i l is r e a so nab l e l o co nc l ud e t h ai t he e n g i ne er b y hi s si le nc e c a n b e d e e med t o h a ve acc ep t ed t h e r ate . 2 0 Ho we v er , t he S up r e me Court of 21 I nd ia i n another case involving similar provision in the co ntr ac t h eld differently. I t wa s observed t hat until the r at es we r e settled by agreement t he contractor wa s under no obligation to carry out the additional or altered work. He could legitimately have said that in the absence of scheduled rates in the division for the type of work in question or an agreement in regard to th e rales, he wa s no t bound to carry out the

additional or altered work. The contention that since the Engineer-in-charge did not exercise his liberty to cancel the order, there was a concluded contract between the parties was rejected. It was held that in the absence of some positive act on the part of the Engineer-in-charge agreeing to the rate, there was no agreement as to the rate and that the respondent was not bound to carry out the work". (Emphasis supplied). The Supreme Court has duly laid down the law, it is respectfully submitted, that failure of the contractor to execute the extra work till there is an agreement in respect

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of the rates would not amount to a breach of the contract on his part. However, this interpretation of the contract provision is easier said than done. 22 The extra work ordered may be of small quantum compared to the subsequent work, which cannot be executed till completion of the varied work. In such a situation it may amount to suspension of the whole work under the contract, which could lead to huge losses to both the parties. Invariably, under pressure the contractor executes the extra work without the rates having been agreed and ultimately lands himself in disputes and litigation. In the interest of justice, the interpretation earlier upheld by the High Courts and the Supreme Court deserves to be restored, it is respectfully submitted.

5.5

FIDIC FORM

FIDIC is a French Acronym 23 for the International Federation of Consulting Engineers. It was founded in 1913. Today its membership is more than 60 countries from all parts of the world. The Standard from of contracts in use in India for many major projects is the adapted version of the FIDIC form 4th edition 1987 and amended reprint 1992. The revised form has been published in 1999. The provisions of both the editions are considered below.

FIDIC form 4th edition 1987 and amended reprint 1992 contains provisions 51.1, 51.2 and 52.1 to 52.4 under the main heading 'Alterations, Additions and Omissions'. 20 21 22 23

Union of India v. Khetra Mohan Banerjee, AIR 1960 Cal. 190 confirmed in appeal by the Supreme Court in CA No. 206 of 24.11.1962. Bombay Housing Board v. Karbhase Naik & Co. AIR 1975, SC 763. For further discussion see Art. 5.8.2. pp.314 Federation Internationale des Ingenours -Conselis (FIDIC).

Cl a u se 5 1 .1 e mp o we r s l he e n gi n eer lo ma ke a n y var ia tio n o f l he fo r m, q ua li l y o r q ua n ti t y o f l he wo r k s o r an y p ar i i h er eo f l h al ma y, i n hi s o p i n io n, b e necessary. T hi s ge ner al p o wer e na b le s l he e n gi n eer lo i n c r ea se o r d e cr ea s e t he quantity o f a n y wo r k, o mi t a n y s u c h a wo r k, c h a n ge l he c h ar a cter o r quality o r kind o f a n y s u c h wo r k, c ha n ge l e vel s, lines, p o s itio n s a nd dimensions of an y p ar t of t he wo r k, o r d er additional wo r k necessary fo r t h e completion of t he work a nd change any specified seq ue n ce or t i mi n g of construction of an y part of the works. The provision further stipulates that t h e ordering of variation would not vitiate o r invalidate the contract b ut the effect would be valued i n accordance with the provisions of clause 52. It contains a proviso that if variations were necessitated by some default or breach of

contract by the contractor the additional cost, if any, would be borne by the contractor. It further provides that no such instruction would be necessary if increase or decrease resulted from the quantities exceeding the quantities stipulated in the Bill of Quantities. The notable feature of this provision is that apparently the variations need not necessarily be ordered in writing. Clause 51.2 stipulates that the contractor shall not make any variations without an instruction of the Engineer. It does not say 'instruction in writing'. However this provision needs to be read with provisions of clause 68 under the heading 'Notices'. The said provisions require " all certificates, notices or instructions to be given to the contractor by the employer or the engineer under the terms of the contract to be sent by post, cable, telex or fax .

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Although the provisions of Clause 51 do not per se require the instructions to be given in writing, the contractor is well advised to insist on written instructions for the reason as already stated above. If in spite of demand the written instructions are not issued, the contractor should place on record the variations orally ordered, which if not contradicted, would be deemed to have been issued in writing. This suggestion stands expressly incorporated in the 1999 edition of the FIDIC Form under Clause 3.3 considered in Art. 8.1.1. The right of the contractor to get paid for variations orally ordered would not be prejudiced if the contractor can establish by evidence the fact of variations having been orally ordered and confirmed in writing by the contractor. It is further pertinent to note that the right to get paid for varied work is subject to the condition contained in the proviso under clause 52.2 below which requires a notice to be given within 14 days of the date of such instruction (other than in the case of omitted work ) before the commencement of varied work, by the Contractor to the Engineer of his intention to claim extra payment or a varied rate or price or by the Engineer to the Contractor of his intention to vary a rate or price. Clause 52.1 specifies the procedure for valuation of variations. The following provisions stand incorporated: 1) Varied work to be valued at the rates set out in the contract if the Engineer opines that the said rates are applicable. 2 ) I f t he co ntr act d o e s no t co nta i n a n y r a te s o r p r ice s fo r t he var i ed wo r k , n e w r ate s should b e worked o ut fr o m t he r ate s o r p r ice s o f similar ite ms in t he contract if reasonably possible. 3)

The new rates to be mutually agreed between the Engineer and t he Contractor after consulting the Employer.

4) I f no agreement is possible the Engineer is to fix the rates or prices and notify to the Contractor with a co p y to the Employer. Should finalisation of the rates by mutual consultation or otherwise is likely to take time, the provision empowers the Engineer to determine provisional rates or prices for the purpose of issuing interim payment certificates. Clause 52.2 carves out exceptions to the above rules by way of two provisos. The first proviso stipulates that if the nature or amount of any varied work when compared with the nature or amount of the whole work is such that in the opinion of the engineer originally agreed contract rates or prices are rendered inappropriate or inapplicable, new rates would be agreed between the Engineer and the Contractor, in consultation with the Employer. Failing such agreement the power is given to, the Engineer to fix the rates finally or provisionally similar to the power given under clause 52.1. The second proviso requires the Contractor to protect his right to get paid extra at a varied rate or price by giving notice within 14 days of the date of such instruction. Such a notice is not required if the Engineer at the time of instructing to vary the work gives notice of his intention to vary a rate or price. The notice contemplated by this provision must also be in the form and manner provided under Clause 68. Clause 52.3 provides for addition to or deduction from the contract price such sum as may be agreed between the Contractor and the Engineer after due consultation of the Engineer with the Employer and the Contractor. This sum is payable in case additions

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to or deductions from the contract price under all varied work valued under sub clause 52.1 and 52.2 taken together are in excess of 15% of the effective contract price. The effective contract price for this purpose is defined to mean the contract price excluding provisional sums and allowance for day works, if any. Clause 1.1 (e) (i)) defines the contract price to mean the sum stated in the letter of acceptance. It may be noted that the provisions of clause 52.3 are attracted only after " all varied work under sub clauses 52.1 and 52.2 are given effect. As such the Contractor is entitled to claim additional payments on account of variation over and above the payments received by him under clause 52.1 and 52.2. The provision for additional payment is generally restricted to compensate "the Contractor's Site and general overhead costs of the Contract" on account of variations. It is significant to note that the agreement expressly provides for escalation under FIDIC conditions clause 70 for increase or decrease of cost of labour and of materials, which generally include fuel oil and lubricants, but there is no provision made for compensating the loss, if any, in respect of overheads on account of variations. This provision expressly s tip u la te s th at t he ad d it io nal a mo u nt i s to b e wo r ked o u t h a vi n g r e g ar d to t ne Co nt r ac to r 's Si te a nd g e ner a l o ver h ead co st s o f t h e Co ntr act.T hi s ad d it io nal a m o u n t ca n b e wo r ked o u t after ascertaining t he provision mad e b y t h e Contractor i n h is te nd er for overheads including si te and h ead office overheads. The percentage provision wi ll b e applicable only " on the a\mount b y which such additions or deductions shall be in excess of the 15 per cent of the Effective Contract Price. For example, i f the additions and deductions exceed 15 per cent or the Effective Contract Price b y s a y

Rs. 10 million and the Contractor's overheads are ascertained at 15 per cent of the contract price (that is to sa y 17.65 per cent of the basic cost of men, material and machinery), the additional amount would be Rs. 15,00,000 /-. Clause 52.4 empowers the Engineer to issue an instruction that any varied work shall be executed on a day work basis. In such an event the Contractor is entitled to payment under the terms set out in the Daywork schedule included in the contract and at the rate and prices affixed thereto by him in the tender. The provision further lays down the procedure for substantiation of deployment of material, labour, etc. by the contractor. Disputes and differences regarding the interpretation of Clause 52 The above provisions are self-explanatory. However, in practice the provisions of Clause 52.2 give rise to dispute and differences regarding the interpretation of " if the nature or amount of any varied work relative to nature or amount of the whole of the works or any part thereof, is such that," the rate or price contained in the contract is rendered inappropriate or inapplicable. The points on which difference of opinion may arise include: (1) The increase in the quantum of work vis-a- vis the original quantity under a given item. The author is of the opinion that the variation in the quantity of an item of work in excess of 20 to 25 % of the originally agreed quantity may be used as a basis for rendering the agreement rate inapplicable. These percentages are generally provided in other popular forms of standard form contracts in India. However, the new edition of FIDIC eliminates this difficulty by expressly limiting the excess to 10% of the originally agreed quantity subject to other conditions.

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(2) Whether the new rate to be decided is to be applicable to the quantity in excess of the originally agreed quantity or whether for the entire quantity executed under the item in question. Invariably the Employer puts forth the plea that the quantity in excess alone will attract the new rate, the Contractor having been bound to execute to the originally agreed quantity at its tendered rate. The author is of the opinion that the provisions of Clause 51.1 and 51.2 together entitle the Contractor for payment for the entire quantity at the new rate. In this respect Clause 51.1, which empowers the Engineer .to increase or decrease the quantity, provides that "— effect, if any, of all such variations shall be valued in accordance with Clause 52." Cl a u se 5 2 .1 e xp r e s sl y p r o v id e s fo r ad d i tio n s to b e val u ed a t t he r al es a n d p r ic es s et o ul i n i he co ntr ac t." T he p r o v i so i n cl a us e 5 2 .2 c ar v e s o ut a n e x cep tio n l o i he ab o ve r u le. T he wo r d i n g u sed " a su itab le r ate o r price s hal l b e a gr eed " i f t he var ied wo r k " r end e r ed inappropriate o r inapplicable the rate or price contained in the contract"

leaves no doubt as to the intention o f the parties. On ce it is he ld that the variation renders the contract rate inappropriate or inapplicable it is for the full quantity and not only for the quantity in exc es s of the stipulated quantity. Unlike other contract conditions this provision does not stipulate any limit o f variation in respect of individual items. Under the circumstance it is difficult to interpret that the new rate would be applicable for quantity in excess of agreed quantity alone. It is concluded that there is no scope to interpret the provisions in any manner other than as suggested by the author. (3) Whether a contractor is bound to execute quantities before the parties mutually agree equitable rates or failing mutual agreement in respect thereof, the rates are decided in arbitration. FIDIC provisions, as already seen above, empower the engineer to fix provisional rates for the purpose of interim payments. The question may still arise in cases where (i) the Engineer unreasonably or under pressure from the employer holds that the agreed rates are applicable to the varied quantities or items of additional works and/or (ii) the provisional rates fixed by the engineer are not workable. It is submitted that answer to this question is not certain and free from doubt. It is advisable to keep the work in progress pending arbitration and if the adverse effect on the cash flow affects the progress its consequences will be on the party, which fails in arbitration. Whether the case will be governed by the decision of the Supreme Court considered above in Art. 5.3.1 14 , in which it was held that the contractor need not execute the work if rates for the varied work were not mutually agreed, is also debatable in view of the arbitration clause. It provides "that the obligations of the Employer, the engineer and the contractor shall not be altered by reason of the arbitration being conducted during the progress of the works." Some contracts expressly prohibit stoppage of work by the contractor due to ongoing arbitration. It is felt that the contractor should keep the work in progress pending settlement of the rates if the Engineer has fixed the rates provisionally for interim payments or the contractor is not sure that the final decision would go in his favour. Only if the contractor is sure of his entitlement to new rates and the rates are not agreed upon or the rates are not

24 Bombay Housing Board v. Karbhase Naik & Co. AIR 1975, SC 763.

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fixed by the engineer for interim payment the ratio of the said decision can be attracted to the case, it is submitted. 5.5.1

FIDIC 1999 Edition

In this edition Clause 13 under lhe heading 'Variations and Adjustments' includes the provisions similar lo Clauses 51 and 52 of the earlier edition. However certain provisions of Clauses 3.3 and 12 are also relevant in so far as giving oral instructions and evaluation of the varied work is concerned. Clause 3.3 is considered in Art. 5.8.1. The other provisions are briefly considered below: Clause 13.1 This provision empowers the Engineer to initiate variations at any time prior to issuing the Taking Over Certificates for the works. There are two methods for initiating variations: firstly, by issuing an instruction and/or secondly, by requesting the contractor to submit a proposal. The scope of variation is more or less the same as covered by Clause 51.1 of the earlier edition including the stipulation that the contractor shall not make any alteration or modification till the engineer instructs or approves a variation. Question of approval of a variation would arise in the case where proposal to vary is submitted by the contractor under clause 13.1 and/or 13.2. Clause 13.2 This sub clause empowers the contractor, suo moto, at any time, to submit to the engineer a written proposal which, in the opinion of the contractor will, if adopted, accelerate completion, reduce the cost of work either of executing or maintaining and operating the works, improve the efficiency or value of the completed works or otherwise be of benefit to the employer. The cost of preparation of the proposal is to be borne by the Contractor and it is to include the items listed in sub clause 13.3. The provision further stipulates that if the proposal is approved by the engineer and involves a change in the design of the part of the permanent works, then unless otherwise agreed by both the parties, the contractor is to design that part of the work under his general obligations listed in clause 4.1(a) to (d). If the change results in a reduction in the contract value the engineer is to determine a fee, which shall be included in the contract price. The quantum of fee shall be half (50 %) of the difference between the following amounts: i)

ii)

Reduction in contract value as a result from the variations, excluding adjustments for changes in Legislation and escalation payable under clause 13.7 and 13.8 respectively, and Reduction in the value to the employer of the varied works on account of reduction, if any, in quality, anticipated life or operational efficiencies.

It is further stipulated that in case the amount (i) is less than amount (ii) no fee shall be payable. In short, the fee payable would be 50% of the net saving effected in the o r i gi na l co s t o n acco u nt o f c h a n ge s s u g ge s te d b y t he co nt r ac to r a f t er d ed uc ti n g r ed u ct io n i n val u e o n a cco u nt o f q ual it y, l i fe, e f fi cie n c y, e tc. o n ac c o u n t o f t h e ch a n ge s so mad e.

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Clause 13.3 This provision prescribes the procedure of variation in the case of the en g i ne er requesting the contractor to submit a proposal under clause 13.1. On receipt of suc h request the contractor may promptly give notice to the engineer if the contractor cannot comply with the request. In the notice so issued the contractor is expected to give reasons with supporting particulars such as the contractor's inability to readily obtain the goods required for the variations, etc. In such an event the engineer is empowered to cancel, confirm or vary the instruction under clause 13.1. If the contractor accepts the request he should promptly submit description of the proposed work along with the program for its execution and modification, if necessary, to the program submitted under clause 8.3 and extension for time for completion, if warranted. The contractor must include in his proposal evaluation of the variation. The engineer is to respond to this proposal with approval, disapproval or comments. The contractor must not delay any work while waiting for the response. The provision contemplates each instruction to execute a variation, with any requirements for the recording of costs, to be issued by the engineer to the contractor, who shall acknowledge the receipt. Each variation is to be evaluated in accordance with Clause 12 unless the engineer instructs or approves otherwise in accordance with this clause. In short, the engineer acting under the provisions of clause 13 is empowered to decide the cost of variations independent of clause 12 or in accordance with clausel2. The provisions of sub clause 12.3 and 12.4 are relevant for the purpose. The said provisions incorporate for evaluation of the contract price 'except as otherwise stated in the contract' as follows: i) For each item of work, the appropriate rate or price shall be the rate or the price of item specified in the contract or, ii) If there is no such item, the rate or price specified for similar work included in the contract. iii) A new rate is to be agreed in the case of two contingencies contemplated in sub clause (a) and/or (b). Sub clause (a) provides for excessive variation in quantities in respect of items included in the contract but not specified as a " fixed rate item". An item in the bill of quantities qualifies for a new rate, if it is not a fixed rate item and further fulfills the following three conditions: 1) The measured quantity of the item is changed by more than 10 % from the quantity of the said item in the BOQ or other schedule. 2) This change in the quantity multiplied by the agreed rate exceeds 0.01 % of the accepted contract amount, and 3) T his c h a n ge i n t he q ua n ti t y d ir ec tl y c ha n g e s t he co s t p e r u ni t q ua nt it y o f t hi s ite m b y mo r e t ha n 1 % . T he ab o v e p r o vi s io ns li mi t p o wer to o r d er v ar ia tio n s to ma x i mu m 1 0 % o f t he o r i gi n al q u a nt it y o f a n y it e m o f wo r k a t t h e o r i g i nal l y st ip ul ated r a te a nd e n ti tle s t he Co n tr ac to r to cla i m p a y me n t at ne w r ate s i f t h e ch a n ge i n q u a nt it y mu l t ip li ed b y t he sp e ci f ied r ate fo r t he i te m i n q u e st io n e xce ed s 0 .0 1 % o f t he acc ep t ed c o nt r ac t a mo u n t. T hi s c la u se i s complicated and ill -d r a ft ed . The words "this cha n ge in quantity" wh et h er i s i n te nd ed to mean the difference in quantity between the "measured q ua n ti t y" and the quantity shown i n the bill of quantities or the total measured quantity, to which the quantity shown in the bill of quantities gets changed, is li ke l y

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to create confusion. The words "such specified rate for this item" in the second condition obviously means the agreed rate shown in the BOQ, because that is the only rate specified at that stage to determine if the new rate is required to be worked out. It appears that the first and third provisions would be satisfied if the quantity of a given item exceeds by more than 10 % from the quantity of the item in the BOQ if "the cost per unit quantity" is also to mean the originally agreed rate. The drafters in such a case would not have used words different from the words used in second of the condition. It has to be presumed that the third of the above provision stipulates that a new rate will be payable only if the unit cost of the item in question due to changed quantity, costs more than 1% of the accepted unit rate. But at this stage it is not decided if the new rate is at all attracted. One possible view is that if the first two conditions are satisfied, the new rate should be worked out and it will be payable only if it is found to be more than 1% of the originally agreed rate. Sub clause (b) of clause 12.3 deals with fixing the rate or price for variations and adjustments ordered under clause 13 and for which no rate or price is specified in the contract and no specified rate or price is appropriate because the varied item is not of similar character or is not executed under similar conditions as any item in the contract. The sub clause 12.3 further stipulates that each new rate or price on account of application of either (a) or (b) shall be derived from any relevant rates or prices in the contract with reasonable adjustments. And if there is no relevant rate or price for the derivation of new rate or price the rate shall be derived from the reasonable cost of executing the work including reasonable profit duly accounting for any other relevant matters. The provision empowers the engineer to determine a provisional rate or pricefor the purposes of interim payment certificates.

5.6 OMISSION IN SCOPE OF WORK Clause 12.4 of FIDIC Form and clause 13 of CPWD Form deal with deletions/ omissions. The provisions of the said clauses are considered as follows :

5.6.1 Clause 12.4 of FIDIC This clause deals with evaluation of omissions. It stipulates that whenever the omission of works forms part of variations, the value which has not been agreed, if ( a) Co nt r ac to r wi l l i nc ur ( o r h as i nc ur r ed ) t he co s t wh ic h b ut fo r s u c h o mi s sio n wo u ld h a ve to b e d ee me d to b e co ver ed b y t h e a ccep t ed co n tr a cted a mo u nt ; ( b ) O mi s sio n o f t he wo r k wi ll r es u lt ( o r ha s r e s u lt ed ) i n t h e s u m no t fo r mi n g p ar t o f t he co ntr act price; and ( c) This cost is not d ee med to be i nc l ud ed i n t he evaluation o f an y s ub s ti t ute d

work. T he Contractor wi ll be en ti tled to additional a mo u n t only when a ll the three conditions ar e satisfied and the Contractor has given notice to the Engineer

accordingly, with supporting particulars. The provision empowers the Engineer to determine the cost which is to be included in the Contract price under the power vested in him by the provisions of clause 3.5. The said provisions require the Engineer to consult each party a nd endeavor to reach an agreement by the parties. If such an agreement is not achieved, the Engineer shall make a fair determination and give notice to both the parties with supporting particulars. The parties are to give effect to each such agreement or determination unless and until it is revised under clause 20 pertaining to claims, disputes and arbitration.

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In respect of omissions, the Contractor is entitled to claim extra for the cost of omitted work, if the omitted work was such that its cost was included in the rate/price forming part of the contract price provided that the cost is not deemed to be included in the evaluation of any substituted work. The addition to which the contractor will be entitled will be in the form of compensation for the loss of overheads, expected profit besides cost of preliminary works/part of work if executed and rendered valueless. For the purpose of evaluating the addition to the contract sum on account of omissions in the work, due credit shall be given to the cost of any substituted work. The deletion of part or whole of the work and its consequences are provided for in clause 13 of the C.P.W.D. From. 5.6.2

Clause 13 of C.P.W.D. Form

Clause 13 reads: " No compensation for alterations in or restriction of work to be carried, out. "If at any time after the commencement of the work the President of India shall for any reason whatsoever not require the whole thereof as specified in the tender to be carried out, the Engineer-in-charge shall give notice in writing of the fact to the contractor who shall have no claim to any payment of compensation whatsoever on account of any profit or advantage which he might have derived from the execution of the work in full, but which he did not derive in consequence of the full amount of the work not having been carried out, neither shall he have any claim for compensation by reason of any alterations having been made in the original specifications, drawings, designs and instructions which shall involve any curtailment of the work as originally contemplated. "Provided that the contractor shall be paid the charges on the cartage only of materials actually 'and bonafide brought to the site of the work by the contractor and r end er ed s ur p l us a s a r e s ul t o f Ihe ab a nd o n me nt o r c ur t ai l me n t o f t h e wo r k o r a n y p o r tio n t h er eo f a nd t h e n t a ke n b ac k b y t he co nt r ac to r , p r o vid ed ho we ver , t ha t t he En g i neer - i n -c h ar ge s ha l l h a ve i n a ll s uc h c as es th e o p t io n o f ta k i n g o v e r all o r a n y s uc h mat er i al s a t t he ir p ur c h a se p r ice o r a t lo cal c ur r e n t r a te s wh i c h ev er ma y b e le ss . I n t h e ca s e o f s u ch s to r e s ha v i n g b e e n i s s ued fr o m Go ver n me nt sto r e s a nd r et ur ned b y t he co n tr ac t o r to the Go ver n me n t st o r es cr ed it s ha ll b e gi ve n to hi m b y the Eng i neer - i n - C har g e at rates not exceed i n g t ho se at wh ic h t h e y wer e o r ig i na ll y is s ued to h i m, a f ter ta k i n g into consideration an y deduction fo r cl ai ms on acco u n t o f any deterioration or damage while in the custody o f the co n tr ac to r a nd in this r esp ec t the decision of the Engineer-in-Charge shall b e fi na l."

Clause 13 Analysed An understanding of proper interpretation of the above clause is necessary. Firstly, it must be remembered that this provision, being an 'exemption clause' in the printed form, will be strictly construed against the Employer. As such for the provisions of this clause to be applicable the following conditions must be satisfied. (i) The notice in writing should have been given by the Engineer-in-charge . This stipulation is mandatory. 25 (ii) Secondly, such notice should have been given by the Engineer-in-charge 'after the commencement of work'. Thus where after the issue of the work order but before the commencement of the work, an order cancelling the contract is given,

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the Department cannot avoid liability to pay compensation to the contractor for the breach of contract. (iii) The contents of the first paragraph clearly point out two contingencies: a) "The full amount of the work not having been carried out", and b) Alterations in the work "which shall involve any curtailment of the work as originally contemplated." The above two contingencies can occur only after the commencement of the work and, therefore, the words in the para-heading "restriction of work" can mean restriction to the stage executed and, therefore, can encompass within its sphere total abandonment of the whole of the balance work, it is submitted. This could result on the one hand, in the abandonment of the whole project in certain contingencies only, for example, project such as construction of dams, canals, roads or rails, etc. is dropped and on the other hand it may result in "restriction of the work" to the stage already executed, for example, not constructing the top storey or two - of a multistoried building project. The words "materials —rendered surplus as a result of the abandonment or curtailment of the work or any portion thereof in the second paragraph lend support to this interpretation. 25 Bombay Housing Board v. Karbhase Naik & cO., AIR 1975,SC 763(767).

( i v) T he wo r d s " no t r eq u ir e t he wh o l e t he r eo f a s sp ec i f ied i n t he le nd e r lo b e car r i ed o ut ." ca n mea n : t he p ar t o f i t ( wo r k alr e ad y e x e cu ted i nc l ud ed ) ma y b e car r i ed o ut as sp eci f ied i n t h e te nd er a nd t h e b a la nc e wo r k i s to b e c ar r i ed o u t wi t h " al ter ed

specifications, drawings, designs and instructions." I n other words a possible view to b e taken can be stated thus: "T he President o f India shall fo r any reason whatsoever not require the whole work to b e carried out as

specified in the tender; but can modify, alter or restrict its scope and have it executed in any manner without abandoning the whole work." The use of the words ".as specified in the tender" following the words "the whole thereof", it is submitted, makes the dual interpretation possible. If this indeed is the case, the words of para heading can control the meaning and "restriction" of work cannot by itself mean total abandonment of the work or project. But the use of words "abandonment or curtailment of the work or any portion thereof in the second para makes this interpretation weak if not untenable. The doubt can be eliminated by amending the contract by deleting the words "as specified in the tender" in the opening sentence without causing any misunderstanding in the remaining part, if the intention of the parties is to cover total abandonment of the balance work as a whole or in part. 26 (v) Lastly, the words "The President of India shall for any reason whatsoever not require the whole (work) as specified in the tender", make this provision inapplicable to cases where the deleted work is not, in fact, totally abandoned. "Under the terms of most contracts, an employer who exercises the power to omit work must genuinely require the work not be done at all, and cannot exercise such a power with a view to having the work carried out by someone else." 27 ILLUSTRATIONS

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(1) In a case decided by the Patna High Court, 28 the State, with a view to terminate the contract and get it executed through other agency with changed designs and specifications wanted to rely on the clause, which read: "3.11 if at any time after award of the contract, the Government for any reason whatsoever shall decide to abandon, reduce the scope of the work, or shall not require the whole or any part of the works to be carried out, the Engineer-in-charge shall give notice in writing to that effect to the contractor. The contractor shall not have claim to any compensation whatsoever on account of any profit or advantage which he might have derived from the execution of such works in full but which he did not derive in consequence of the foreclosure or curtailment of the whole or part of the work"^ ' 26 For example, see the wording of the clause in Illustration No. (1) below. 27 Hudson's Building and Engineering Contracts, 10th Ed. Pp. 340 and 533. 2 8 Singh v. State (FB), AIR 1991 Pat. (168)..

M/s. Pancham

I t wa s he ld : " I n v ie w o f t h e a fo r e sa id c la u se 3 .1 1 t he Go v er n me n t fo r an y r e a so n wh at so e v er ma y d e cid e to ab a nd o n o r to r ed uc e t h e sco p e o f t he wo r k. T h e exp r e ss io n 'ab a nd o n ' me an s, t h e ab a nd o n me n t o f t h e p r o j ect i t sel f . I n o th er wo r d s, th e Go ver n me n t d o es n o t wa n t to p r o c eed wi t h t he co ns tr uc tio n o f t h e p r o j ect. I n th e p r e se n t ca se it i s n o t t he st a nd o f t h e S ta te t h at t he p r o j ec t it s el f ha s b e e n ab a nd o ned . I n t he p r es e nt ca se t he St ate is ve r y mu c h a n x io us to p r o c eed wi t h t he co n s tr uct io n o f t he p r o j ect b ut o n t he b a si s o f t he d i f f er e n t drawing a n d d esi g n. As s uc h t h e ac tio n o f t he S tat e i s no t r e f er ab le to cla u se 3 .1 1 o f t he a gr e e me n t. T h er e is no e sc ap e fr o m t he conclusion that t h e g r o u nd fo r c a nce ll ati o n o f th e co ntr ac t d o es not flow from any o f the terms of t he agreement, it i s de hors a n y terms of t he contract and as such can be the subject matter of j ud ic ia l review." ( 2 ) A contract for erecting a factory provided for free issue of steel by the owner and

its fabrication by the contractor in accordance with the instructions of the Architect. The architect subsequently wrote to the contractor that the owner had awarded the contract for fabrication of structural steel to another company. T he contract contained a provision empowering "The Architect in his absolute

discretion and from time to time to issue written instructions or directions - - in regard to the omission - - of any work" and making it obligatory on the part of the contractor who "shall forthwith comply with all the instructions of the Architect." It was held 29 that the provisions of the contract would authorize the Architect, doubtless within certain limits, to direct that particular item of work - shall not be carried out. But the provisions do not authorize him to say that particular items so included shall be carried out not by the contractor with whom the contract is made but by some other builder or contractor. Such a power in the architect would be most unreasonable power, which very clear words would be required to confer. Exercise of power to issue variation order such as the one issued is thus outside the power conferred by the variation clause and, therefore, amounts to a breach of contract entitling the contractor to terminate the contract. (3) A contract for road work included an item of moving and spreading top soil. The specifications provided that if, top soil available at the site of work was insufficient, the engineer could order the contractor, in writing to obtain top soil elsewhere for which the agreement prescribed a rate. The engineer, rather than ask the contractor to bring soil from elsewhere instructed a third party to bring more soil from

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elsewhere on to the site. It was held that this was a breach of contract, on the part of the employer. The power to omit the work from the contract, did not entitle the owner to take away part of the contract .work so that it might be given to another contractor. 30 29 Carr Y. J. A. Berriman Pyt. Ltd. High Court of Australia (1953) 27 ALJR 273. 3 0 Y. Reed & Stuart Pyt. Ltd. High Court of Australia (1974) 12 BLR 55.

5.7

DECISION REGARDING ARBITRATION?

RATE - WHEN

Commissioner for Main Roads

N O T O P E N TO

Where in a contract Clause 13A provided for the power to the Engineer-in-charge to make any alteration in, addition to, etc. as per normal provisions and ended with the wording - "In the event of a dispute (regarding rate fixed by the Engineer-in-Charge) the decision of the Superintending Engineer of the circle shall be final" and the arbitration Clause 14 opened with the wording "Except where otherwise provided in the contract all questions and disputes ... shall be referred to the sole arbitration." It was held by the Madhya Pradesh High Court31 that the dispute regarding rate cannot be referred to an arbitrator appointed under Clause 14. The Supreme Court, upheld this decision of the Madhya Pradesh High Court. 32

5.8

CHANGE ORDERS MUST BE WRITTEN

The clause relating to additions and alterations generally makes it clear that the contractor is bound to execute the extra or additional work in accordance with any instructions, which may be given to him in writing signed by the Engineer-in-charge. It is a common experience that engineers on site give a number of instructions and orders, including change orders, orally. For the present the question arises as to whether the contractor is duty bound to follow oral orders or instructions which amount to variation or deviation of the contract. In ordinary language, the use of 'may' implies option. But legally 'may' might mean 'must'. The meaning will have to be construed in the context the term is used. It has been pointed out in Ch. 3 that a contract with the Government to be binding must be written. As such any amendments, modifications or additions in respect of that contract must also be in writing. Not only that but the amendments, modifications, or additions must be made by a person who has the authority from the Government to that effect. Assuming that the Engineer-in-charge is empowered by the Government to make changes in the contract, 'it is necessary that all orders which make changes resulting in additions and alterations must be written and signed by him. He may not be able to delegate the authority to his subordinate. Thus, 'may' in this clause means 'must'. Many a time, a contractor writes to the engineer for confirmation of the oral order given to him. In a great number of cases, he receives no reply to his letter. Should the contractor carry out the extra work? The answer suggested is no, unless he expects no extra payment. The Supreme Court of India has held that to allow a clai m o n acco u n t 3 1 Dandakaranya Project v. P. C. Corporation, AIR 1975 M.P. 152. 3 2 M/s. P.C.Corporation Ltd. v. Chief Administrator.Dandakaranya Project,AIR1991SC957. 3 3 Dutt Pandit, AIR 1999 SC 3196.

State of J. & K. v. Dev

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o f d e via tio n /a lte r at io n, p r e vio u s p er mi s sio n i n wr it i n g o f t he au t ho r i t y is ne ce s sar y. 3 3 I n t he sa i d case , o n e o f t he co nd i tio n s p r o v id ed a s f o llo ws : " T he co n tr a cto r s h al l no t i n an y wa y al ter t he wo r k s or a n y p ar t t h er eo f i n r e sp ec t o f d es i g ns , q ual it y, mat er ial s or sp ec i fic at io n s wi t h o ut t h e p r e v io us p er mi s sio n i n wr i ti n g o f t he E n gi n eer . .."

T he S up r e me Court se t as id e a war d al lo wi n g t h e cl ai m mad e b y t he co nt r ac to r fo r ex ca va tio n d o ne at t he original site, wh ic h wa s ab and o n ed , ho ld i n g t ha t ad mi tted l y th er e wa s no written order though h e wa s orally promised payment. T he decision mentioned above was held as not applicable in a case decided by the

Delhi High Court in which a number of extra items were ordered and got executed and the engineer had proposed for approval rates for eight items which were not accepted by the contractor and in respect of the other items there was no decision of the authority placed on record to show that the decision had attained finality and as such the case was considered on merits by the arbitral tribunal. The condition in the contract made it obligatory on the part of the contractor to submit every month an account giving particulars of the extra or the additional work. A breach of this provision by the contractor was also not urged. The award was upheld. 34

5.8.1 Absence of Written Variation Order : Contractor When not Bound to Execute the Extra Work The provisions made in the contract, as considered above, empower the employer through his architect or engineer to order extra or additional work. These provisions expressly limit the power to architect/engineer to order the extra work without requiring the prior consent of the employer. When variation is ordered with or without the consent of the employer, the agreements generally provide for a written order. Under these circumstances the contractor need not execute the extra work unless he is served with a written order. Some agreements do provide that if any variation is orally ordered, the contractor should in writing confirm the oral order and if the engineer/architect does not contradict the same within the stipulated time limit, the variation order would be deemed to have been issued in writing. For example, FIDIC Conditions, 1999 edition contains clause 3.3. The said provision stipulates that if oral instructions are issued to the contractor by the engineer or delegated assistant who receives the written confirmation from the contractor within two working days and does not reply by a written rejection and/or instruction within two Working days after receiving the confirmation then the confirmation issued by the contractor shall constitute the written instruction of the engineer or delegated assistant, as the case may be. The case in illustration (1) below is an excellent illustration of what happens when work is executed without a written order. 34 D.S.A. Engineers v. Housing & Urban Dev. Corporation, 2004(2) Arb. LR 33 (Delhi).

I LLU ST R AT I O N S (Ij

T he Co ur t sta ted t he f act s as fo l lo ws :

" No w o n p er u s al o f t h e r eco r d , i t i s c lear t hat t h e p eti tio n er s h ad i n v ited te nd er s fo r allo tt i n g wo r k o f t he va lu e o f ab o u t R s. 5, la cs . W hi le t ha t wo r k wa s b ei n g car r ied o ut , ad d it io nal wo r k was ad mi tted l y a llo tt ed t o t he Re sp o nd e n t s o f t he v al u e o f

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ab o u t R s. 10 la cs i n r ela tio n to wh i c h a s ub sid iar y co n tr ac t wa s e nt er ed i n to . Acco r d i n g to t he R esp o nd e n t s, ho we ver , f ur t her ad d i tio n al wo r k wa s al l o tted to hi m wo r t h about R s. 25 lacs and t he present dispute relates to payment fo r t h i s ad d it io na l wo r k wo r t h about Rs. 25 lacs, wh ic h according to the Respondents, wa s a llo tt ed to hi m pursuant to the oral instructions by the officer of the petitioners and was carried

out by him. I t wa s observed:

"It is thus clear that the entire dispute between the parties relates to the second additional work which, according to the Respondents, was allotted to the Respondents by the officers of the petitioners orally. The petitioners have relied on clauses 41 and 42 of the standard general conditions of contract. In my opinion, the provisions of clauses 41 and 42 of the standard general conditions of contract are to be read and interpreted in the light of the provisions of Article 14 of the Constitution. The petitioner is the State and, therefore, is bound by the guarantee of Article 14 of the Constitution. As a result of series of judgments of the Supreme Court, it can now be taken as settled law that the State and its instrumentalities cannot enter into contracts without giving an opportunity to every person who may be eligible to compete for that contract. "Even the works which can be given additionally to existing contractors in exercise of powers under clauses 41 and 42 have to be given pursuant to a written contract. The provision in clause 41 which permits allotment of work by verbal orders, which, no doubt, have to be reduced to writing in the form of a formal instrument, has to be restricted to such work which is of an urgent nature or is of marginal nature. Insofar as the present case is concerned, even if it is assumed that the work worth about Rs. 25 lacs could have been allotted by verbal orders nevertheless, those orders are required to be reduced to writing in the form or formal instrument by an officer who is competent to do so. Even if the requirement of a formal instrument is taken to be not mandatory, the requirement of sanction being given to such a work by an officer who is competent to do so, in my opinion has to be held to be mandatory. Perusal of clauses 41 and 42 of the standard general conditions of contract together shows that the power vests in the Engineer." It was held that the Assistant Engineer who was supposed to have signed the second and final variation statement was not an Engineer within the meaning of this contract. It was further held that an Assistant Engineer is Engineer's representative as distinguished from the Engineer and, therefore, even assuming that the second and final variation statement was signed by Assistant Engineer, it could not be said that he was an officer competent to sign that statement or sanction that work so as to bind the petitioners. T he Ar b i tr ato r had r eco r d ed a f i nd i n g t h at t he As si st a nt E n gi n eer wh o was s up p o sed to h a ve s i g ned t h e s ta te me n t wa s a competent o f f icer . T he Arbitrator in th e Award had observed t hat e ve n i f it i s a s s u me d t h at t he seco nd a nd f i na l variation st at e me n t d o es no t e xi s t t he n al so , t h e petitioners wer e li ab le to ma k e payment to t he Respondents fo r t he wo r k carried o u t. T he se observations, it was he ld , we r e clearly contrary to c la u se s 41 and 42 of t he standard general conditions of th e contract

because if existence of the second and final variation statement is not established th e n t h er e is no document on the basis of which liability can be fastened on the

Railways. For making the petitioners liable for making payment for the work as per th e terms of the contract a written document signed by a competent authority is

absolutely necessary. Taking an over all view of the matter, therefore, the Award was set aside and the Railway was awarded the cost. 35

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(2) Silence does not amount to acceptance During the course of execution of the contract between the State of Rajasthan and a contractor, for construction of drainage siphons on a canal, the Assistant Engineer wrote to the contractor that it was proposed to increase the number of R.C.C. pipes and the steel content in the R.C.C. work in the bank portion of the canal. He, therefore asked the contractor to let him know whether the contractor would like to take up "the additional work at the same rates and the applicable rates of the schedule" as provided in the agreement. The contractor wrote back to the AssistantEngineer that he would execute extra work other than that agreed upon in the agreement at 40% above the Chambal Schedule of Rates. The Assistant Engineer to this letter of the contractor sent no reply. It was argued that the silence on the part of the Assistant Engineer amounted to implied acceptance of the rate quoted by the contractor. This is what the Rajasthan High Court observed while dealing with this aspect:-3 * "..I do not think there is any warranty for the above contention. There is a clear distinction between an act done or omitted to be done by an officer of the Government and by the Government. An officer of the Government does not represent the Government unless he is authorised to do so. In the present case, there is nothing to suggest that the Assistant Engineer had the requisite authorisation on behalf of the Government. Unless the authority, actual or ostensible, to enter into a contract binding on behalf of the Government is established, an act or omission on the part of the public officer cannot form the basis of plea of estoppel against the Government. That apart, I fail to understand how omission to repudiate the proposal put forward by the plaintiff for charging enhanced rates would amount to an implied agreement to pay at the enhanced rates". An authority of the Supreme Court was cited wherein the Supreme Court had held that mere silence cannot be deemed to be acquiescence. 37 It is also made clear in Chapter 3 that there cannot be an implied contract with the Government in view of Art. 299 of the Constitution. The plea of implied acceptance in the absence of a written acceptance thus fails in the case of Government contracts and the contractor 35 36 37

Union of India, v. M/s. Arora Associates.AIR 2003 Bom. 477. State v. Motiram, AIR 1973 Raj. 225 (228). Union of India v. Watkins Mayor and Co., AIR 1966 SC 275.

is we ll ad vi sed to i n si st o n wr it te n o r d er s o f t he a ut ho r is ed e n g i ne e r b e fo r e h e ex ec ut e s t he e x tr a o r ad d itio n al wo r k. Ve r b al a s s ur a n ce s ar e, it i s p o i n te d o ut, o f no co n seq u e nce , I n t h e sa m e ca se t he R aj as t ha n Hi g h Co ur t o b ser ved :

"Assuming fo r a moment th at t he assurances as alleged by the plaintiff we r e i n fact given by t he Assistant Engineer and Executive Engineer even then they are of no consequence. Both these officers were deputed to look after the contract works. They had no authority to give assurance for payment at enhanced rates and this fact was within the knowledge of the plaintiff. No estoppel can arise from the representation of the agent unless it is within his actual or ostensible authority to make it". What happens if the contractor fails to get a written order? The dispute between the parties would then be whether the alleged work is covered in the contract by the rates agreed upon or not. Both the sides would be putting their rival interpretations and the contractor would be in a precarious position. If he does not carry out the oral order or leaves work at his own risk and cost then he would be subject to all the penalty clauses. On the other hand if he executes the work under protest, he can expect justice at the hands of the arbitrator or in the absence of an arbitration clause in the

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contract, by taking the matter to the Court. It would be the arbitrator or the Court, as the case may be, which would be resolving the dispute. ILLUSTRATION A contract contained a usual provision stipulating that no works beyond those included in the agreement would be paid for without a written order from the employer and the architect. During execution of the works the employer required certain work to be done which he insisted was included in the contract. The contractor on the other hand insisted that the work was not within the scope of the contract and must be paid for as an extra. It was held by the Privy Council that it was open to the arbitrator, if he concluded that the works in question were not in fact included in the contract, to hold that the employer had implicitly promised to pay for the said works. 38 The dispute as mentioned earlier would be as to whether a particular work falls under the contract and is to be paid for at the agreed rates or whether it is a wprk outside the contract for which no rates are fixed under the contract. In the first case the claim would arise under the contract pursuant to its terms. In the second case the claim would be outside the contract on the principle of quantum meruit or Section 70 of the Indian Contract Act. Where the claim is of the first category that is, arising out of the contract it is subject to the terms of the contract. One of them usually stipulates that extra work will not be paid for unless a claim in writing is made within a specified time to a particular person. It is necessary to ensure payment for extra work done, that the contractor must submit a written claim as specified in the contract because the condition in the contract is valid and enforceable. 39 38 39

Malley v. Liebe: (1910) 102 L.T. 616. Privy Council. Abercrombe and Williams v. Vandiver, 126 Ala, 513 So 491.

I I lhe a u t ho r i tie s d o no t accep t h is c la i m, a nd t he ar b itr ato r o r t he Co u r t co ncl ud es th at t he wo r k d id ar i se o ut o f t h e co ntr act , t h e co n tr a cto r ma y no t b e ab le to g el hi g h er r ate s t ha n a gr ee d . Fo r , u nd er t he ter m s o f t he co ntr act , t h e o r d er o f t he En g i neer - i n -c h ar ge i n wr i ti n g had to b e o b t ai ned b e fo r e t he wo r k in vo l vi n g ad d it io na l e xp e n se s wa s exe c uted . I n l h e ab s e nc e o f a n y s u c h wr i tt e n o r d er it i s no t o p en to t he Co ur t lo h o ld t h e Go v er n me n t l ia b le fo r e xtr a e xp e ns es b y ap p l yi n g so me p r i n cip le s o r r u le ana lo go u s to es to p p e l. T he Raj a s t ha n Hi g h Co ur t h ad al so he ld i n t he ab o ve ca s e t ha t u nd er t he cir c u ms t a nc es t h e co ntr a cto r i s n o t en ti tl ed to ge t i ncr ea sed r a te s o n t he b a s is o f q ua n t u m me r u it t h at i s j u s t a nd r ea s o nab le va l ue o f t he wo r k d o ne . 4 0

5.8.2 Contractor need not execute the work unless and until the rates are finalized I f the variation order is issued in writing duly signed by the person authorised by the

terms of the contract to do so, and if the terms of the agreement require that the parties mutually agree upon the rates/cost of the varied work, the contractor need not execute the work unless and until the rates are finalized. 4 ' It was observed: "We do not think that the respondent was bound to carry out the additions and alterations as there was no reply, to the notice stating the rates it intended to charge. But it was free to commence and complete the work on the basis that since the rates quoted by it were not accepted, it would be paid at such rates to be fixed by the Engineer-in-charge and that if it was dissatisfied with the rate or rates fixed by the

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Engineer-in-charge, it could raise a dispute before the Superintending Engineer and that the time limit for completion would be extended in all cases of additions or alterations as stated in the last sub-para of clause 14. "The High Court was of the view that clause 14 had no application because it thought that the respondent was bound to carry out the work as directed by the Engineer-incharge even when there was no agreement as regards the rate to be charged for the extra work, as the nature of work in some cases would be such that if the work, was not completed at the time when the work was to be completed, the contractor would have to do much extra work over and above the actual work involved. The Court also said that clause 14 gave the Engineer-in-charge an absolute power to fix the rate and that would be unjust and therefore the Court decreed in full the amount claimed under items A-3 and A-4. "We think that until the rates were settled by agreement the respondent was under no obligation to carry out the additional or altered work. The respondent could legitimately have said that in the absence of scheduled rates in the division for the type of work in question or an agreement in regard to the rates, it was not bound to carry out the additional or altered work. We are not satisfied that since the Engineer40 41

AIR 1973 Raj 225. Bombay Housing Board v. Karbhase Naik & Co. AIR 1975, SC 763.

iii -clmrge d id no t e x er ci se hi s lib er t y to c a nc el t h e o r d er , t her e wa s a concluded co n tr a ct b e t we e n t h e parties. T he failure to canc el t h e o r d er fo r additional o r alter ed wo r k o n r ece ip t o f t h e notice specifying th e r at e wo u ld no t result in a n agreement as to t h e r a le lo be charged. T he clause only gave th e Engineer - i n -charge t he liberty to ca nce l t h e o r d er a nd g et t h e wo r k done by another contractor. The fact that an exp r e ss power was given to the Engineer-in-charge by t he clause 10 cancel the o r d er i f he did not agree to t he rate would not mea n that the failure to can c el the o r d er would result in an agreement as to the rate or rates. The proviso in Clause 14 was

intended to cover cases where the notice specifying the rate was not given by the contractor, or where, even though the notice was given, the Engineer-in- charge did not cancel the order in the event of his not agreeing to the rate specified in tne notice. We are of the view that in the absence of some positive act on the part of the Engineer-in-charge agreeing to the rate, there was no agreement as to the rate and that the respondent was not bound to carry out the work". Whereas mere failure to cancel the order for additional or altered work on receipt of the notice specifying the rate could not result in an agreement, it is equally true that the contractor cannot be compelled to accept the rate unilaterally fixed by the Engineer-in-charge. The Supreme Court has duly accepted this position, it is respectfully submitted and indicated that in case the contractor is not satisfied about the rate or rates fixed by the Engineer-in-charge, he may raise a dispute and the Superintending Engineer will decide the same. It lays down firmly the law to the extent of non-liability of the contractor to execute altered or additional work till the Engineer-in-charge communicates his acceptance of the rates submitted by the contractor or the contractor accepts the rates proposed by the Engineer-in-charge, it is submitted. Failure of the contractor to execute the extra work till there is an agreement in respect of the rates would not amount to a breach of the contract on his part. The same cannot, however, be said to be the case in respect of additional work, and also in

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respect of extra work for which the price is stipulated in the contract.

1

Sometimes, it so happens that the engineer issues directions which in the opinion of the contractor are not only unwarranted by the facts of the case but amount to an extra, if executed. He is bound to comply with the instructions. Both the engineer and the owner make it clear that for executing the work in the manner directed no extra payment would be made. What should the contractor do? The Supreme Court of India has held, as stated above that the contractor is not bound to do additional or altered work unless rates for the same are mutually agreed upon. The Supreme Court of Canada in a majority decision held a similar view in the case in which 42 the appellant, the main contractor for a bridgework, subcontracted the piling work to the respondent. During the execution of the piling work the employer's engineer insisted that many of the piles be driven to a greater depth than the respondent considered was required by the sub-contract. The respondent complained 42

Peter Kiewit Sons Co. of Canada Ltd. v. Eakins Construction Ltd. Supreme Court of Canada (1960) 22 DLR(2d) 465

to the appellant that the work was not required but was told to comply with the instructions of the engineer. Both the engineer and the employer made it clear that they would not authorize extra payment. The respondent claimed extra payment both from the employer and the appellant. Its action against the employer was dismissed. The action against the appellant also failed in the trial court, but in appeal it was held that the respondent's view of the meaning of the contract was correct. The Supreme Court of Canada took the view (majority) that if the engineer's instructions were not justified, the respondent's correct course was to refuse to carry them out without a variation order. The author is in full agreement with the dissenting view that this was an unrealistic course of action to propose. It must be remembered that many a time the terms of the contract are so difficult to construe that there can be a difference injudicial opinion as to its true meaning. If the contractor, who holds one view, is to stop the work, he will be under the threat of virtual financial ruin, if his view turns out to be not acceptable to the judiciary. To say that because under these circumstances the contractor was not prepared to stop work and so risk a ruinous loss which would have befallen him, if his view turned out to be erroneous, the employer will retain the benefit of all additional work without paying for it, would be to countenance an unjust enrichment of a shocking nature. Consider as an example the case discussed below: The appellate court stated the relevant facts thus: "The allegations of the plaintiff are that during the execution of the work, the plaintiff found several defects in putting up the foundation both for abutment and piers. The excavation had to be done deeper than the designed level and this necessitated further dewatering in the riverbed. The plaintiff, therefore, wrote a letter to defendant No. 2 on 25-10-1978 pointing out the difficulties in respect of excavation of foundation and dewatering. It was stated in the said letter that the rates in the tender for this work were far less than the cost which he was required to incur for carrying out this work. To the details of this letter, we shall come later, but suffice it to say at this stage that

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the differences started right from 24-10-1978... Briefly stated, the stand that was taken by appellant/defendant No. 2 was that under the stipulated conditions of tender, the plaintiff was not entitled to the additional amount or extra rates for excess excavation and dewatering." The trial Court allowed the claims. Being aggrieved by this judgment and decree, the appellant/State had preferred this Appeal. It was held: "It would be also important to observe that unexpected difficulty or expense is in general, no excuse for non-performance. The contractor in such a case cannot rely on his ignorance of such matters as defects in the soil nor any implied warranty by the employer that the bills of quantities, plans and specifications are accurate or that the work is capable of performance in the manner set out in the invitation to tender or limit his liability to exactly excavated stated quantities of work. More particularly, when t h er e i s a cl a us e t ha i t he co ntr acto r s h all acquaint himself wi t h t he si te, wit h t he locality a nd al l ma tt er s relating lo t h e co n tr a ct, he ca n no t ha c k o u t fr o m this co nd i tio n a nd sa y t ha t t he quantities mentioned therein ma y n o t b e complete o r t ha t nature o f so i l i s u n k no wn . He should visualize al l probable contingencies and also al l o t her matters, whi c h could in any way influence lender or the contract. Thi s risk i n s u c h contracts has to be laken by the contractors. He cannot resile and say that he was unaware o f the soil o r local conditions. I t was further observed: "In clause 14, it is clearly provided that, "the Engineer-in-

charge shall have power to make any alteration in or additions to the original specifications, drawings, designs and instructions that may appear to him to be necessary or advisable during the progress of the work, and the contractor, shall be bound to carry out the work in accordance with any instructions in this connection, which may be given to him in writing signed by the Engineer-in-charge and such alteration shall not invalidate the contract and any additional work which the contractor may be directed to do in the manner above specified as part of the work shall be carried out by the contractor on the same conditions in all respects on which he agreed to do the main work and at .the same rates as are specified in the tender for the main work." From this clause, it would be manifest that when the extra work in contemplation at the time of tender is done, for which the rates are provided in the original tender, the contractor cannot claim any extra rate. He can claim extra rate only if that class of work is not provided in the tender. The judgement of the trial Court was set aside. 43 The judgement contains observations of far reaching consequences throwing the total risk of uncertainties on the contractor with the State having no responsibilities at all, in investigating the site conditions, preparation of drawings and estimate of cost, etc. It is submitted with respect that the said observations do not lay down a good law. It is referred to here to show how the judicial opinions can vary and refusal by a contractor to carry out the work, which according to him is extra and therefore deserves to be paid for at new rate may prove disastrous to him. ILLUSTRATION A contract included a paragraph designed 'extra work' which the contractor would be paid, should extra work under any of the named items be ordered. The owner refused to permit the contractor to complete the work as agreed because the contractor

43 State of Maharashtra and others, Appellants v. Saifuddin Mujjaffarali Saifi, AIR 1994 Bom 48.

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refused to carry out an item of 'extra work'. The suit was filed by the contractor to recover damages for alleged breach of contract by the owner. The owner counterclaimed damages for alleged breach on the part of the contractor. The contention of the contractor was that there was no agreement on his part "to proceed with so called extra work, and hence the agreement to, the payment therefor was without mutuality and hence without consideration". On this ground, the contractor moved to have the owner's counter-claim d is mi s s ed . T he tr ia l C o ur t r e f u sed t h e co ntr a cto r 's ap p lic at io n ho ld i n g t h at t h e p ar a gr ap h i n t he co ntr act e nt it led 'e x tr a wo r k ' ca n no t he d i s so c iat e d fr o m t h e b ala nc e o f t he co n tr a ct. T he Ap p el lat e D i vi s io n r e ver sed t he d e ter mi n atio n o f t he lo wer Co ur t. T h at Co ur t he ld t h at t he co n tr ac t c o nt ai n ed no p r o vi sio n r eq u ir i n g t he co n tr a cto r to e x ec u te t h e wo r k me nt io ned i n t he p ar a gr ap h e n tit led 'e xtr a wo r k '. " I t me r el y s et s f o r t h a n a g r eed p r ice fo r s uc h s er vi ces u nd er t he cap tio n 'e xt r a wo r k '. T he Co ur t o f Ap p eal s r e ver s ed t h e d ec i sio n o f t he Ap p e ll ate D i vi sio n a nd a f fir me d th e d e ci sio n o f t h e lo we r Co ur t. T h e 44

Co ur t he ld , " i n o ur o p in io n, t he p r o vi sio n o f th e co n tr a ct f i xi n g t he p r ice to b e p aid fo r i te ms a s 'e x tr a wo r k ' cle ar l y i mp li es a n o b li g at io n to d o s uc h e xt r a wo r k a t th e st ip ul ated p r ic e a s r eq u ir ed ."

It is thus clear that under the clause mentioned in the beginning the contractor is obliged to carry out the extra work as would be ordered from time to to time during actual execution of the work and for which rates are provided in the agreement.

5.8.3

Interpretation of "During Actual Execution of the Work"

Clause 13 of one of the Standard Form Contract places an obligation on the contractor to carry out all extra items not included in the schedule and found necessary "during actual execution of the work", and an obligation on the Department to pay for such extra items. In one case the contractor claimed that the work tendered for was to be executed by 'pile driving' but it was actually done by 'jetting' having regard to the nature and condition of the soil at the sites, and that this was an extra item of work, for which he was entitled to extra remuneration. The State (employer) took the view that 'jetting' was not an extra item of work but only a revised and improved technical method of executing the work tendered for, and therefore, the contractor was not entitled to any extra remuneration. The matter was refereed to arbitration in accordance with the arbitration clause included in the contract. The arbitrator decided that jetting was not an extra item of work. The award of the arbitrator was set aside by the trial Court under the provisions of the Arbitration Act. The State appealed to the High Court. The High Court allowed the appeal and set aside the decision of the Court below. This case, decided under the Arbitration Act is mentioned here to study certain observations of their Lordships of the Kerala High Court which are set out below : "Before closing we wish to venture certain observations. Clause 18 provides for the successful tenderer executing an agreement before commencing the work. The agreement in this case was on 2-11-65. Consistent with clause 18 this must have been before the commencement of the work. This is also indicated by Ext. P-l, dated 7-1065, from the Chief Engineer to the contractor informing him that jetting has to be.

44 45

State v. K.P. Poulose AIR 1973 Ker. 242. De Martini v Elade Realty Corp., 293, N.Y. 779, 58 BE 2d, 519.

Building and Engineering Contracts

resorted to in the top strata, and asking the contractor meanwhile, to execute the agreement and start the work. We have again Ext. P-2 dated 21-2-66 from t he co n tr a cto r i n ti mat i n g t h at he ha s star ted t he wo r k o f d r i v i n g p i le s a t T ho p u n ip ad i. T he d i sco v er y o f t he s a nd y n at ur e o f t he so i l a t t h e si te s a t c er t ai n la yer s wa s b y th e r ep o r t o f t h e E xe c ut i ve E n gi n eer , P r ec hi R es ear c h I ns ti t ut e, d a ted 14 -9 -65, wh ic h wa s long p r io r to t he execution o f t he a g r ee me n t a nd t he co m me nc e me n t o f th e wo r k. O n t h e ter ms o f Clause 13 t he r e fo r e eve n if jetting is a n e xt r a it e m o f wo r k, it does no t ap p e ar lo b e one found necessary "in th e course of t he act u al execution of the wo r k" . I nd eed t he contractor's cla i m for extra p a yme n t for j etti n g ap p ear s lo have been r e j ected on this ground in a short but instructive o r d er , d a ted 3- 10-68 ... by the then C hi e f Engineer. He referred to Ext. P-l intimation co n ve yed b efo r e the execution o f the agreement, and held that therefore the claim for j etti n g as

an extra item was inadmissible. The contractor's attempt to have the decision reconsidered also failed ... Despite these the point that on the terms of Clause 13 the contractor was not entitled to extra payment was never raised before the Arbitrator, nor if it could b e raised at all, at any of the subsequent stages".

T he author respectfully submits that the contention that on the terms of Claim 13, the contractor was not entitled to extra payment has no force and is unsustainable in la w. I f the wording of Clausel3 is to b e so construed it would b e disastrous. The point in time at which the sandy nature of the soil at the site was discovered is not at all ma ter ia l in deciding whether 'jetting' is an extra item or not. The decision has got to b e based on the terms of the agreement. Consider for example, an extreme ca s e in which R.C.C. work is called for by the contract. The schedule, say, includes two items, providing reinforcement and laying cement concrete excluding the form wo r k . The item of formwork is not included in the schedule. The contractor knows that there is a material omission and yet tenders his rates as called for by the invitation. Upon acceptance of the tender the contract is concluded. During actual execution of the work the item of formwork not included in the schedule will b e found necessary. I f Clause 13 were to b e interpreted as suggested in the case above, it would amount to saying that the formwork is admittedly additional work not called for by the contract but as it is not one found necessary "in the course of the actual execution of the work" but prior to submission of the tender, the contractor cannot recover compensation. Such an interpretation will b e absurd and quite contrary to the intention of the parties.

The provision of extra work is made in the construction contracts, not only for unforeseen items but also for possible omissions and, changes intentionally made. The words "during actual execution of work", .in Clause 13, it is submitted, refer to the obligation of the contractor to carry out extra items not included in the schedule, on the one hand, and reservation of the right of the owner or engineer to order for extra items "during actual execution of the work" that is even after concluded contract is reached, on the other hand. It would not be out of place to mention here that the forms and conditions of the construction contracts are invariably printed. A materially important clause of a printed form cannot, possibly, be interpreted in more than one way in so far as it expresses the intention of the parties, because the form is used repeatedly for different works. As such the interpretation has not only to be very strict but also to be such that it would not be absurd under a different set

Chapler-5

Variations and Deviations

325

p

o f c ir c u ms t a nce s fr o m t ho se u nd er co n sid er a tio n. T ha i b ei n g t he p o s it i o n, t h e S lat e in t he ab o ve c as e wa s r i g ht l y ad vi sed i n no t r ai si n g t he p l ea a s ap p ear s to b e s u g ge st ed b y t heir Lo r d s hip s.

Subsequent to publication o f t he second ed it io n o f this b o o k in wh ic h t he above mentioned discussion ap p ear ed , t h e Supreme Co ur t considered t he decision of th e Ker a la High Co ur t in a civil appeal. T he Supreme Court held th ai 4 5 t h e t wo letters wh ic h admitted jetting as a n e x tr a item, b o t h internal correspondence one written b y th e Executive Engineer to the Chief Engineer and t he other written by the Superintending Engineer to t he Chief Engineer we r e material documents to arrive at a just and fair decision to resolve the controversy and it was incumbent upon the arbitrator to get. hold o f all the relevant documents including these two letters, even if the Department did not produce these documents. It was finally held: "We now come to the award. Although the Arbitrators has held that 'jetting, however, is not an authorised extra covered by the agreement', he has made the following significant observation which is inconsistent with his conclusion that the contractor has no right for extra payment for the jetting: "The Chief Engineer had rejected the claims of the contractor on grounds of noninclusion of this (Jetting) in the agreement which was executed subsequent to the direction issued by the department to adopt jetting. The Chief Engineer's decision totally ignores the next sentence in that letter 'Meanwhile you may execute the agreement'. By this sentence the issue of extra payment for jetting is left open even after the execution of the agreement." "If the above is the conclusion of the Arbitrator, rejection of the claim on the ground that 'jetting, however, is not an authorised extra covered by the agreement cannot be anything but rationally inconsistent. The award, therefore, suffers from a manifest error apparent ex facie. "In the result the judgment of the High Court is set aside and that of the Subordinate Judge is restored. The award of the Arbitrator thus stands quashed. The Arbitrator will complete the proceedings after considering all the relevant documents including Ext. P. 11 and Ext. P. 16 after giving opportunity to the parties. The appeal is allowed with costs." 45

5.9

RECOVERY IN THE ABSENCE OF WRITTEN ORDER -WHEN POSSIBLE?

Where the terms of the contract provide for written variation order and the extra work is found to be outside the contract, it follows that the terms of the contract have no application, and although the production of an order in writing may be a condition precedent to the recovery of payment for an extra work done under the contract, it is not a condition for payment for extra work which is outside the 45

Poulose v. State of Kerala, AIR 1975 SC 1259.

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Building and Engineering Contracts

co n tr a ct. -I t i s no t n ece s sar y to p r o d u ce t he co n tr ac t i n e v id e n ce to r eco ver p a y me n t fo r t h at wo r k e x cep t , i n th e e ve n t o f t h e d e fe nc e b ein g r a i sed , lo p r o ve t ha t I he wo r k in q ue st io n i s o u l sid e I he co ntr ac t a nd p a y me n t i s lo b e ma d e fo r il n o t at co ntr ac t r ale s b ut up o n a q u a nt u m me r ui t o r o t her wi s e i n acco r d a nc e wi t h I he sep ar at e co n tr a ct o r r eq ue s t r el ie d o n. T hi s p r o v is io n ha s fo u nd a sta t uto r y r eco g ni tio n u nd er Sec tio n 7 0 o f t he I nd i an Co ntr act Act. T he S up r e me Co ur t o f I nd i a ha s h eld a s me n tio n ed e ar l ier t ha t o nc e i t is s ho wn t ha t t h e Go ver n me n t to o k t h e b e ne f it o f e x tr a wo r k wh i c h wa s no t gr a t ui to u sl y d o ne , a nd wh ic h cr ea ted a q u as i -co ntr ac t ual o b li ga tio n, t h e cla i m fo r co mp e ns at io n u nd e r Sect io n 7 0 o f t he Co nt r ac t Ac t co u ld \be e n fo r ced a ga i n st the Go v er n me n t. Ar t i cle 2 9 9 of the I nd ia n C o n st it u tio n is no bar to ap p licat io n of Sect io n 7 0 u nd er the cir c u ms t a nce s e mb o d ied in t ha t sec tio n 4 6 .

In case of contracts for private wo r k s, which by law are not required to be in writing, oral orders would be valid. Even where, such a contract provides that deviation orders must be in writing, a contractor can, in certain circumstances, recover payment in absence of a written order. For example, where oral change orders were frequently handled without a protest by either party, during the course of prosecution of the work, it was held that such a conduct constituted the waiver of the contract provision. 47 A clause as to orders in writing may be so worded that such orders will not be a condition precedent to the contractor's right to payment. For example, a clause may provide that 'the contractor shall execute such alterations as the architect may direct in writing' and may not exclude any claim for work not so ordered. In such a case there is nothing to prevent the owner being liable under the law on a separate contract, express or implied. Also instructions can be said to have been given through drawings or sketches. ILLUSTRATION In a case, plea was raised on behalf of the defendant that the special conditions of the contract required the plaintiff to obtain an order before execution of the work and as the plaintiff executed the work without obtaining such a permission, he was not entitled to get the price. On the basis of the facts on record it was held: 48 "The submission made cannot be accepted for two reasons. The first reason being that the evidence filed by the plaintiff shows that he had been orally asked to do the R.C.C. work. The statement made by .., RW. 2, has already been referred to, by me above. There is nothing in his cross-examination, which could shake his testimony. It shows that he had been orally instructed for the work which is in dispute. Reference may also be made to Condition No.5 of the Detailed Specifications, which requires that 'all work shall be carried out in accordance with the detailed drawing to be supplied or as directed by the Engineer-in-charge from time to time. 46 AIR 1962 SC 779: See Art. 3.7.1 pp. 139. 4 7 Standard Construction Co. v. National Tea Co. b2 N.W. 2d 201 Supreme Court of Minnesota, 1953. 4 8 State of U.P. v. Chandra Gupta, AIR, 1977, All 28.

As l h e w o r k w a s d o n e b y l h e p l a i n t i f f i n a c c o r d a n c e w i t h t h e o r a l i n s t r u c t i o n received by him from the Engineer-in-charge, therefore, it cannot be said thai the plaintiff was not entitled to get the price for R.C.C. work. Ext.2 - - in the second drawing also shows alterations and changes in the nature of work, i.e. reinforced

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Building and Engineering Contracts

concrete work. Therefore, this exhibit itself can be treated as an order in writing. Accordingly, the submission of the counsel for the Stale that as the plaintiff had not obtained any order in writing, he could not get the price for this item, is liable lo fail." 5 .10

INSTRUCTION TO ASSIST CONTRACTORS IN DIFFICULTY

Sometimes due to unforeseen difficulties the contractor suggests a few alternatives to execute the work and the engineer with a view to assisting the contractor faced with a difficulty orders changes; which difficulties it would be the contractor's contractual obligation to surmount by whatever methods he chose to adopt at his cost. Such an action by the engineer may be of benefit to the owner as well as to the contractor, since (i) the delays which might be costly to the owner may be avoided, (ii) the difficulty may throw doubt on the long-term suitability of the permanent work after completion, and hence in the owner's interest may call for a design change which incidentally will assist the contractor. Such a situation may give rise to a more difficult problem. Two contentions are likely to be advanced by the owner: (i) that the change was agreed solely to assist the contractor faced with a difficulty and not for any interest or advantage of the owner; or (ii) the work concerned was not a variation, at all, but only contingent work which on true construction of the contract was the obligation of the contractor. In this connection it is to be noted that if a contractor is already bound, on true construction of the contract, to do a certain work for a certain price, there will be no consideration for any promise by the owner to pay for it under the mistaken impression that it is a variation. It may be so even if the engineer gives an instruction to execute certain work expressly stating it to be a variation, if, on the true construction of the contract the work is included in the contract price. To avoid doubt, architects or engineers should be careful in using the language; particularly when authorizing such an alteration, they should expressly disclaim any intention to give an instruction or order in the matter under the terms of the variation clause. For an illustration see Art. 5.15 below.

5.11

EXTRAS CAUSED BY MISREPRESENTATION

It has already been pointed out that the contract, to which consent is caused by misrepresentation or fraud is voidable at the option of the party whose consent was so caused. Thus a contractor, who submitted his tender on a belief that certain conditions as indicated by plans and specifications actually exist, and has relied upon them in submitting the tender, is entitled to recover the value of such extra work as was necessitated by conditions being other than as represented. If a contract contains positive representations as to the conditions, character, or nature of the work amounting substantially to a warranty there may be recovery based on such representation. This may be true even though the contractor was required to make investigations and satisfy himself upon these matters.Where, however, the intention of the parties is such that the contractor should rely upon his own investigations and examinations, he cannot recover upon the representation. But "a recovery may be had where the representations made are fraudulent even though the contractor is required by the contract to make independent investigations.

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Building and Engineering Contracts

Thus, the ultimate guide in determining whether or not there can be a recovery for the extra cost of doing a work under a contract is the contract itself. It is always a question of the intention of the parties and has to be gathered from the provisions of the contract.

5.12

EXTRAS CAUSED BY LEGAL PROVISION

If a change is caused due to some legal requirement overlooked in the specifications, the contractor can recover the increased cost of the work even though the general provisions of the contract called for compliance with the requirement of the law. ILLUSTRATION The specifications, in one case, gave the contractor the option to use either plasterboard or plaster over lath in the bathrooms of the building. The contract contained the provision that the contractor would comply with rules and regulations of the State affecting work of this character. The contractor decided to use plasterboards. The law, however, required the use of plaster over lath and therefore, a change order was delivered to the contractor. Subsequently the contractor brought an action to recover the increased cost on account of the change order. The trial Court denied him the recovery. The Appellate Court holding that the contractor was entitled to recover the increased cost of the work caused by the change order, however, reversed the judgment. The Appellate Court in its opinion observed: "The city prepared the plans and specifications and asked for competitive bidding on the basis thereof. It would not be expected that the bidders would examine the various laws and building codes as to each item specified to see if the codes required some different method of construction. Such procedure would make the bidders' interpretation of the law rather than the specifications controlling it. It would make the specifications so indefinite and uncertain as to destroy the validity of any contract awarded pursuant thereto 49 .............. "

5.13

EXTRAS : WHEN CONTRACT BASED ON 'APPROXIMATE ESTIMATE'

It has already been pointed out that an estimate as an offer may be binding..50 If in such a case, the cost of the work exceeds the cost indicated by the 'approximate estimate' 49 Green Construction Company v. City of New York, 128 NYS 2d 715, Appellate division, First Dept. N.Y. 1954. 5 0 See Art. 1.9.2.

submitted by the contractor, can he recover the excess cost? In one case it was held that he could. The Court in its opinion indicated that to make an estimate ordinarily means to calculate roughly or lo form an opinion as to ihe amount, from imperfect data. The use of the word 'estimate' and especially 'approximale'monthly estimate' precludes accuracy. Sl 5 .14

EXTRA CLAIMS BEYOND THE SCOPE OF AGREEMENT

Where an agreement expressly prohibits extra payment in certain contingencies, a very good case is required to be made out to overcome the contractual stipulation, if indeed it is possible to do so. The Courts are inclined to invalidate an award, which

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allows extra payment in spite of contractual stipulations 52 ..The following cases will serve as illustrations of the above well-established position. ILLUSTRATIONS (1) Where the items of supplying and laying boulders and sheet pile driving included cost of all labour, material, lead and lifts, dewatering, etc., the contractor claimed dewatering as an extra work under items 16 and 17. On the other hand, the defence contended that nothing was to be paid on this count, as per the terms of the agreement. The arbitrator allowed the claim which decision was upheld by the trial Court. Allowing the appeal and setting aside the judgment and decree upholding the award, it was observed: "In the present case, items 16 and 17 clearly provide that the rates were being invited for the entire work covered by those items including dewatering. When specific provision has been made in the items themselves, there is no question of there being discrepancy between the terms stipulated in the items and the technical specifications, even though the latter did not provide for dewatering. This is a case where in respect of one item the schedule of quantities and bids clearly provided that dewatering was included in the work required to be done and there was no mention of dewatering at all in technical specifications. The fact that technical specifications were silent did not mean that the same were contrary to what was stated in the schedule of quantities and bids, The fact that in the cost analysis also there was no mention of dewatering in respect of this item, did not improve the situation. As regards the other item, the schedule of quantities and bids specifically include dewatering in the work required to be done and there is also specific provision in one para of technical specifications that nothing is to be paid extra for dewatering but there is no mention in technical specification relating to rates about it." " (2) In a case the contract included conditions which read as follows: 51 52 53

A. Beeler v. Mitter, 254, S.W. 2d, 986 Kansas City Court of Appeals, 1953. FCI v. Surendra, D*vendra & Mahendra Transport co„ 2003 (1) A;b. LR 505 SC. ; State of Kerala v. Mathai. 2003 (3) 28 Kerala.; Associated Engineering Co.v. Government of Andhra Pradesh, AIR 1992 SC 232. State of U.P. v. M/s. Allied Construction Engineers and Contractor, AIR 1996 All. 295.

"3.15. Rates quoted by the contractor shall hold for work at all heights and depths. The contractor shall not be paid anything extra for maintaining in good condition all the work executed till completion of the entire work nor on account of damage to the work nor on account of damage caused by rains or other natural phenomena during the execution of works. "3.19. Centering and shuttering required for double height slab shall be done by the contractor as per approved drawing issued by the Engineer in-Charge." The plea so far as Clauses 3.15 and 3.19 was that the increase in height of shuttering was necessitated due to the change in drawing appended with the bid documents and any change in the original tender drawing drastically affecting the quoted rate cannot be changed without payment of extra amount. Reliance was placed upon clause 3.19 of the agreement which stipulated that the centering and shuttering required for double height was to be done as per the approved drawing issued by the Engineer-inCharge. And the relevant clause was not Clause 3.15 which provided that the rates quoted by the contractor should ensure for all heights and depths but Clause 3.19

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which stated that shuttering and centering should be as per the approved drawing issued by the Engineer-in-Charge. The above plea had found favour with the arbitrator to whom the dispute was referred. The award was set aside by the trial Court on the ground that Clause 12 of the conditions was not even referred to by the arbitrator. It was held: 54 "A perusal of the counter statement clearly shows that the respondent had not relied on Clause 12 at all. ... Clause 12 was not referred to by respondent in their objections filed in this Court. Accordingly the learned Single Judge's judgment to the extent it relies upon Clause 12 cannot be sustained." Relying on the judgments cited in which it was held 55 that when an objection is not raised before the Arbitrator, it cannot be urged before the Court and that had the respondent raised the plea of Clause 12, perhaps the award could have been open to further challenge. Generally, the notice inviting tenders contains the stipulation showing the quarry chart from which the materials can be obtained. Many a times these stipulations do not guarantee either the quality or adequacy of the materials from these sources. The contracts, which contain provisions such that the contractor shall make his own arrangements for quarries or for supply of water and no assurance is given regarding availability of materials from quarries or water from sources indicated, the claims made by the contractor for extra lead or extra expenditure incurred may not be tenable. The relief can be denied even if an assurance to that effect was available on the record.56 Similarly, if an agreement makes provision for payment of escalation for certain limited materials, escalation charges in respect of other ma ter ial s o r ma tt er s ma y no t b e p a yab le . T he ca s e i n i ll u str at io n b elo w d ec id ed b y t h e S up r e me Co ur t o f I nd ia 54 55

56

Guru Ffehar Constructions vs. DDA, Arb. LR 2002(2) 254 Delhi (DB). M/s. Jullundar Ex-Servicemen Motor Tram Co-operative Society Ltd. .vs. The General Assurance Society Ltd., Calcutta and another, AIR 1978 P&H 336 and Ansal Properties & Industries Ltd. vs. Himachal Pradesh State Electricity Board 1997 (2) Arb. LR 595. State of Karnataka v. Stellar Construction co.; 2003 (1) Arb. LR 40 (Karnataka) (DB).

hi g h li g h t s t h e ne ed o f c au tio n o n t he p ar t o f t e n d er er s a s a l so ar b itr ato r s/ u mp ir e s.

I LLU ST R AT I O N

The terms of an agreement included escalation provision which was limited to matters such as, diesel oil, labour, etc. but not to Napa slabs used for canal lining. The agreement in fact prohibited claims for price adjustment other than those provided in the agreement. It further stipulated that the contractor should make his own arrangements to obtain the napaslabs as per standard specifications. The Department did not accept any responsibility either in handing over the quarries or producing the napa slabs or any other facilities. The contractor was not entitled any extra rate due to change in selection of quarries. The Supreme Court held these provisions to amount to a prohibition against price adjustment or award for escalated cost in respect of any matter falling outside the price adjustment provision in the contract. In the same case the Supreme Court set aside the claim for extra lead for water allowed by the umpire and observed: 57 "The contract specifically stated that it was the responsibility of the contractor to make its own arrangements for the supply of water. The Government gave no assurance to the contractor regarding the availability of water or the prices payable therefor. The umpire, therefore, had no jurisdiction to allow the claim.. "

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From the brief facts narrated in the judgement it appears that the agreement provided for widening of banks "to 5 metres and 3 metres width by the Department to facilitate transport of materials. The contractor, however, has to maintain the haul roads." The claim of the contractor for extra expenditure incurred due to flattening of canal slopes and consequent reduction in top width of banks used as roadways, that was allowed by the umpire, was set aside by the High Court and the Supreme Court. The Supreme Court observed: "In the absence of any provision to pay for extra expenditure and in the light of specific provision placing the sole responsibility for the maintenance of the haul roads, on the contractor, the arbitrator had no jurisdiction to award ... extra rate...." The representation that canal banks will be widened to facilit'.ue transportation of materials was made at the time of tendering the rates thereby inducing the contractor not to account for the cost of providing "any other haul roads required by the contractor and not specified in the plan to be carried out by the contractor at his cost" in his tendered rates. If the representation proved false the contractor deserved to be compensated for the extra expenditure. The award being non-speaking, the ground for it was not revealed and in the process it got struck down as a bad award, . it is submitted. 57

Associated Engineering Co.v. Government of Andhra Pradesh, AIR 1992 SC 232.

The case mentioned above and the decision of the Supreme Court in it were referred to and relied upon by the full Bench of the Kerala High Court. The facts of the case were as under: In a roadwork contract to be completed within fifteen months there was delay on the part of the Government in handing over the site, supplying cement and steel, etc. For the purpose of extension of time a supplemental agreement was executed between the parties in which the contractor agreed not to claim compensation for the extra work or expenditure and not to claim higher rates for labour, material, etc. The said supplemental agreement stipulated that payment would be according to the terms and conditions in the original agreement, the only benefit being extension of time. In spite of these facts the contractor raised disputes referring the claims for compensation and higher rates to arbitration. The State put in the defence of supplemental agreement. The arbitrator did not even care to look into the objection of the State and to call for the supplemental agreement. He passed a non-speaking award allowing compensation. The trial court rejected the objection to the award on the ground that the award was a non-speaking award and there was no error apparent on the face of the award or misconduct on the part of the arbitrator. In appeal, the Division Bench referred the main point to the Full Bench as to whether the arbitrator had acted in excess of authority and can an award be attacked on any of the grounds mentioned in Sections 16 and 30 of the Act in a non-speaking award. It was held:58 "In our view, the latest decision of the Supreme Court in Associated Engineering Co. v. Govt, of Andhra Pradesh, (1991) 4 SCC 93: (AIR 1992 SC 232), clinches the issue in favour of the appellants. That decision has now clearly laid down that if an arbitrator while giving a non-speaking award, acts in contravention of the clear, obvious or patent terms of the- main contract which deals with the rights and obligations of the parties,

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such action will be without jurisdiction. It is also held that for the purpose of finding out if the arbitrator has so acted, it is open to look outside the award, including affidavits, pleadings and terms of the main contract. Such conduct also amounts to legal misconduct. Accordingly the High Court set aside the award for the compensation and remitted the said part of the award for reconsideration. In a case the claim for extra lead for procuring metal from far away places which according to the findings of the arbitrator was not visualized by the parties and therefore allowed by him was also upheld by the Supreme Court on the ground that the arbitrator can be said to have taken a reasonably possible view. However, in respect of a couple of other claims which were awarded, ignoring the express provisions of the agreement, the award was set aside.59 58 59

State of Kerala v. V.P. Jolly AIR 1992 Kerala 187. M/s. Shyama Charan Agarwala and Sons, v. Union of India, AIR 2002 SC 2659.

I t wa s o b s er ved :

"This is not a case of interpretation of a clause of Contract Agreement or technical conditions annexed thereto but a case in which the Arbitrators have read something in Para 1.09 of Technical Conditions... Had the sentence "No extra payment shall be made for use of manufactured sand for such change over" not been there, the Arbitrators would have been right in allowing this claim. Therefore, it is a case of an error apparent on the face of the record vitiating the decisions of the Arbitrators in respect of Claim No. 3 as they have gone beyond Para 1.09 of Technical Conditions. Therefore, we have no hesitation to uphold the findings of the learned single Judge whereby he has set aside the award of the Arbitrators against Claim No. 3 by accepting the Objections of the Board."

5.14.1

No estoppel on account of Payment already made

The law is well setded that if the terms of the Agreement have been reduced into writing and the writing appears to contain the whole terms, no oral evidence or reference to a document such as tender forwarding letter will be permissible, unless such document forms an integral part of the contract. If payment is wrongly made, there is no estoppel and the terms of the agreement are given effect to. ILLUSTRATION The appellants before the Supreme Court, had submitted their tender along with which a letter was also enclosed. This offer of the plaintiff was accepted and an agreement was entered into. In accordance with the agreement the plaintiff furnished a bank guarantee and deposited the necessary earnest money and commenced the work of transport of materials. It was further alleged that the plaintiffs carried the material and delivered the same at various destinations as per the direction given from time to time by the defendants. But the defendant instead of making the payments in accordance with the terms of the contract postponed the payment of the bills. It was averred in the plaint that the defendant agreed to pay on multi-slab basis which is apparent from the letter of the plaintiff attached to the tender submitted and that was also the trade practice. The plaintiff finally issued a notice calling upon the defendants to settle the bills but the defendants replied making several misleading

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averments. As the plaintiffs' bills were not settled, the suit was filed for recovery of the amount as already stated. The defendants in their written statement denied the allegations made in the plaint. The specific stand taken in the written statements was that the plaintiffs are not entitled to claim multi-slab basis and on the other hand they are entitled to single slab basis. It was stated that the multi slab rates had never been accepted and not covered by the agreement executed by the parties. It was. also stated that on the basis of Instructions from headquarters the Superintending Engineers have been passing the bills on single slab basis and the plaintiffs remained silent during the entire tenure of the contract period but raised this issue after the contract period was over. The other relevant facts and the law was stated by the Supreme Court thus: " At the outset it must be borne in mind that the agreement between the parties was a written agreement and therefore the parties are bound by the terms and conditions of the agreement. Once a contract is reduced to writing, by operation of Section 91 of the Evidence Act it is not open to any of the parties to seek to prove the terms of the contract with reference to some oral or other documentary evidence to find out the intention of the parties. Under Section 92 of the Evidence Act where the written instrument appears to contain the whole terms of the contract then parties to the contract are not entitled to lead by oral evidence to ascertain the terms of the contract. It is only when the written contract does not contain the whole of the agreement between the parties and there is any ambiguity then oral evidence is permissible to prove the other conditions which also must not be inconsistent with the written contract. The case in hand has to be adjudged bearing in mind the aforesaid principles and the plaintiffs being conscious of this position along with the tender appended a letter and in that letter inserted certain terms by writing in ink to establish the case that the acceptance of the plaintiffs tender would tantamount to the acceptance to the terms contained in the letter in which there was insertion in writing to the effect that it was on multi slab basis. It is in this context the question whether such hand written portion was originally there or was subsequently inserted assumes great significance. We are unable to accept the stand taken by the learned counsel for the respondent that there was no such issue on this question inasmuch as this question was considered by the learned Trial Judge while discussing Issue No. 1 on the basis of evidence laid and the Trial Judge had given a finding in favour of this plaintiffs. The said finding, however, on the face of it appears to us to be wholly unsustainable. As has been stated earlier there was no signature either by the persons submitting the tender or by the persons receiving the same on the hand written portion of the letter. The learned Trial Judge had noticed that the certified copy which was issued by the Board on 11-7-1978 of the aforesaid letter clearly contains the hand written portion and therefore he came to the conclusion that the hand written portion was there at the time of submission of the tender. The tender itself was submitted on 12-7-1978 and we fail to understand how the Board could grant a certified copy of the letter on 11-7-1978 when the plaintiffs' case itself is that along with the tender he had appended the letter in question. On this ground alone it can be safely held that hand written portion in Exhibit P-l was not there at the time of submission of the tender but was subsequently inserted obviously with the connivance of the officers of the Board. The Board in its rejoinder affidavit filed in this Court has stated that the attested copy was actually received on 28-12-1978, much later than the finalisation of the tenders and agreement and in order to build up a case the aforesaid interpolation has been made. In the facts and circumstances of the present case the aforesaid stand of the Board appears to us to be wholly justified and at any rate we have no hesitation to come to the conclusion that the hand written portion in. Exhibit P-l was not there., initially and has been inserted subsequently.

60 T.N. Electricity Board and another v. N. Raju Reddiar, AIR 1996 SC 2025.

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The main basis of the plaintiffs' case on which a multi slab rate was claimed therefore fails. The written agreement between the parties nowhere indicates that the rate to be paid to the plaintiffs was on multi slab basis and the terms and conditions of the written contract is not susceptible of such a construction. "It is no doubt true that DW -1 a witness of the defendants in his evidence had admitted that after submission of tender there was certain discussions between the contractor and the authorities and in that discussion contractor had expressed to charge for the job on multi slab basis and same was accepted by the authorities. We are afraid a decree cannot be granted in favour of the plaintiffs on the aforesaid statement since the contract in hand was a written one. There is no document whatsoever in support of the aforesaid so called after tender discussion and the acceptance of the terms in the said discussion to the effect that rate would be charged on multi slab basis. Then again if the plaintiff had appended the letter to the tender indicating that he would be charging on multi slab basis there was no occasion to have any after tender discussion or to raise the issue of rate being accepted on multi slab basis. The so-called statement of DW-1 therefore is wholly unacceptable and in the eye of law also cannot be taken into account to vary the terms of the written contract. The Division Bench of the High Court committed obvious error in allowing variance of the terms of the written contract relying upon such statement of DW-1 and granted the decree on multi slab basis. "The only other question which survives for consideration is whether the conduct of some of Superintending Engineers in passing some of the bills on multi slab basis can be pleaded as an estoppel against the defendants and can form the basis of plaintiffs' case. The answer to this question must be in the negative. It transpires that some of the Superintending Engineers passed some of the bills on multi slab basis and further when complaints were received and the matter was investigated into by vigilance to absolve the concerned officers from liability, a recommendation has been made to grant the rate on multi slab basis. But such a recommendation or such passing of bills on one count or multi slab basis cannot be construed to have conferred a right on the plaintiffs to get the payments on multi slab basis, until and unless it is proved by the plaintiff that the defendants agreed under the written contract to pay on multi slab basis. The plaintiffs have utterly failed to establish the same. A particular officer for various reasons may pass a bill on multi slab basis or a contractor may be able to get one of his bills passed at a rate other than the rate given in written contract in connivance with the passing authority. But when a dispute arises and the matter comes to Court for adjudication no decree can be granted to the plaintiffs on that basis and the plaintiffs would be required to establish that the defendants in written contract agreed to grant the rate on multi slab basis. That has not been established in the case in hand. Therefore, in our considered opinion the Division Bench of the High Court wholly erred in law in allowing the plaintiffs' appeal and granting the decree accepting plaintiffs' claim that the rate has to be paid on multi slab basis. In the aforesaid premises the impugned judgment and decree of the Division Bench is set aside and that of the learned single Judge is affirmed. This appeal is allowed, but in the circumstance there will be no order as to costs. 60 5.15

OWNER'S LIABILITY TO PAY FOR CHANGES MADE

60 T.N. Electricity Board and another v. N. Rani Reddiar, AIR 1996 SC 2025.

Where the contractor voluntarily, and without any request by the owner, does extra work or provides better materials than those stipulated for, he can have no claim against the owner for more than the contract price. 61 Under similar circumstances a sub-contractor too shall have no claim against a contractor. 62 If the owner has

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consented to alterations from the works specified he would be liable to pay only if he has expressly been informed that additional expense might be incurred. 63 If the change is allowed by way of a concession to the contractor, the owner is not liable to pay more than the contract price. ILLUSTRATION In a case, the contractors agreed to furnish and erect all the iron and general work for a lump sum and the contract made an express provision that no alteration in the specified work should be made by the contractor without the written order of the engineer appointed by the owner. The contractor found that they were unable to make certain girders owing to thinness of the metal specified and their liability to hoist. The contractor made the girders of thick metal with the oral consent of the engineer. It was held: "When, as in this case, the contractors say. 'We cannot do the work as we have promised to do it unless you permit us to make it thicker than we undertook to make it and the engineer on behalf of the company says, "I will not object to your making it thicker if you cannot do it otherwise". I think there is nothing in that to imply that there was to be payment for that additional thickness. 64 It would seem by analogy that if the owner consents to the contractor making use of less expensive materials than those specified, he cannot, unless there is a new contract, claim that the contractor shall make a corresponding reduction in price." Thus, the owner will be liable for any cost of additions and substitutions made by the contractor of his own accord only if the owner ratifies such changes. Merely retaining the extra work done or superior material used does not make the owner liable for its full or any value.

5.16

BASIS OF COMPENSATION FOR EXTRA WORK

Where a work is to be done on an item rate basis, payment for additional quantities of work will be made on, the basis of the unit prices stipulated in the contract for increase in the quantities within the variation limit. 66 61 62 6 3 64 65 66

Wilmot v. Smith (1828) 3 0 & P 453. Ashwell and Nesbit Ltd. v. Allen & Co. (J 912); Hudson's Building and Engineering Contracts Page 410. Molley v. Liebe (1910), 102 L.T. 616 P. C. See Hudson's 10th Ed. Pp. 269. See Art 5.10. Halsbury's Law of England 2Ed. Vol. 3 Page 268. See Art. 5.4.1 pp. 281 for excessive variation in quantities.

If a contract is silent as regards the basis of compensation for extra work, payment will, as a general rule, be made on the basis of the fair and reasonable value of the work done or material furnished. 67 Generally when a dispute is referred to an arbitrator for deciding rate of an extra item, both the parties submit their respective rate analysis in support of the rates proposed by each party. Evidence has to be led to prove the cost of materials, labour and machinery assumed in the rate analysis. Based on the said evidence the rate is decided by the arbitrator. Occasionally, rather than leading evidence of the prevailing prices at the time the extra work was executed the parties place reliance upon the price indices to show the variation in the cost that was prevailing at the time of

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signing of the agreement. Care must be taken in such cases to use the price index prevailing at the time of execution of the work.. The Bombay High Court remitted back an award for reconsideration of the rates for which the arbitrator admittedly did not use the price indices for the period the extra work was done. 68 As to what is the fair and reasonable value of a work done, the following cases will serve as illustrations: ILLUSTRATIONS (1) A contractor had brought an action for recovery of balance in which the only dispute to be settled was as to the value of extra work done.Three experts testified as to what they would consider to be fair and reasonable charges for the extra work. Their estimated cost varied. The lowest estimate was $ 1149 and the highest estimate was $ 2,140. The trial court as to this item allowed $ 1,550, which was sustained on appeal. As to the value of labour the estimates of the three experts varied from $1,960 to $ 2,140. The judgment of the trial court which allowed the highest estimated value was reduced to $ 2000 by the appellate Court. 69 (2) In another case 70 the contract provided for excavation in hard murum. The contractor was, in fact, required to carry out the work of excavation in soft rock, payment for which was to be made on the basis of quantum meruit, that is, the fair and reasonable value of the work done. The contractor had during the performance of the contract demanded a rate of Rs, 45/- per 100 c.u. ft. for the type of soil met with. In the cross-examination, one of the witnesses of the owner had admitted it as a proper rate. The geologist appointed by the contractor, an expert witness who had examined sample of the rocks in question had opined after seeing the other two rates for hard rock excavation and the working rate of the plaintiff that Rs. 80/- was, the proper rate. The Gujarat High Court allowed a rate of Rs. 45/- per 100 cu. ft. in view of the circumstances that the work had to be done in the sea bed where it could be carried on only for a few hours when the site was not flooded due to high tide. 67 68 69 70

Carr v. J. A. Ber6man Pvt. Ltd. (1953) 27 A.L.J. 273 (Australia) See Hudson's 10th Ed. P. 340 & 533 Municipal Corporaion of Greater Mumbai v. Prestressed Products (India) 2003(2) Arb. LR 624 (Bombay). Lindberg v. Brandt el. all, 112 N.E. 2d. 746 Appellate COlul of Illinois, 1953. AIR 1973 Guj. 34.

If a contract is silent as regards the basis of compensation for extra work, payment will, as a general rule, be made on the basis of the fair and reasonable value of the work done or material furnished. 67 Generally when a dispute is referred to an arbitrator for deciding rate of an extra item, both the parties submit their respective rate analysis in support of the rates proposed by each party. Evidence has to be led to prove the cost of materials, labour and machinery assumed in the rate analysis. Based on the said evidence the rate is decided by the arbitrator. Occasionally, rather than leading evidence of the prevailing prices at the time the extra work was executed the parties place reliance upon the price indices to show the variation in the cost that was prevailing at the time of signing of the agreement. Care must be taken in such cases to use the price index prevailing at the time of execution of the work.. The Bombay High Court remitted back an award for reconsideration of the rates for which the arbitrator admittedly did not use the price indices for the period the extra work was done. 68 As to what is the

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fair and reasonable value of a work done, the following cases will serve as illustrations: ILLUSTRATIONS (1) A contractor had brought an action for recovery of balance in which the only dispute to be settled was as to the value of extra work done.Three experts testified as to what they would consider to be fair and reasonable charges for the extra work. Their estimated cost varied. The lowest estimate was $ 1149 and the highest estimate was $ 2,140. The trial court as to this item allowed $ 1,550, which was sustained on appeal. As to the value of labour the estimates of the three experts varied from $1,960 to $ 2,140. The judgment of the trial court which allowed the highest estimated value was reduced to $ 2000 by the appellate Court. 69 (2) In another case 70 the contract provided for excavation in hard murum. The contractor was, in fact, required to carry out the work of excavation in soft rock, payment for which was to be made on the basis of quantum meruit, that is, the fair and reasonable value of the work done. The contractor had during the performance of the contract demanded a rate of Rs, 45/- per 100 c.u. ft. for the type of soil met with. In the cross-examination, one of the witnesses of the owner had admitted it as a proper rate. The geologist appointed by the contractor, an expert witness who had examined sample of the rocks in question had opined after seeing the other two rates for hard rock excavation and the working rate of the plaintiff that Rs. 80/- was, the proper rate. The Gujarat High Court allowed a rate of Rs. 45/- per 100 cu. ft. in view of the circumstances that the work had to be done in the sea bed where it could be carried on only for a few hours when the site was not flooded due to high tide. 6 7 Carr v. J. A. Ber6man Pvt. Ltd. (1953) 27 A.L.J. 273 (Australia) See Hudson's 10th Ed. P. 340 & 533 6 8 Municipal Corporaion of Greater Mumbai v. Prestressed Products (India) 2003(2) Arb. LR 624 (Bombay). 6 9 Lindberg v. Brandt el. all, 112 N.E. 2d. 746 Appellate COlul of Illinois, 1953. 7 0 AIR 1973 Guj. 34.

under the provisions of law. The said measurement book did not bear any signature of the departmental officers and that were never seen or submitted prior to the same being exhibited in Court. Ext. 14 is a typed copy which claims to be the work done from March, 16, 1975 up to 31st March, 1976. It gives the nature of work carried out and engaging average labour strength of 150 numbers daily and it also gives the volume and value of work. This also has no evidentiary value at all. Ext. 16 is another sheet which claims that it is the work done from April, 1976 up to 31st March, 1977. It shows the nature of work carried out and also volume and value of the work. It does not bear the signature of anybody. The typed copies were exhibited by the plaintiff. Exts. 17 and 18 are other two typed copies of the same nature. All these exhibits have no evidentiary value whatsoever and they cannot thrust any liability on any person."

5.18 COMMON GROUNDS ON WHICH EXTRAS ARE CLAIMEDILLUSTRATIVE CASES Illustrative cases to highlight further the above principles are grouped under the following heads: i) ii)

Extra work in foundations - excavation. Changes in design, drawings, specifications.

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iii)

Extra Lead/Lift.

iv)

Additional difficulty in carrying out the work.

5.18.1 Extra Work in Foundation Excavation (1) The facts of a case decided by the Gujarat High Court, will clarify the concept of what may amount to 'extra' work with reference to excavation. The contract was for construction of a seabed tank. The dispute in the case was regarding the following three items : (i) Excavation work.(ii) Carting the excavated stuff.(iii) Dewatering from the bed of the tank. The contract provided for these items as follows:

Excavation Work The rates agreed between the parties for depths from 0 to 12 feet varied between Rs. 8/- and Rs. 14/- per 100 cu. ft. The original contract contemplated excavation in hard murum only. However, the abstract on the works order described the work as excavation for tank "in any soil, murum, sock, etc." In actual execution of the contract the contractors were required to excavate a substantial quantity in soft rock, allegedly by chiselling, due to the vicinity of the power house. The Board turned down extra item and extra rate for excavation in soft rock on the ground that excavation in rock was contemplated between the parties as was evident from the wording qtjoted above. It was argued that "sock" is a typing error for the word "rock". Deciding this point in favour of the contractor their Lordships of the Gujarat High Court observed: 73 73

Gujarat Electricity Board v. SA Jais & Co., AIR 1972 Guj. 192.

"... there is no dispute in the present case that so far as rock excavation work was concerned it was not a digging process by pickaxe. The process was of cutting the rock. The rock may not 'be as hard as Porbandar rock but even for the soft rock, even in the cross-examination of the plaintiff, the stand of the Board is that the proper rate for such soft rock cutting was Rs. 45/-. Therefore, we would be interpreting such a works contract ignoring all realities if we were to attempt a literal interpretation of the words. We must always bear in mind the context in which the words are used while describing the item of excavation for which such low rate was agreed varying from Rs. 8/- to Rs. 14/- to go up to the depth of 12 feet. The background has a great importance that when the rates and the time limit were first agreed, the nature of the work was mentioned to be excavation in hard murum only. Therefore, howsoever, widely described may be the items in the new works order, Ex. 63, when the Board continued the contract at the same rates by putting such wide words "in any soil, murum, sock etc." the ambit of these words could never go beyond the excavation only in any soil or murum. Since the operation was changed from digging to cutting rock, it called for a different rate for such different work, which was never contemplated 'by the parties at the time of fixing the price schedule under the contract." The contractor completed the work as directed. He was granted extension of time for about seven months without imposing any penalty. Further extension of about six months was given again on the same ground stated by the contractors, viz., rock cutting was involved. No penalty was imposed. Their four letters demanding extra rate remained unreplied for more than eight months. In this background, commenting on the statement made by the engineer their Lordships observed:

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"In view of the silence for all these months and the extension being granted to the plaintiff because of the difficult work which he had to carry out with manual labour in these difficult circumstances in sea bed, the denial by this engineer can hardly be swallowed by anybody that there was no rock at all or that the plaintiff did not carry out any rock cutting by chiselling". Apart from these facts, their Lordships, it is submitted, rightly relied on the rates and time limit, mentioned in the agreement, as material facts in concluding that excavation in rock was not Contemplated in the contract. This is obvious from the following* observations: "If the rate of the contractor's work has remained the same and the time limit has remained the same, it is obvious that there could not have been any agreement to do a totally different type of work which will call for such a higher rate which even according to the Board would be Rs. 45/- and which would require substantially longer time."

Extra Bulkage in Transport of Excavated Stuff The item for carting of excavated stuff included unloading and spreading as directed, including all lift and lead up to one mile. The rate agreed in the contract was Rs. 3/ per 100 cu. fl. The dispute was regarding the mode of measurement. The contractor had claimed in the discussion a rate of Rs. 3-10-0 per 100 cu. fl. on the ground that there would be an extra 25 per cent bulkage. The other side never agreed to this demand. Considering the fact that total quantity under the item of excavation exactly tallied with that under transporting the excavated material, it was held by the High Court that the contract was based on the basis of burrow pit measurement and it was not a claim for work outside the contract so as to justify an extra rate. Dewatering from Bed of Tank This item was described in the contract thus: "Dewatering from the bed of the tank including strutting, shoring if necessary, including pump and all accessories for this job, etc. complete". The rate was Rs. 2/- per 100 cu. ft. of excavation. The power was to be supplied by the Board at the rate mentioned by it. The contractor in terms accepted the rate and power charges as stated by the Board. The contractor claimed payment by repeating this agreed rate three times for (i) excavation, (ii) laying concrete bed and (iii) completing the masonry walls so that for the entire work he would, in all get a rate of Rs. 6/- per cu.ft. The trial Court had upheld the claim of the contractor. Reversing this judgment of the trial Court their Lordships of the Gujarat High Court held: "The trial Court has ignored the material word in the abstract in item No.7, dewatering "from the bed of the tank". The term "from" is very relevant in showing that what was agreed to was not dewatering only during the process of excavation but the entire job of dewatering because water would be coming out from the tank, which was excavated during all the three processes. That is why the complete job was mentioned as dewatering complete." In reply to the vehement argument of the learned counsel for the contractor that quantity mentioned in the abstract against the item was 104900 cu.ft. which was the quantity of excavation and therefore, the dewatering must be only for the process of excavation their Lordships observed "that the quantity is mentioned because the measure which was adopted for fixing this rate was not the time for which the pump

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works or the water which is taken out but a lump sum of Rs. 2/- for dewatering from the bed of the tank by way of a complete job on the basis of 100 cu.ft. of this excavation work." It was further held that the rates for items of cement concrete and masonry were agreed for the complete job. These rates, therefore covered everything including dewatering without which these items could not be done. An appeal was filed in the Supreme Court. The Supreme Court confirmed the findings of the High Court.74 (2) Over Breakage In a case the agreement for the construction of a canal provided in the specificatiorfs that over breakage was permissible up to a maximum of 5 cm limited to an average 74 S.A.Jais & Co. v. Gujarat Electricity. Board, AIR /988 SC 254.

cm. It was the contention o f the contractor that over breakages occurred due t o adverse geological conditions not visualized at the time o f estimating the cost o f the work, which was beyond the control o f the contractor and which occurred in spite o f due care and caution exercised by him.

2.5

The defence contentions were manifold : (a) The contractor should be blamed for extra excavation.(b) The contractor should have taken the necessary precautions after studying the nature o f the soil strata.(c) The Report of the Geologist relied upon was contested for its correctness.(d) The fact of measurements having been recorded was admitted but it was urged that the said fact by itself cannot be taken as acceptance of the work. The disputes were referred to arbitration. The arbitrators allowed the claim of the contractor. In a petition under Section 30 of the Arbitration Act, 1940 challenging the award, the Karnataka High Court, after reproducing the relevant provisions of the specifications, observed and held 75 : "What the above specifications provide is that the contractor would not be entitled for payment for extra breakages and their filling beyond the stipulated average depth of 2.5 cm. if the extras are due either to inadvertence or carried out for the convenience of the contractor. The claim had not been rejected till the dispute was brought before the arbitrators. At no stage the department had informed that the over breakages in excavation was due to the inadvertence on the part of the contractors, but on the other hand they informed that the claim was under consideration of the department. Therefore, the arbitrators concluded that while the work was in progress all along at no time did the department warn or charge the contractors that they were not resorting to proper methods of blasting in a manner so as not to cause over breakages or that they had been careless or indiscriminate in blasting which resulted in breakages. "The arbitrators held that Clause 39 of the agreement which required the contractors to acquaint themselves of the site conditions before taking up the work does not militate against their claim and that has no relevance at all to the issue. They also held that recording of the measurements in the measurement book was not merely for the purpose of accounts, but on the other hand discloses the tacit acceptance of the claim of the contractors. In the circumstances, they held that the overbreakages occurred due to the peculiar geological strata and therefore rejected the contentions of the appellants and admitted the claim of the contractors."

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It was held: "This discussion discloses that no error apparent on the face of the record can be spelt out inasmuch as the arbitrators have specifically referred to each one of the contentions ol' the 75

State of Karnataka v. R. Shetty & Co. Engineers & Contractors, AIR 1991 Kant. 96 (100-101).

appellants and the contractors and have considered the same with reference to the relevant clause and on examination of the facts arrived at the conclusion. Therefore, this aspect of the award cannot at all be attacked".

5.18.2 Changes in design, drawings and specifications (1) In a case the construction of Hall of the Nations and the Hall of Industries for, the Third Asian International Trade Fair, November, 1972, was entrusted to the appellant construction company by the Union of India. The work consisted of construction of "space frame structures in exposed concrete" a new venture in the field of construction technology and architecture. The designs could not be finalized prior to giving the work order and substantial details were required to be given during execution of the work which caused and necessitated extra items and extra work on account of which the value of the work went up from Rs.91.57 lacs to 1.53 crore rupees. One of the disputed extra items contested before the Supreme Court pertained to the order substituting prefabricated structure by cast-in-situ for which a permanent steel staging became necessary. A huge quantity of additional steel was used for a continuous period of about 9 months after which it had to be discarded. The other contested items included payment demanded for additional platform of steel channels and kail wood set up for staging. The contention of the respondent was that staging was included in the work and did not deserve separate payment. The contractor's contention was that the additional platform had to be set up on account of subsequent modification in the nature of the work and was different from the scaffolding put up for the movement of the labour force. Clause 18 which was attempted to be relied upon in defence read: "The contractor shall supply and provide at his own cost all materials (except such special materials, if any, as may in accordance with the contract be supplied from the Engineer- incharge's store), plant, tools, appliances, implements, ladders, cordage, tackle scaffolding and temporary works requisite for the proper execution of the work whether original, altered or substituted and whether included in the specification or other documents forming part of the contract or referred to in these conditions or not ..." Undoubtedly, the wording of this clause and in particular "for the proper execution of the work" whether original, altered or substituted and whether included in the specification or other document forming part of contract" is very wide to deny demand for any extra cost by the contractor. But its interpretation has to be restricted to changes made, which will not involve cost in excess of the cost originally contemplated by both the parties, that is by the owner while estimating the cost of construction prior to inviting tenders and by the contractor at the time of submission of his tender. Cost of such items of work, which were necessary for executing the main work but for which no separate payment is contemplated by the contract, is generally spread over or included in the rate or cost of executing the concerned item or

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items. As such the owner or his engineer/architect cannot order substantial changes, which will involve cost in excess of that provided for at the time of signing of the agreement. The engineers are fully aware of this and as such defenses are not raised before engineer arbitrators but attempted to be raised in the Court of law as happened in this case, it is submitted. The Supreme Court of India it is respectfully submitted correctly upheld the award of the arbitrator allowing extra cost on tne above accounts.76 (2) The facts of an appeal directed against the Judgment of the Allahabad High Court, arising out of an arbitration proceeding were summed up thus:77 " The respondent-contractor had entered into an agreement with the appellant for construction of non overflow and overflow sections with bridge spillway and other appurtenant works of Maudahe Dam in Hamirpur district in the State of Uttar Pradesh. ... In the year 1987 in respect of two items of work namely Items 13 and 15, it is alleged that the appellant changed the designs and drawings as a result of which the quantity of work became abnormally high compared to the estimated quantity of work in the agreement. On account of such abnormal increase of the quantity of work the contractor claimed higher rate than what was agreed to in the agreement. The State having refused to accede to the contractor's demand and disputes having arisen between the parties, the arbitration clause of the agreement was invoked and dispute was referred to the sole arbitration of the Joint Secretary and Joint Legal Remembrance to the Government of Uttar Pradesh. Before the arbitrator the respondent contractor made a claim.. According to the respondent contractor, on account of substantial change in designs and drawings there has been abnormal increase in the quantities of work compared to the estimated quantity of work in the original agreement and in respect of such additional quantity of work he is not bound to be paid at the agreed rate but at an enhanced rate on the basis of the analysis of rate submitted by him. It was further averred that when the drawings and designs were changed, the contractor had resisted and prayed for the alteration in the rate but the concerned authorities had assured him orally for such change though ultimately did not agree to the same. It was also averred in the claim petition that under the agreement he was bound to carry out the work as per directions of the concerned authorities and accordingly he has carried out the same. "The appellant State filed written statement before the arbitrator denying its liability to pay at the revised rate as claimed by the contractor. It was admitted that there has been a change in the drawings and designs relating to Items Nos. 13 and 15 and on account of such change, the quantity of work in respect of the aforesaid two items has increased. But the claimant is not entitled to any enhanced rate, in view of the dilTerenl clauses of ihe agreemenl itself. It was also averred in the written statement that the so called variation in quantity of work is 76 77

Puri Construction Pvt. Ltd., v. Union or India, AIR 1989 SC 777. State of U.P. Appellant v. M/s. Ram Nath International Const. Pvt. Ltd., AIR 1996 SC 782.

,

covered by clauses 11.25 and 13.11 of the agreement and therefore the contractor is not entitled to any higher rate.

"The learned arbitrator after analysing different clauses of the agreement, came to the conclusion that the contractor could not have refused the work in accordance with the alterations and modification in the drawings and designs. He further held that there has been a fundamental change in the drawings and designs which abnormally increased the quantum of work than the estimated quantum indicated in the agreement and under the agreement though the contractor cannot claim any excess rate for work up to the excess of 10%, but beyond the same the contractor would be entitled to claim a higher rate. The arbitrator

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accepted the analysis of rate given by the contractor and accordingly in respect of the quantity of work executed after the date of the completion of the work indicated in the agreement namely 28-2-1989, he granted as per the rate claimed by the contractor. "....The arbitrator having considered all the relevant materials and there being no legal proposition which has formed the basis for acceptance of a higher rate and on the other hand the same being arrived at on account of the abnormal increase in the quantity of work which was on account of change of drawing and designs, the Court will not be justified in interfering with the same. " However, it was held that in respect of the excess quantity of work executed by the claimant subsequent to the completion period indicated in the agreement when the claimant had made the claim at a higher rate and that claim was allowed by the arbitrator on the basis of analysis of rates given by him, then the amount already paid to him by the State in accordance with the escalation clause in the agreement has to be adjusted and the claimant would not be entitled to double benefit on that score. The award was accordingly modified with the consent of all. (3) Change in R.C.C. Design : When it may amount to extra In the case decided by the Supreme Court referred to earlier", the contract provided for five inches thick R.C.C. slab to cover an area of about 61,000 sq. ft. which was subsequently changed to 4 1/2 " thick slab incorporating more steel than required for 5" thick slab. The agreed rate was per unit area of the slab. Extra payment to the contractor was denied on the ground that the contract provided for change in the design and specifications and it included a further provision that where as a result of the change ordered the contractor suffers any loss no compensation will be paid to him. The findings of the High Court that the contractor had to be paid extra was upheld by the Supreme Court. The provision in the contract that denied payment of compensation was held to be not applicable. Such a dispute in a present day contract may not arise because the present day contracts normally provide payment for reinforcements separately on weight basis and for concrete on volumetric basis. (4) Introduction of reinforcement: when it may amount to extra 77

Bombay Housing Board v. Karbhase Naik & Co. AIR 1975 SC 763.

Under a contract the plaintiff was required to carry out cement concrete work. It was the case of the plaintiff that he was-subsequently ordered by the Engineer-in-charge to provide reinforcement to connect different layers of I :4:8 concrete at various places. The contention of the defendant was that the concrete work having been done in a ratio of 1:4:8 with brick ballast, it could not be considered as R.C.C. The fact that reinforcement was used was, however, admitted. It was held: 78 "Having considered the evidence given by the parties on the aforesaid question, we . find that iron bars having been used by the plaintiff in the completion of the work mentioned in Schedule B, the work which the plaintiff did was R.C.C. and not cement concrete. " The author respectfully points out that it is erroneous to say as was observed in the above case, that the quantity of cement in concrete with 1:4:8 ratio is not less than the quantity of cement in concrete of ratio 1:2:4. In fact, in a given quantity of cement concrete of 1:4:8 ratio, the quantity of cement is very nearly half that of the quantity of cement in the same quantity of 1:2:4 concrete. It is further respectfully submitted that if this correction is read in the above judgment, it will not make any difference in as much as the rates for two different types of concrete would be also different. Nonetheless the

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rate for R.C.C. will be higher than the rate for plain cement concrete of the same ratio, not because of change in the quantity of cement but because of additional difficulty in placing, ramming and vibrating the concrete presuming that the cost of steel is separately paid for including the cost of cutting, bending, binding and placing in position the steel reinforcement. It is on this count that the claim of the contractor could be sustained.

(5)

Changes requiring supply of panelled windows instead of glazed windows amounts to novation

After the plaintiff company had manufactured glazed windows covering 2000 square feet in accordance with the original design, the plan was revised and the plaintiff was required to manufacture and supply panelled windows. The cost of material and the labour cost for panelling was to be borne by the plaintiff company.The plaintiff company asked the Executive Engineer for enhancement of rate. On demand from the Executive Engineer the plaintiff company also supplied the detailed analysis of rate. The Executive Engineer recommended to the Superintending Engineer that the rate for new work be enhanced. It was alleged that the Executive Engineer advised the plaintiff to carry on with the supply like a good contractor. The plaintiff company consequently completed the supply as per the new design but the Superintending Engineer did not agree to the enhancement of the rate and the matter had to be referred for arbitration to the same Superintending Engineer. He allowed the claim but the quantum of relief was objected to by the contractor. 78

State of U.P. v. Chandra Gupta & Co. AIR 1977 All 28 (32).

The trial judge set both the award and reference aside. The conclusion of the trial court, that there was no agreement between the parties as to the rates at which the plaintiff was to be paid for the revised work was upheld by the High Court, in the appeal by the State. The observations of the High Court being illuminating on the point are partly reproduced below. "It is of the essence of the contract that there should be an aggregatio mentium, the meeting of the minds of the contracting parties. In this case there was no consensus ad idem as to the making charges of windows of the altered design. Rates of new type of windows were not settled and there was neither any offer by the one nor the acceptance by the other. No sooner was the design revised, the plaintiff demanded enhanced rates to which the Government never agreed". The High Court further observed79: "A person who does work or supplies goods under a contract, express or implied, if no price is fixed, is entitled to be paid a reasonable sum for his labour and materials supplied. If the work is outside the contract the terms of the contract can have no application; and the contractor, in the absence of any new agreement is entitled to be paid a reasonable price for such work as was done by him. Of course, it is necessary in all such cases' that the extra work outside the contract 'has been ordered or accepted by the defendant." It was held by the High Court that "in this case, however, the subsequent requirement of the defendant, to supply panelled windows, instead of glazed windows, was in the nature of a novation; and the defendant was bound in law to compensate the plaintiff for the panelled windows; the obligation to supply which was de hors the original undertaking. In such a case, the plaintiff can claim a fair and reasonable price for the work done, or the goods supplied on the basis of quantum meruit that is so much as is deserved or merited."

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"Here the original contract had been superseded by a new undertaking, and the new work was not complementary to the work originally contemplated, but outside its scope. The defendants cannot avoid payment of the txtra cost involved in the new type of work which was required to be done." 79 (6) Extra cost for direction to use specific quality materials Where, the owner or his architect/engineer insists upon use of specific quality material not originally specified, the contractor can claim extra cost. In one case the contractor was directed to use new planks for shoring instead of old planks and the arbitrator allowed the claim of the contractor for extra payment. It was held by the Calcutta High Court80 : "It appears to us that by insisting on supply of new planks the appellant altered the terms and 79 80

State of Punjab v. Hindustan Development Board Ltd. AIR 1960 Punj. 585. Calcutta Metropolitan W. & S. Authority v. M/s. Chakraborty Bros., AIR 1988 Cal. 423 (425-6).

conditions of the contract which was accepted by the respondent with a claim for a higher rate and the appellant was not entitled to call upon the respondent to execute the work at the original rate. There was sufficient evidence before the Arbitrator on which he could allow the claim of the respondent." (7) 'Extras' on Account of Additional Difficulties in executing the work It not infrequently occurs in practice, particularly in engineering contracts such as the construction of dams, bridges, etc. and excavation for canals, sewers, etc. that unexpected difficulties may be encountered which may necessitate change from the expected method of working. Most contracts contain express provision making such risk or contingencies the responsibility of the contractor, in the form of, for example, express disclaimers as to the state of the site, subsoil conditions, etc. The question as to whether the contractor in such a case can claim and succeed in getting payment for the extra expenditure occasioned by such an eventuality needs to be considered. The answer to this question is not simple and straightforward. It will depend upon the facts and circumstances of each case, the terms of the agreement including type of contract (i.e. lump sum or using bills), specifications, etc. The general trend of the Court decisions is to hold the contractor liable for extra expenditure required to be incurred.81The exceptions can be made of cases where: (i) There is misrepresentation of conditions by the owner; (ii) Difficulties encountered are in variations ordered; (iii) There is ground to believe that the change in design made by the engineer necessitated extra expenditure; etc. FIDIC conditions of contract for works of Civil Engineering Construction contain Clause 12.2 which provides in such contingencies as under: (a) The contractor to give notice of physical obstructions or physical conditions, not foreseeable by an experienced contractor to the engineer with a copy to the employer. (b) The engineer if satisfied that the obstruction/conditions could not have been reasonably foreseen by an experienced contractor, after the consultation with the employer and the contractor, to determine extension of time and amount of costs which the contractor may have to incur, to be paid to him in addition to the contract price.

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(8) Force majeure Clause— Compensation when allowable A contract contained the provision reading : "Neither party shall be liable to the other for any loss or damage occasioned by or arising out of act of god, such as unprecedented flood...". 81

See illustrations in Hudson's Building and Engineering Contracts, 10th Ed. P. 642.

An award for payment of compensation on account of flooding of the work area during progress was upheld by the trial Court and also the High Court. The Supreme Court of India upheld the said decision for the reason, the appellant did not lead evidence that the rain was unprecedented and in fact it was an act of God.81 In another case, with the contract containing the similarly worded clause, the claim was made on account of material washed due to breach of protection bund which was also constructed by the same contractor who made the claim, the State sought protection under the force majeure clause. It was alleged that the unprecedented rains caused excessive discharge. The appeal against the award was dismissed by the High Court holding82: "The State has not been able to substantiate its protection under force majeure clause as no evidence in support thereof has been brought on record as none has been pointed out by the learned Deputy Advocate General. There is no detail of discharge of water prior to the construction of the protection bund nor any has been mentioned after the construction of the protection bund. The State has also not pointed out the structural design of the protection bund and resultantly the strength for which it has been constructed. Thus, the argument in support thereof is totally misconceived and is therefore, rejected. "The argument that the material was not kept at the safe place, therefore, the contractor is liable on account of "volunti non fit injuria" is not sustainable. The learned Deputy Advocate General has not been able to point out any evidence or any communication by which the place for stacking the material by the contractor had ever been specified. He has also not been able to refer to any communication to the effect that after the material had been stacked by the contractor, it had ever been pointed out to him that the material should be removed from the place to avoid any possibility of the water coming in on account of excessive rains. Thus, the plea remains unsubstantiated. As such, the argument has no force and the same is rejected. In view of the above, the appeal is dismissed." In yet another case decided by the Bombay High Court, claim for murum washed away by tidal waves was allowed by the arbitrator in spite of exemption clause on the reasons recorded thus: " At the time of invitation of tenders, there was provision of aerated lagoons; enclosure bund and the W.W.W.T.F. Subsequently the scope of work was revised and in this process aerated lagoons and enclosure bund was deleted. And at this stage the work of filling in W.W.T.F. was taken up without the provision of enclosure bund. The filling work was subjected lo the tidal effect which was not contemplated by the claimants at the time of submission of his 8 1 State of U.P. v. Allied Constructions, 2003 (3) Arb. LR 106 (SC). 8 2 State of Punjab v. Parmar Construction Co. 2002(3) Arb. LR 32 (P.& H.).

offer. Their stand that this attracts extra payment for washout of filled up materials needs to be considered favourable on this background. When the filling area is facing the main Arabian Sea Water front this effect is quite pronounced and has to be considered in favour of the claimants. I therefore agree with the claimants as about payability of this item."

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It was held:83 "I am of the view that the construction which has been placed by the Arbitrator is a possible view to take and the Court would not be justified in interfering with the Award in view of the limitations placed on the exercise of its jurisdiction of Section 34 of the arbitration and Conciliation Act, 1 9 9 6 . The Arbitrator while construing the contract has formed the view that the restriction which was placed under clauses 14 and 70 would apply to B.O.Q. items " (and not to extra items). In the case mentioned above the award allowing the quantity excavated to be the quantity in fill because the BOQ showed the two quantities under the two items as identical was set aside on the ground that the agreement expressly prohibited the basis of measurement as per excavation in borrow area but on the basis of levels taken before and after the formation of the bank.

(9) Excess consumption of materials In the above case, the claim for consumption of gross quantity of steel as against the net quantity measured and recorded was allowed because the employer had agreed to the payment, it was not challenged in the petition also. In another case an arbitrator by his award rejected recovery on account of excess consumption of steel and cement on the ground that the employer had not made any allegation that the contractor had diverted the steel and cement and the excess material could have been used in the work itself. It was held that the arbitrator had given good and sufficient reasons.84

8 3 Municipal Corporaion of Greater Mumbai v. Prestressed Products (India) 2003(2) Arb. LR 624 (Bombay). 8 4 Bhai Sardar Singh & Sons v. Delhi Development Authority, 2003(1) Arb. LR 387 (Delhi); Also see M/s Jagan Nath Ashok Kumar v. D.D.A., AIR 1995 Del hi 87.

♦ ♦♦

Chapter 6

Time for Completion, Delay in Completion 6.0

INTRODUCTION

A construction project consists of many activities. Each activity requires some time for its completion. The cost of execution varies with the time required for its completion. The total cost of work is made up of two elements. The first is direct cost, which includes cost of materials, labour and plant. The second consists of overheads. These two bear a definite relationship with time. If a graph of time-cost relationship were plotted it would be clear that for every project there is an optimum time for its completion. In other words if a project were allowed to be completed in its optimum time the total cost would be minimum. If an attempt is made to complete the project earlier than the optimum time direct costs increase and indirect costs decrease but the overall cost is high. So also if a project is allowed to linger for a period longer than the optimum time the direct costs may decrease but the indirect costs increase and the overall cost is high. Every attempt, therefore, must be made to plan a project in such a way that the contractor will get optimum time for its completion.

TIME COST CURVE a 0 . D z

CRASH TIME

0 J

DIREC

a -i 0 INDIKKCri'

■—i ------------ r ----------1 --------- 1--------- 1

--------------- 1 O «

1

8

2

3

4

5

u« 1-1

s

0.

FIG.l If earlier completion than the optimum time is desired, the owner should weigh the advantages of direct and indirect benefit which may thereby result, against the high cost of construction. It must, however, be remembered that no matter how much of

1 0

resources are put in, a project cannot be completed earlier than what is called a 'crash time'. Before inviting tenders for a work a careful thought must be given to the above aspects and a realistic duration fixed for completion of the work. 6.1 PROVISIONS OF THE LAW Indian Contract Act Section 46 Sections 47 to 50 Section 55; Section 63

Art. 6.17 Art. 6.18 Art.6.5,6.15, 6.16 and 6.12.

6.1.1 Provisions of Standard Form Contracts State P.W.D. C.P.W.D. M.E.S. Railways. M.D.S.S. &A.P.D.S.S. FIDIC 1992 FIDIC 1999 MoS&PI.GOI

C1.2ofB-l/B-2forms CI. 2, 3 and 6 CI. 11 CI. 17 CI. 59 CI. 41.4,43.1,44.1 to 44.3 CI. 8.1 to 8.12 CI. 17,27 to 32.

6.2 MODE OF SPECIFYING TIME LIMIT Once the time required for completion of a project is decided it may be stipulated in the contract in anyone of the following three ways: (a) on a given date, or (b) within a definite number of calendar months, or (c) within a stipulated number of working days. In order that the contractor should be careful in avoiding delay in completion the provisions made in the standard form contracts usually empower the engineer to take certain actions during the performance of the project. As an example, Clause 2 of the B-2 form of contract used by the State of Maharashtra for executing public works is discussed here. A similar provision is found in the CPWD form as also forms adopted by other States and public undertakings. The clause reads: "The time allowed for carrying out the work as entered in the .tender shall be strictly observed by the contractor and shall be reckoned from the date on which the order to commence work is given to the contractor. The work shall throughout the stipulated period of the contract be proceeded with, with all due diligence (time being deemed to be of the essence of the contract on the part of the contractor) and the contractor shall pay as compensation an amount equal to one per cent, or such smaller amount as the Superintending Engineer (whose decision in writing shall be final) may decide, of the amount of the estimated cost of the whole work as shown by the tender for every day that the work remains uncommenced, or unfinished, alter the proper dates. And further to ensure good progress during the execution of the work, the contractor shall be bound, in all cases in which the time allowed for the completion of any work exceeds one month lo complete: the time 1/3 of the work in i/2 —do — —do — 3/4 _do„ — do —

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In the event of the contractor failing to comply with these conditions he shall be liable, to pay as compensation an amount equal to one per cent or such smaller amounts as the Superintending Engineer (whose decisionin writing shall be final) may decide of the said estimated cost of the whole work for every day that the due quantity of work remains incomplete: "Provided always that the total amount of compensation to be paid under the provisions of this clause shall not exceed 10 per cent, of the estimated cost of the work as shown in the tender." This clause provides for the following: (i) Time limit for completion, which is usually stipulated in calendar months (ii) Time shall be reckoned from the date of order to commence the work (iii) Time is deemed to be of the essence only on the part of the contractor (iv) It provides only four stages for review of progress and stipulates payment of liquidated damages if the progress is not maintained, as entered in the agreement (v) The decision of the Superintending Engineer is made final as regards the levy of penalty. (vi) The maximum amount of penalty is mentioned as 10 per cent of the estimated cost as shown in the tender. The first provision makes Section 55 of the Indian Contract Act applicable. When a contract stipulates a time limit, it is obvious, to avoid dispute, that it should also stipulate the date from which it shall be reckoned. Even after receiving the order to commence the work, the contractor would naturally require a week or two for the actual commencement of the work. FIDIC 1999 Edition clause 8.1 stipulates that the Engineer shall give the Contractor not less than 7 days' notice of the commencement date. The provision further stipulates that if not specifically stated in the COPA (Conditions of Particular Application) the commencement date shall be within 42 days after the contractor receives the letter of acceptance of his tender. This form thus takes into account the fact that mobilization period depends upon the nature and extent of the project and cannot be uniformly stated as 15 days or so. As such this provision is realistic, reasonable and fair and may be adopted for all contracts. Clause 17.1 of the Government of India Form reads: *Note - The quantity of work to be done within a particular time to be specified above shall be fixed by the Officer competent to accept the contracts after taking, into consideration the circumstances of each case and inserted in the blank, space kept for the purpose.'

"The Contractor may commence execution of the Works on the Start Date and shall carry out the Works in accordance with the programme submitted by the Contractor as updated with the approval of the Nodal Officer or his nominee, and complete by the intended completion dale." The stipulation making time to be of the essence of the contract is legally ineffective and need not be incorporated. The provision incorporated to ensure good progress is indeed age-old and has been drastically changed in view of recent developments in planning and scheduling of works. It is advisable that each tenderer be asked to submit along with his tender the construction schedule of the project based on the CPM or PERT method. Alternatively the blank tender forms issued may include a construction schedule expected by the owner/engineer to which the contractor be directed to adhere in future planning and scheduling. On acceptance of a tender the schedule should be included in the contract documents. It would be helpful in more than one way to avoid disputes, which may arise later on during the performance of the contract, inasmuch as, with its use, the cause of delay can be pinpointed. The part of the clause dealing with liquidated damages is dealt with in Chapter 7. 6.3

CAN ADEQUACY OF TIME LIMIT BE QUESTIONED?

C.P.W.D. Manual Vol.2 stipulates time limit that may be allowed for completion of a work depending upon the cost of construction. However, once a different time limit is stipulated and agreed to by the contractor he cannot question the adequacy of the time allowed relying on the provision in the C.P.W.D. Manual Vol.2. 1 Once an undertaking is made one cannot avoid liability under it merely because it is difficult to perform or not possible to perform except at an exorbitant cost. 6.4

MEANING OF 'WORKING DAYS"

Where a contract provides that the work shall be completed within a stipulated number of working days, dispute may arise as to the legal interpretation of the term "working days". The term "working days" means the days on which it is possible to carry out the work or the work is carried out. The reason for not carrying out the work could be any, such as Sundays, holidays, bad weather, acts or omissions of the owner or his engineer/ architect necessitating suspension of work; etc.

ILLUSTRATION In one case the contract provided that the building was to be completed in 125 "working days". It further provided that should the contractor fail substantially to perform the work within the time limit allowed, the owner would be entitled to deduct $ 25 for each day of 1

Mohinder Singh v. Executive Engineer, AIR 1971 J & K 130.

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such delayed performance. However, in computing the amount of compensation for delayed performance Sundays and holidays were to be excluded from excess days of performance. The contractor failed to complete the work in 125 days excluding Sundays and holidays because of bad weather and acts of the owner. The owner, thereupon, deducted from the contract price compensation at $25 per day. In an action brought by the contractor to recover the sum so withheld, the owner claimed that under the contract all days except Sundays and holidays constituted "working days". The contention of the contractor was that the term "working days" had a well defined meaning in the construction business and did not include, in addition to Sundays and holidays, days when the work could not be performed because of unusually bad weather or days when the work was delayed by the acts of the owner. He produced testimony of an expert in the building trade to support his contention. While sustaining the contractor's contention, the Court observed that the owner and his architect, at the time the contract was entered into, must have known the meaning of the term "working days" when used in a construction contract.2

6.5 MEANING OF "TIME SHALL BE DEEMED TO BE THE ESSENCE OF THE CONTRACT" When time for performance is stipulated in the agreement and it is further stated to be of the essence of the contract, the parties to the contract understand that the performance of the contract at the precise time designated is of extreme and obvious importance. Section. 55 of the Indian Contract Act, which deals with this matter, reads as follows: "55. Effect of failure to perform at fixed time in contract in which time is essential. "When a party to a contract promises to do a certain thing on or before a specified time, or certain things on or before the specified times, and fails to do any such thing on or before the specified time, the contract, or so much of it as has not been performed, becomes voidable at the option of the promisee, if the intention of the parties was that time should be of the essence of the contract'. "Effect of such failure when time is not essential.

"If it was not the intention of the parties that time should be the essence of the contract, the contract does not become voidable by the failure to do such a thing on or before the specified time; but the promisee is entitled to compensation from the promisor for any loss occasioned to him by such failure. 2

Lewis Y, Jones, 251, S. W. 2d, 942, Court of Appeals of Texas. 1952.

"Effect of acceptance of performance at time other than that agreed upon.

"If, in case of a contract voidable on account of the promisor's failure to perform his promise at the time agreed, the promisee accepts performance of such promise at any time other, than that agreed, the promisee cannot claim compensation for any loss occasioned by the nonperformance of the promise at the time agreed, unless, at the time of such acceptance, he gives notice to the promisor of his intention to do so.

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These words used in Section 55 are to be understood in respect of reciprocal promises to perform certain acts on or before specified times and not necessarily with reference to the entire transaction. For example, in a typical construction contract, to complete construction within the stipulated time, the contractor is the promissor and the owner is the promisee. However, to hand over the site for working or for making the payment, owner is the promisor and the contractor is the promisee. What is the effect of the contractor's failure to complete the work within the time specified in the contract'?

Section 55 provides two answers to this question. Firstly, if the intention of the parties was that the time should be of the essence of the contract, the contract or so much of it as has not been performed becomes voidable at the option of the owner. That is if the owner so desires he can terminate the contract by proper notice immediately after the lapse of due time and sue the contractor for recovery of damages for the breach of the contract. In the absence of a proper notice the option to avoid the contract will be deemed to have been waived and the contract subsisting.3 Secondly, if the time is not deemed to be of the essence of the contract the contract does not become voidable at the option of the owner but only entities him to compensation from the contractor for any loss occasioned to himby such failure. The owner cannot, without making himself liable for breach of the contract, terminate the contract immediately after the time limit is over. When the contract or part of it becomes voidable at the option of the owner and he does not annul it but agrees for an extension of time expressly or by implication he cannot claim compensation for the non-performance at the agreed time in the absence of notice to that effect. It does not, however, mean that the owner forfeits his right to claim damages if the contractor fails to complete the work at the extended time.4 If the owner is willing to extend the time of performance on the condition that such an extension will not prejudice his right to get the damages for the loss he sustained due to delay, he must give the contractor notice of his intention to recover damages at the time the extension is granted. Such a notice is not necessary if the time is not of the essence of the contract. 3 4

Arun Prakash v. Tilsi Charan AIR 1948 Cal. 510. Mohammad Habib Ulah v. Bird & Co. (1921), LR 48 IA 175.

ILLUSTRATION State v. Associated Engineering Enterprise, Hyderabad The above case5 needs to be specifically considered for it raises certain important issues. . The said case was decided under Section 30 of the Arbitration Act and it still complicates the matter, inasmuch as the Court admittedly did not enter "into the merits of the decision of the arbitrator." Brief facts of the case were as under: An agreement was entered into between the State of Andhra Pradesh and the respondentcontractor for executing the work of constructing approaches to the rail-cum-road bridge across the river Godavari at Rajahmundry. A period of 42 months was stipulated for completing the work i.e. the work was to be completed on or before 21. 12.1973.The respondent actually completed the work by 10.12.1974. Extension was granted up to the end of August 1974, subject to the imposition of penalty of Rs.50/- per day after 1.9.1974.

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After the work was completed, disputes arose between the parties and were referred to arbitration in accordance with the agreement. The arbitrator made an award on 25.3.1981. The award was a non-speaking one. It was objected to on behalf of the State but was made a rule of the Court by the Trial Court. Aggrieved, the State filed an appeal to the High Court. The High Court set aside the award under Claim No. 1 which decision raises an important issue as already stated. Claim No.l included compensation for delay in handing over part of the site. It was urged before the High Court that: "Even if there is any delay in handing over the site, no claim for compensation can be made since any such claim is barred by clause 59 of the APDSS. It is also submitted that the contract does not provide for any such compensation, and hence the arbitrator, who had to operate within the fourcorners of the contract, had no power to award any compensation on this account." * It was further observed: "According to this Section, it was open to the respondent to avoid the contract on account of the Government's breach of promise to deliver the sites at a particular time, but, he did not choose to do so, and accepted the delivery of sites at a time other than what was agreed upon, between them earlier. If so, he is precluded from claiming compensation for any loss occasioned by such delay, unless, of course, at the time of such delayed acceptance of the sites, he had given notice to the Government of his intention to claim compensation on that account. It must be remembered that this provision of law was specifically referred to, and relied upon in the counter, filed by the Government to 'the respondent's claim before the arbitrator. But, it is not brought to our notice that the contractor had given such a notice (contemplated by the last sentence in Section 55). We must make it clear that we are not entering into the merits of the decision of the arbitrator. What we are saying is that such a claim for compensation is barred by law, except in a particular specified situation and inasmuch as such a particular specified situation is not present in this case, the claim for compensation is barred. It is well settled that an arbitrator, while making his award, has to act in accordance with the law of the land, except in a case where a specific question of law is 5 6

State v. Associated Engineering Enterprise, Hyderabad AIR 1990 A.R 294. Hind Construction Contractors v. State of Maharashtra, AIR 1979 SC 720.

referred for his decision." The author is in respectful disagreement with the view expressed by the High Court. It is submitted that agreement provided for both penally for delay and extension of time under certain contingencies thereby attracting the law laid down by the Supreme Court of India * drat time ceased to be of the essence of the contract. As such paragraph two of Section 55 of the Indian Contract Act is applicable. The third paragraph of the said Section is applicable only when paragraph one of Section 55 applies, as is clear from the opening words of the third paragraph. Under the law, therefore, it was not open to the contractor to avoid the contract in the first instance and it was not obligatory on his part to give any notice contemplated under paragraph 3 of Section 55 of the Indian Contract Act in the second instance. The arbitrator did not misconduct on this count, it is respectfully submitted. However, the High Court has further observed: 7 "Even apart from Section 55, we are of the opinion that the arbitrator had no power to award compensation as claimed by the respondent. Clause 59 of the APDSS specifically bars such a claim. We have set out the clause in full hereinbefore. The meaning of the said clause was considered by a Bench of this Court of which one of us (Jeevan Reddy, J.), was a member in A A.O. No.677/81 and C.R.P. .No.385 of 1982 disposed of on 19-41982. It was held: "Coming to clause 59 of the preliminary specifications of "APDSS", it provides that neither party to the contract shall claim compensation "on account of delays or hindrances to work from any cause whatever." That the delays and hindrances contemplated by clause 59 include the stoppage, hindrances and delays on the part of the department as well, is clear from the

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following sentence, in the first part of the said clause, viz., "the Executive Engineer shall assess the period .of delay or hindrances caused by any written instructions issued by him, at 25% in excess, of the actual work period so lost". Indeed, the second para of the clause also contemplates delays and hindrances being caused on account of the failure of the Executive Engineer to issue necessary instructions. In such a case, the contractor has a right to claim the assessment of such delay by the Superintending Engineer of the Circle, whose decision is declared to be final and binding on the parties. But, any such claim has to be lodged in writing to the Executive Engineer within fourteen days of the commencement of such delay, or hindrance, as the case may be. We find it difficult, therefore, to say that clause 59 has no application to the present case. The words "from any cause whatever", occurring in clause 59, are wide enough to take in delays and hindrances of all types, caused by the department, or arising from other reasons, as the case may be. Thus, by virtue of clause 59, the contractor is precluded from claiming any compensation on account of delays or hindrances arising from any cause whatever, including those arising on account of the acts or omissions of the departmental authorities..." The other decisions of the same court were also referred to.8

The author respectfully differs from the views expressed by the Andhra Pradesh High Court on the interpretation of Clause 59 of the "APDSS". 7 8'

AIR 1990 A.P. 294(302). Chief Engineer, Panchayat Raj Department v .B.Balaiah (1985) I APU 224 and State of A.P. v. S.Shivraj Reddy (1988) 2 APU 465.

The said Clause is given the heading: "Delays and Extension of time". It nowhere refers to or speaks about monetary compensation. The word compensation in ordinary parlance means anything given to make things equivalent, to make amends for loss; it need not therefore necessarily be in terms of money.9 The Supreme Court has held that compensation for one property may be by allotment of other property. Similarly, property construed "APDSS" Clause 59 uses the word "compensation" for loss of time in the sense, "extension of time" and not monetary compensation. It does not even remotely hint of monetary compensation. The view of the High Court that Clause 59 of APDSS clearly barred the claim for monetary compensation is not the correct view, it is submitted with respect. The Clause reads: "No claim for compensation on account of delays or hindrances to the work from any cause whatever shall lie, except as hereinafter defined." Thereafter the provisions speak of nothing except extension of time. The paragraph heading, though, cannot control the meaning of the text, certainly can be referred to for proper interpretation of the terms of the contract.10 Until the Supreme Court reviews the decision11 the interpretation is bound to hold the field. This is demonstrated by the following illustration: ILLUSTRATION The respondent-contractor was awarded a contract to execute the work - Lining to Canal. The value of the work as per the contract was less than the estimated value by 18%. The respondent entered into an agreement on 23-11-1981. A supplemental agreement was also entered into in March, 1982. The time for completion of the work was 12 months from the date of handing over the site. The site was handed over on 1-1-1982. The performance of contract got prolonged much beyond the stipulated period, mainly because the Department did not stop the flow of water in the canal. The respondent-contractor sent a letter on 26-121986 intimating the fact that he was closing the contract. This was followed by another letter dated 14-10-1987 (Ex. C-30) treating the contract as null and void and demanding settlement of his accounts, including compensation payable for the breach of contract. The Department itself sent a communication to the petitioner on 29-1-1990 that the contract was being closed

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without levy of penalties. In the meanwhile, the disputes were referred to a panel of arbitrators. Later on the Court appointed a retired Chief ^Engineer, P.W.D., as sole arbitrator in the place of the panel of arbitrators. The learned arbitrator entered on the reference on 112-1990 and passed the award on 8-8-1991. An amount of Rs. 13,89,343/-was awarded towards various claims with interest thereon at 24% p.a. from the date of award to the date of realization. A sum of Rs.50,000/- was awarded towards cost. The counterclaim of the appellant viz., for recoveries on various accounts was rejected. In Claim No. 6, the case of the contractor was that the execution of the work had to be prolonged much beyond the stipulated period of contract solely on account of the delay, defaults and breaches of contract on the part of the Department, with the result that he had to incur extra cost towards materials, labour, transport, etc. Hence, he claimed Rs. 2.98 lakhs 9

State of Gujarat v. Shantilal, AIR 1969 SC 634.

1 0 • Union of India v. Raman Iron Foundry, AIR 1974 1974 SC 1265 (1270). Also see Art. 4.10.

11

Ch. Ramalinga Reddy v. Supdt. Engineer, (1994) 5 Scale 67.

towards escalation in cost at 25% extra for the work done beyond the agreement period, deducting the extra rates already paid for a part of the extended period. The learned arbitrator referred to clause 2(b) of the 'Additional Conditions of Contract' in Schedule 'D' appended to the tender documents, which read as follows: " 2(b). Water may be released into the canal from March to June and the work may have to be stopped partly or wholly during this period. In such a case, the Contractor shall resume and complete the work after the water supply is closed. No extra rates for any item other than the agreement rates will be paid due to such interruption in work. Necessary extension of time will, however, be given." The arbitrator found that the contractor was prevented from completing the contract by reason of the water flow in the canal being allowed for an indefinite period every year. The arbitrator further referred to the understanding reached between the contractor and the Department at the meeting held on 9-8-1983 where under the escalated rates as per the Standard Scheduled of Rates plus or minus the original tender premium was offered in addition to dewatering and desilting charges to be paid extra if the balance work was done, by June, 1984. The contractor expressed his willingness to resume the work and to complete the same by June, 1984. This understanding was reached on the basis that the canal could be closed by the end of October and it would be possible to resume the lining works from November 1983 to June, 1984, but the canal was made free from water only by the end of November 1983 and after the work was resumed in January 1984, it was soon intercepted by the release of water on 17-2-1984 for about 10 days and thereafter in July 1984. For the work done by the contractor in 1984, extra rates over and above the agreement rates based on S.S.R. of 1984-85 was allowed to the respondent and payments were made accordingly. The learned arbitrator observed that by parity of reasoning, the Government ought to pay further increased rates based on S.S.Rs. of 1985-86 for the work done by him after May, 1985. Thus observing, he arrived at the value of work done after May 1985 based on the quantum of work taken from the measurement books and the increased rates as per the S.S.R. of 1985-86 (over and above the 1984-85 rates) and worked out the difference as per Clause 6 of the Additional Conditions of the Tender Notice. 25% increase uniformly sought for by the contractor was not allowed. Thus, the arbitrator awarded 1.12 lakhs towards claim No. 6AThe Department relied upon Clause 59 of the A. P. Standard Specifications, which formed part of the contract to resist the claim of the contractor, and before the High court also, reliance was placed on this clause and the decision of the Supreme Court in Ch. Ramalinga Reddy v. Supdt. Engineer, (1994) 5 Scale 67. Clause 59 provides that no claim for compensation on account of the delays or hindrances to the work from any cause whatever shall lie except as mentioned therein. It had been held by a Division Bench of the Andhra Pradesh High Court12 that by virtue of Clause 59, the contractor was precluded from claiming

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any compensation on account of the delays or hindrances arising from any cause whatever including those arising on account of acts or omissions of the departmental authorities. It was observed:13 "The question is whether in the light of the aforementioned decisions, especially the latest decision of the Supreme Court, Clause 59 precludes claim No. 6 being 12 13

A.A.O. No. 677 of 1981 dated 19-4-1982 Also see: State of A.P. v. Associated Engineering Enterprises, Hyderabad, AIR 1990 Andh Pra 294. Govt, of A.P. v. V. Satyam Rao.AIR 1996 AP 288 .

raised and allowed by the arbitrator and whether the arbitrator can be said lo have committed an error ol" jurisdiction or a patent error of law in granting extra rale based on Standing Schedule of Rales in force during the relevant year i.e., 1985-86. Before dealing with the question of applicability of Ramalinga Reddy's case (1994 (5) Scale 67) (SC) (supra) to the facts of the present case, we would like to advert to what the arbitrator has said vis-a-vis Clause 59. The arbitrator drawing support from the decision of this Court in V. Raghunadha Rao v. Stale of A. R, (1988)1 Andh LT 461 opined that clause 59 was totally inequitable and unreasonable. The learned arbitrator observed, "there ought to be some sense of proportion; the contract period of one year cannot be extended for two more years without paying any compensation for the extra cost involved." As the execution of the contract within the timelimit stipulated was clearly frustrated by a fundamental breach or failure on the part of the Department, Clause 59 cannot be put against the contractor. The arbitrator further commented, "payments were made at the increased rates for the work done in 1984 season after accepting a supplemental agreement. By the same argument, the respondent ought to pay at further increased rates based on S.S.R. of 1985-86 for the work done after May, 1985 since water was again released in July, 1984 irregularly without giving adequate time for the completion of the work. The argument of the respondent invoking Clause 59 is invalid in the light of Ins own acceptance of the breach in contract necessitating payment at increased rate and the claim as such cannot be resisted." It was held: "...We may mention that the reasoning of the arbitrator based on invalidity of Clause 59 cannot be sustained for the reason that the judgment of the learned single Judge in Raghunadha Roa's case (1988(1) Andh LT 461) (supra) has not become final and in the writ appeal filed against that Judgment, the operation of the same has been suspended. Though the Division Bench confirmed the said Judgment in State of AP. v. Raghunadha Rao, (sic) 1983 (1) ALT 242, the decision of the Division Bench was reversed by the Supreme Court in C. A. No. 530/ 1994 and the matter has been sent back to this Court for fresh consideration of the writ appeal. As already noted, the Supreme Court applied Clause 59 to negative the contractor's claim for escalation vide Ramalinga Reddy's case (1994 (5) Scale 67) (supra). In O.P. No. 4/ 1994 (vide Judgment dated 14-7-1995), a Division Bench of this Court (Lingaraja Rath and Sudershan Reddy, JJ. after referring to Raghunadha Roa's case, held that the claim of the contractor for escalation of rates was beyond the arbitration clause in view of the decision of the Supreme Court in Ramalinga Reddy's case. We must, therefore, proceed on the footing that Clause 59 still holds the field and has to be given effect to if the facts and circumstances of the case warrant. Even then, the second reason given by the learned arbitrator commends itself for acceptance. At any rate, that reasoning which is to be found in the passage extracted supra at page 14 is not inconceivable or impossible to adopt. It is an undisputed fact that the appellants themselves made extra payment based on the Standard Schedule of Rates of 1984-85 for the work done in 1984 season pursuant to a supplemental agreement entered into between the parties. Thus, the appellants did not insist on the performance of the work at the very same rates during the prolonged period of contract, obviously realising the fact that the work could not be executed by the contractor within the stipulated "period or within a reasonable time thereafter for reasons beyond his control and the fault lay at their doors. The appellants did not call in aid Clause 59 of the agreement in

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order to exculpate themselves from the liability to make extra payment when the Department was faced with the prospect of stoppage of work by the contractor. In the interests of progress of work, it entered into a supplemental agreement. The appellants must, therefore, be deemed lo have waived their right to insist on the adherence lo Clause 59 which purports to exclude the liability to pay compensation in the circumstances specified therein. In the context of this changed situation, the arbitrator felt tliat on a similar analogy or parity of reasoning, tire contractor shall .be entitled for the payment at the Standard Schedule of rates prevailing in the year 1985-86 in respect of the work done during 1985-86 season. When once it was found by the arbitrator that there was a fundamental breach of obligation under the contract by one of the contracting parties, namely, the Government, it was within the incidental power of the arbitrator to quantify the loss that was caused to the contractor as a direct result of such breach. The arbitrator acted within his jurisdiction to determine this aspect and felt it proper to award extra amount for the work done during 1985 season based on the same principle that was adopted by the Department itself for the immediately preceding period. The ratio of decision in P. M. Paul's case (AIR 1989 SC 1034) (supra) which was explained by Jeevan Reddy, J. in P. V. Subba Naidu's case (AIR 1990 NOC 90) (Andh Pra) (supra) gets squarely attracted. In Ramalinga Reddy's case (supra), the Supreme Court distinguished P. M. Paul's case on two grounds: firstly, on the ground that there was no clause similar to Clause 59 excluding the claim for compensation and secondly the Department made it clear when extension of time was granted, that no claim for compensation would lie ........ What the arbitrator had done was only to go into an aspect incidental to the breach of contract as was done in P. M. Paul's case. But, he had not done anything de hors the contract. The second point of distinction noted in Ramalinga Reddy's case (1 supra) has also no application here as the appellant did not at any time notify the respondent that the work had to be done during the extended period of contract without claiming any compensation. ... On the other hand it is apparent from the award and the documents mentioned therein that the respondent was throughout claiming compensation/ extra payment for the loss suffered by him for the work that had to be undertaken beyond the contractual period. The principle underlying Section 55 of the Contracts Act cannot, therefore, be put against the petitioner as was done in Associated Engineering Enterprises' case (AIR 1990 Andh Pra 294) (supra). We, therefore, see no-error of jurisdiction or an error of law apparent on the face of the award in allowing claim No. 6A partly.

6.6 WHEN IS TIME OF THE ESSENCE OF THE CONTRACT? It is worthwhile to consider the situations under which the time of performance is deemed to be the essence of the contract. When the parties to a contract desire to make the time to be of the essence of the contract, they must do so by expressing their intention in explicit and unmistakable language. Mere mention of time during or before which something must be done will not be enough.14 Fixation of a period within which contract is to be performed does not make stipulation as to time being the essence of the contract nor does a default clause by itself evidence intention to make the time as an essence of the contract.15 A contract provision normally included to meet this requirement is "the time shall be of the essence of this contract". However, such words will not be effective if they are not in accord with all the other terms of the contract. In 14 15

Kisen Prasad v. Kunj Beharilal, 1925, 24 All L.J. 210, 91 IC. 790 (26) A.A. 278. Chand Rani v. Kamal Rani, AIR 1993 SC i724; Gomathinayagam Pillai v. Palaniswami Nadar AIR 1967 SC 868. Also see AIR 1974 Raj. 112; Vairavan v. K. S. Vidyanandam,AIR 1996 Mad 353.

the absence of an express stipulation as the one above the intention of the parties is to be inferred. It may be inferred from the antecedent conduct of the parties but not from the subsequent conduct of the parties after the contract is made.16

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Time may be implied as essential in a contract, from the nature of the subject matter with which the parties are dealing. Examples of such subject matters include: (a) Sale of a commodity, the value of which undergoes constant change; (b) modem business dealings, which may include purchase of land for prosecution of trade and (c) mine transactions, etc. The essentiality of time may also be implied from the surrounding circumstances connected in each case with a particular contract. For example, a contract for purchase of a house, where the object of the purchase was immediately occupying it as the purchaser's own residence, included a condition that the owner should give possession of the house on a stipulated-date; in the breach that followed, it was held that time was the essence of the contract.17 However, in a case18 the Supreme Court observed with reference to its earlier judgement:19 "The law is well settled that in transactions of sale of immovable properties, time is not the essence of the contract." Even if it is not of the essence, the Court may infer that the transaction is to be performed within a reasonable time frame from i. the express terms of the contract; ii. the nature of the property; and iii. the surrounding circumstances, for example, the object of making a contract. The Courts generally look at all the relevant circumstances including the time limit specified in the agreement and determine whether discretion to grant specific performance should be exercised. The time limit prescribed by the parties in the agreement has its own significance and value. It would not be reasonable to say that because the time is not made the essence of the contract the time limit specified in the agreement has no relevance and be ignored altogether. It has been rightly observed, it is submitted that".. the rigor of the rule evolved by Courts that time is not of the essence of the contract in the case of immovable properties evolved in times when prices and values were stable and inflation was unknown - requires to be relaxed, if not modified, particularly in the case of urban immovable properties. It is high time, we do so."20 In short it must be kept in mind that when the parties agree and prescribe certain time limit for taking steps by one or the other party, it must have some significance and that the said time limit cannot be ignored altogether on the ground that time has not been made the 16 17 18 19 20

Aran Prakash v. Tulsi Charan, AIR 1948 Cal. 510. Gedye v. Duke of Montrose, 26 Beav 45. Indira Kaur v. Sheo Lai Kapoor, AIR 1988 SC 1074. Govind Prasad Chaturvedi V. Hari Dutt Shastri (1977) 2 SCR 877 : AIR 1977 SC 1005 Also see Bhagwan Singh v. Teja Singh,AIR 1995 P&H 64 K. S. Vidyanadam v. Vairavan, (1997) 3 SCC 1 : AIR 1997 SC 1751. Also see: M/s. Ceean International Private Limited v. Ashok Surana, AIR 2003 Cal 263; Kabirdass v. Vinothambal and others, 2002(3) Arb. LR 471(Madras).

essence of the contract. It is not necessary to state in the agreement itself that time is to be the essence of contract. The express covenants themselves in the contract may disclose the same such as when clauses under an agreement provide the consequence in case if for any reason the requisite exemption/permission is not forthcoming by the agreed date or within such extended period as may be mutually agreed to, the agreement will become inoperative and unenforceable. In view of such provisions there remains no doubt whatsoever to hold that the parties have specifically agreed the time to be the essence of the contract.21

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ILLUSTRATIONS (1) An agreement of sale of immovable property stipulated that part consideration was to be paid within 10 days of the execution of the agreement and the balance at the time of registration of the deed. It was further agreed that the vendor would redeem the property, which was mortaged, and also obtain an income tax clearance certificate. The agreement used the word "only" in respect of the amount and ten days time, it was held that the intention of the parties was to make time the essence of the contract. When the purchaser was not ready and willing to pay the amount as agreed before possession and income tax clearance, it was held that the purchaser was not entitled for specific performance.22 (2) In a case, the agreement was dated 21-6-1970 and the time prescribed for payment of balance was 2-8-1970 i.e., about six weeks. It also contained a specific clause that in case the payment was not made the earnest money of Rs.2,500/- would stand forfeited. However, the plaintiffs made a part payment on 25-11-1970, the defendants accepted the same and an endorsement to that effect was made. Under the endorsement also it was specifically mentioned that the balance would be paid by 31-12-1970, i.e., within five weeks and the registered document shall be obtained, failing which the agreement would stand cancelled. It was held:23 "The above said terms .. clearly show that intention of the defendants to complete the sale transaction at the earliest point of time. It is also relevant to note that even according to the plaint averments there is rapid increase in the price of the schedule land. The fact that both under Exs. Al and A2 short time was stipulated for payment of balance, apart from incorporating specific clauses for cancellation of the agreement as well as forfeiture of the earnest money paid, clearly indicates that the parties intended that time is the essence of the contract. Ex. A3 is nothing but an endorsement made on Ex. Al acknowledging the part payment made. The defendants clearly explained that on an assurance given by the plaintiffs that the balance will be paid shortly thereafter, no clause was incorporated under Ex. A3 fixing time limit. In the facts and circumstances of the case and having regard to the express terms under Exs. Al and A2 and the nature of the property involved, even in the absence of a specific term under Ex. A3, we have no hesitation to conclude that time is the essence of the contract in question." 21 22 23

P. Purushotham Reddy v. M/s. Pratap Steels Ltd.,AIR 2003 AP 141. Chand Rani v. Kamal Rani. AIR 1993 SC 1742; Also see: Smt. Swamam Ramachandran v. Aravacode Chakungal Jayapalan, AIR 2000 Bom. 410; Vairavan v. K . S . Vidyanandam, AIR 1996 Mad 353. Dutta Seethamahalakshmamma v. Yanamadala Balaramaiah, AIR 2003 AP 430.

(3) The Plaintiffs case in brief was that he manufactured telescopic out-let shutters for hume pipes of various dimensions in his industrial unh and coming to know that the State of Orissa (defendant No. 1) was in need of such shutters, he submitted his quotations before the Executive Engineer, who acting on behalf of the State, placed orders between 16-7-90 and 20-7-90 for supply of 133 numbers of shutters at the price quoted by him. When the Executive Engineer placed the orders, the plaintiff represented to him that it may not be possible on his part to supply the shutters within the stipulated time on account of repeated load-sheddings by the Orissa State Electricity Board and he was assured that if he faced any difficulty on account of load-shedding, on his application time for supply of the shutters shall be extended. On such assurance from defendant No. 4, the plaintiff started manufacturing the shutters. In course of manufacture there were frequent load-shedding. Therefore, on 28-7-90 plaintiff put in a written application to the Executive Engineer praying for extension of time, but received no reply. So he then put in a second application on 10-8-90 for extension of time and received a reply dated 25-8-90 to the effect that the purchase order had been cancelled. But by then the plaintiff had completed manufacture of all the 133 numbers of shutters. Thereafter the plaintiff approached the defendants several times to take delivery of the

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articles and make the payment, but to no effect. According to him, two other firms with whom orders were placed for supply of same type of shutters, were given extension of time and they made the supplies during the extended periods and have been paid the price but similar advantage has been denied to the plaintiff. It is specifically pleaded that time being not the essence of the contract and in view of the assurance given by the Executive Engineer, the plaintiff having manufactured the shutters and kept ready for delivery, he is entided to a decree as prayed for. Defendant No. 4 alone filed written statement in the suit. He contended inter alia that in the notice calling for quotation it was stated that the materials were to be supplied within 10 days from the date of issue of the supply orders and no extension of time whatsoever would be allowed. The plaintiff accepted this condition and submitted his quotation but failed to supply the shutters within the time stipulated in the purchase orders and consequently the plaintiff cannot legally claim any amount from the defendants. It was denied that the plaintiff was given any assurance that time for supply would be extended on account of load-shedding. On the above documentary evidence, two points arose for determination, firstly whether time was the essence of the contract between the plaintiff and the Executive Engineer and secondly if after the contract was entered into,_the Executive Engineer on the request of the plaintiff had assured to extend time and if so what is the effect of such assurance on the contract. As to whether dme is the essence of contract, assumes importance in view of S. 55 of the Indian Contract Act, according to which if time is the essence of the contract, then non-performance within the stipulated time makes the contract voidable at the option of the promisee. It was held:24 " As already stated, the five purchase orders were received between 16-7-90 and 20-7-90. In other words, according to the said orders supplies were to be made between 31-7-90 and 4-8-90. The language used is very clear indicating the consequence of nonsupply within 15 days from the date of receipt of the orders. In other words, it is expressly stated that time of supply must be strictly adhered to, failing which the purchase order will 24 State of Orissa and others v. M/s. Durga Enterprisers, AIR 1995 Ori 207.

stand cancelled. Thus, on a consideration of the purchase orders, and applying thereto the aforesaid legal position, there can be no escape from the conclusion that time was the essence of the contract for supply of the shutters.

"The next point is if the time stipulated in the purchase orders for performance of the contract has been extended or waived by the Executive Engineer in any manner. There is not even a scrap of paper to support the plaintiff's stand that the Executive Engineer after issue of purchase orders assured to extend time if the plaintiff faced any difficulty in manufacturing the shutters on account of load shedding. The sole statement of the plaintiff that when he expressed his inability to supply the shutters within a short time of 15 days, the Executive Engineer assured him to give extension of time, is not corroborated by any other evidence. So plaintiff's case on this point is not acceptable". It was finally held: "On a consideration of the above material, it is held that time being the essence of the contract as revealed from the purchase orders, and the same having neither been waived nor extended, the Executive Engineer had the option to avoid the contract and no right under the contract accrued in favour of the plaintiff, because of non-performance of the contract by letter within the stipulated period. "As regards the stand taken on behalf of the plaintiff that two other suppliers similarly placed were given extension of time and meanwhile they have supplied the shutters and taken

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payments there was an admission to this effect in the evidence of P.W. 1." However, it was held: " It is thus apparent that the treatment meted out to the plaintiff was unfair. But this fact can be of no assistance to the plaintiff because the Court can grant relief to the plaintiff upon establishment of his right and not otherwise. As discussed above, the plaintiff has failed to establish his right and therefore, his claim cannot succeed."

6.7 WHEN TIME CEASES TO BE OF THE ESSENCE OF THE CONTRACT In spite of an express stipulation included in a contract making time to be of the essence, time shall not be of the essence if contradictory conditions are included in the contract. If the terms of the contract provided for a possible extension of time to complete the work, or for the payment of liquidated damages in the event of delay or a similar stipulation whereby the parties to the contract contemplate the possibility of delay in performance, the time ceases to be the essence of the contract. This position is now very well settled by the decision-dated 30.1.1979 of the Supreme Court of India.25 The case involved questions of termination of the contract on the ground of noncompletion of the project work within the stipulated period, levy of penalty and forfeiture of security deposit, etc. which are very common in execution of building and engineering contracts. It is a landmark Judgment and is considered at length in Illustration 1 below. 25 Hind Construction Contractors v. State of Maharashtra, AIR 1979, SC 720.

ILLUSTRATIONS The brief facts of the case, the rival contentions are to be found in paragraphs 2 to 6 and the findings and judgment are incorporated in paragraphs 7 to. 1 1 . This judgment is quoted at length as it represents oft repeated situations in the sphere of public works contracts. The relevant portion reads:

(1)

"2. A contract for the construction of an aqueduct - -was granted to the appellant plaintiff -by the respondent defendant (the State of Maharashtra) after the former's tender was accepted on June 17, 1955. On July 2, 1955, the Executive Engineer issued the work order to the appellant-plaintiff directing him to commence the work by July 5, 1955. The formal regular contract in prescribed Form B-2/1 --------- was executed by the parties on July 12, 1955. A security deposit of Rs.4,936 was kept by the appellant-plaintiff with the respondentdefendant. The period for completion of work was fixed at 12 months from the date stipulated for commencement of the work, that is to say, it was expected to be completed on or before July 4, 1956. It appears that on the ground that the appellant-plaintiff had not completed the work as expected within the stipulated time the Executive Engineer by his letter dated August 27, 1956 (Ex. 78) rescinded the said contract with effect from August 16, 1956. After serving a notice under S.80 of the Civil Procedure Code the appellant-plaintiff filed a suit making a claim for Rs.65, 000 in the aggregate against the respondent-defendant alleging wrongful and illegal rescission of the contract on the part of the respondentdefendant. The appellant-plaintiffs case was that the initial fixation of July 5, 1955 as the date for commencement of the work was nominal, that the area where the work was to be done had usually heavy rainfall rendering it impossible to carry out any work from July to November and that, therefore, it was the practice of the Public Works Department to deduct the period of monsoon in case of such type of works and that the appellant-plaintiff had been orally informed that this period would be deducted or not taken into account for calculating the period of 12 months under the contract and that on this assurance he had commenced the work towards the end of December 1955. His case further was that in any event time was not of the essence of the contract, that on account of several difficulties, such as excessive rains, the lack of proper road and means of approach to the site, rejection of materials on improper grounds by the Government Officers, etc., over which he had no control, the completion of the work was delayed and that the extension of the time which was permissible under the

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contract had been wrongfully refused by the officers of the respondent-defendant. According to him none of these factors had been taken into account by the Government while refusing the extension and the contract was wrongfully rescinded and therefore, the respondentdefendant was liable in damages. "3. The State of Maharashtra resisted the claim contending that time was of the essence of the contract, that the date fixed for commencement was real and not nominal and the 12 months period was fixed after all aspects of the matter had been taken into account; it was further contended that the appellant-plaintiff knew the situation of the site and the so-called difficulties, that there was no excuse for him for not doing the work during the months of July to November, that the appellant-plaintiff failed to carry out the proportionate work during the periods fixed in the contract and that since the appellant-plaintiff had rendered himself incompetent to complete the work in proper time it had to rescind the contract and the rescission was proper and for adequate reasons, it was further contended that the State was entitled to forfeit the security deposit which it did on the date when the contract was rescinded. The learned trial Judge held that the date July 5, 1955 fixed as the date for commencement of the work was not nominal but that time was not of the essence of the contract between the parties that the respondent-defendant (State Government) had wrongfully rescinded the contract, that the appellant-plaintiff was entitled to damages but that he had not established the two items claimed as damages and he was entitled to a nominal sum .. as damages. It was further held that since the rescission of the contract was wrongful the State was not entitled to forfeit the security deposit nor levy any penalty. Two appeals were preferred against the aforesaid decree of the trial Court, one by the appellant-plaintiff in respect of the claims that had been disallowed and the other by the State in respect of the claims allowed against it. Curiously enough the High Court did not decide the main issue that arose between the parties, namely, whether time was of the essence of the contract, as it took the view that a decision of that question was really unnecessary lor disposal of the appeals. The Supreme Court observed: '7. The first question that arises for our consideration, therefore, is whether time was of the essence of the contract.... It cannot be disputed that the question whether or not time was the essence of the contract would essentially be a question of the ... intention of the parties to be gathered from the terms of the contract. It was further observed: "In the latest 4th Edn. Of Halsbury's Laws of England in regard to building and engineering contracts the statement of law is to be found in Vol.4, Para 1179, which runs thus : "1179. Where time is of the essence of the contract. The expression time is of the essence means that a breach of the condition as to the time for performance will entitle the innocent party to consider the breach as a repudiation of the contract. Exceptionally, the completion of the work by a specified date may be a condition precedent to the contractor's right to claim payment. The parties may expressly provide that time is of the essence of the contract and where there is power to determine the contract on a failure to complete by the specified date, the stipulation as to time will be fundamental. Other provisions of the contract may, on the construction of the contract, exclude an inference that the completion of the work by a particular date is fundamental, time is not of the essence where a sum is payable for each week that the work remains incomplete after the date fixed, nor where the parties contemplate a postponement of completion. Where time has not been made of the essence of the contract or, by reason of a waiver, the time fixed has ceased to be applicable, the employer may by notice fix a reasonable time for the, completion of the work and dismiss the contractor on a failure to complete by the date so fixed." (Emphasis supplied)

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It was held: "It will be clear from the aforesaid statement of law that even where the parties have expressly provided that time is of the essence of the contract such a stipulation will have to be read along with other provisions of the contract and such other provisions, may, on construction of the contract, exclude the inference that the completion of the work by a particular date was intended to be fundamental, for instance, if the contract were to include clauses providing- for extension of time in certain contingencies or for payment of fine or penalty for everyday or week the work undertaken remains unfinished on the expiry of the time provided in the contract such clauses would be construed as rendering ineffective the express provision relating to the time being of the essence of the contract." The Supreme Court referred to CI.-2 and CT. 6 of the conditions of the contract, which provided for penalty for the delay and extension of time under certain contingencies. It was observed: "Two aspects emerge very clearly from the aforesaid two clauses. In the first place under cl. 6 power was conferred upon the Executive Engineer to grant extension of time for completion of the work on reasonable grounds on an application being made by the contractor (appellant-plaintiff) in that behalf; in other words in certain contingencies, parlies had contemplated that extension of time would be available to the contractor. Such a provision would clearly be inconsistent with parties intending to. treat the stipulated period of 12 months in cl.2 as fundamental. Similarly, in cl.2 itself provision was made for levying and recovering penalty/ compensation from the appellant-plaintiff at specified rates during the period the work shall remain unfinished after the expiry of the fixed date. Such provision also excludes the inference that time (12 months period) was intended to be of the essence of the contract.... "9. Having regard to the aforesaid material on record, particularly the clauses in the agreement pertaining to imposition of penalty and extension of time it seems to us clear that time (12 months period) was never intended by the parties to be of the essence of the contract. Further from the correspondence on the record particularly, the letter (Ex.78) by which the contract was rescinded it does appear that the stipulation of 12 months' period was waived, the contractor having been allowed to do some more work after the expiry of the period, albeit at his risk, by making the rescission effective from August 16, 1956. "10. Once either of the aforesaid conclusions is reached it would be difficult to accept the High Court's finding that the rescission of the contract on the part of the respondentdefendant was proper and justified on the basis that the same was neither shown to be mala fide nor unreasonable. It must be observed that it was never the case of the appellant-plaintiff that the rescission of the contract on the part of the respondent-defendant was mala fide. .. "It will thus appear clear that though time was not of the essence of the contract, the respondent-defendant did not fix any further period making time the essence directing the appellant-plaintiff to complete the work within such period. Instead it rescinded the contract straightaway by the letter dated August 27, 1956. Such rescission on the part of the respondent-defendant was clearly illegal and wrongful and thereby the respondent-defendant committed a breach of the contract, with the result that there could be no forfeiture of the security deposit. ;.. The appellant plaintiff was also entitled to the payment of interest on the aforesaid sums and costs of suit as directed by the trial Court." In yet another case decided on 13.2. 1979 the Supreme Court in illustration (2) upheld the termination of the contract and forfeiture of the security deposit. The earlier case and this case are in full conformity with each other as far as legal position in respect of the time limit and it being of the essence are concerned. The final decision is different due to a different set of facts.

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(2) The contract in this case also was for the construction (2) below, of an aqueduct to be completed within 12 months from the date of the written order to commence it, which happened to be 16th May 1955. The contract was in the form B-2 which contained provision in Clause 2 reproduced earlier in Art. 6.1. Clause 3 provided for rescission of contract. Clause 6 of the contract provided for extension of time.26 The work continued to be executed at a snail's pace and on May 9, 1956, the plaintiff made an application (exhibit 54) for an extension of the time fixed for completion of the work by a period of six months. The department rejected that application. The letter further informed the plaintiff that he had become liable to pay compensation under clause (2) of the contract and called upon him to show cause why action should not be taken against him under clause (3) thereof. Ultimately, in a letter dated October, 30, 1956 (exhibit 48) the plaintiff was informed that it had been decided to burden him with compensation at the rate of Rs.5 per day for the entire period commencing on 16th May, 1956 and ending with the completion of the work and that if the plaintiff failed to show satisfactory progress within a month of the date of the letter, defendant No.2 would be compelled to increase the rate of compensation and take suitable penal action against the plaintiff. The work not having made much progress and the plaintiff having stopped its execution, he was informed by a letter dated January 17, 1957 (exhibit 49) that the contract stood rescinded under clause (3) thereof. The defendants also forfeited the security deposit., and the security deposit. The trial Court found that the plaintiff had failed to prove that any sum was due to him for execution of the work or by way of damages, but further held that the forfeiture of the security deposit was illegal. Aggrieved by the decree passed by the trial Court, the defendant went up in appeal to the High Court and the plaintiff filed his cross objection to the decree, appeal form which was maintained by the High Court in entirety. The High Court agreed with the findings of the trial court and on the question of rescission of the contract observed as follows: "In our view in law the contract could not be rescinded subsequent to the expiry of the due date for the performance thereof. The right to rescind a contract is- the right to put it to an end and such right cannot exist after the due date of the performance 'expires. The right to rescind the contract is the right to accept anticipatory breach thereof by the promisor, i.e. prior to the expiry of the date of the performance of the contract. This arises in favour of the promisee under Section 39 of the Contract Act. A contract cannot be abandoned by either side, either by a promisor or a promisee after the expiry of the due date for performance thereof. For the above reasons in our view the abandonment of the work of the contract as mentioned in subclause (a) of the clause relate to (anticipatory) breach of the contract by the contractor before the due date for the performance thereof. In this case the Executive Engineer purported to rescind the contract which had become dead some time in August 1956. He purported to do so on the ground that the contractor had abandoned the contract some time in October 1956. The Executive Engineer in our view had no power under clause (3) to rescind the contract having regard to the facts and circumstances, which we have already pointed out above. The forfeiture of the security deposit on .the footing that the contract was validly rescinded must be held to be unjustified and untenable." "It was on the basis of this conclusion that the trial Court's decree for Rs.4,679 passed in favour of the plaintiff was affirmed. .. the High Court certified the case to be a fit one for appeal by the defendant to the Supreme Court under sub-clause (c) of clause (1) of Article 133 of the Constitution of India..." 26 State of Maharashtra v. Digambar. AIR 1979 SC .1339.

The Supreme Court observed: "The learned counsel lor the appellants had challenged the correctness of the observations made by the High Court and reproduced above. Those observations, according to him, run counter to the tenor of clauses (2) and (3) of the contract governing the execution of the work and we are of the opinion that his criticism thereof is

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justified. Although in clause (2) of the contract it was specifically mentioned that time was the essence of the agreement between the parties, all that was meant was that in case the work was not completed within the time originally specified in that behalf, the plaintiff would be liable to pay such compensation for delay in execution as was fixed by the Superintending Engineer within the limits laid down in the clause. This becomes clear not only from the provision appearing in cl. (2) and stating that the contractor shall pay as compensation an amount equal to I per cent or such smaller amount as the Superintending Engineer may decide for every day the work remains uncommenced, or unfinished after the proper dates but also from the contents of clause (3) of the contract, which would become operative only if the plaintiff renders himself liable to pay compensation (in accordance with clause (2) or abandons the work either on account of serious illness or death or for any other cause and it is then that the- contract would become liable to rescission. Cls. (2) and (3) have to be read together and interpreted with reference to each other and their provisions, read as one single whole, clearly mean that the contract was to continue to be in force till the completion of the work or its abandonment. The time was the essence of the contract only in the sense that if the plaintiff completed it within the original period of one year he would not be liable to pay any compensation but that in case he overstepped the said timelimit he would have to compensate the defendants for every day of the delay in completing the work and that the right to rescind would accrue to defendant No. 2 only when the compensation due exceeded the amount of the security deposit or the plaintiff abandoned the work. Till the time the contract was rescinded therefore, it was fully in force and the rescission was consequently well-founded, being squarely covered by clause (3) of the contract, sub-clause (a) of which conferred on the Executive Engineer the right to forfeit the security deposit. Far from being illegal, the forfeiture was fully justified, and the High Court's finding to the contrary is liable to be reversed." It was held: "hi the result the appeal succeeds and is accepted. The decree of the High Court is set aside and the suit of the plaintiff is dismissed in its entirety. In accordance with the undertaking given by defendant No. 1 on the 9th June 1969 to the High Court when it certified the case to be a fit one for appeal to this court, the plaintiff shall be entitled to the costs incurred by him in this Court. In respect of costs in the two courts below, we make no order." The above two decisions of the Supreme Court are very frequently cited and relied upon by the two opposing parties in their cases. The two decisions do not lay down any conflicting propositions of the law, it is submitted. In both the decisions, it is very clearly laid down that time shall not be of the essence of the contract. In the latter decision, though it is clarified that the wording to that effect in clause 2 of the general conditions of the contract is only to identify the date from which the liquidated damages or penalty will be recoverable. The termination in the first case above was held to be wrongful and illegal as it was attempted to be supported only on the ground of time being of the essence of the contract and time was not extended although there were factors justifying such an extension. On the other hand, the termination of the contract in the second case was supported by slow progress of the work resulting in virtual abandonment of the work by the contractor by stopping it. It is also clear thai notices under Clause 2 were given, penalty imposed, an opportunity to show bonafide desire to complete the work by improving the progress was given and after all this when the contractor rather than improving the progress stopped the work, the contract was terminated under Clause 3. Thus the facts of the two cases are totally different justifying the differing verdicts of the Supreme Court in the two cases. (3) Briefly stated the facts in a case were as follows : The respondent held an auction sale on 28th November, 1995. At this auction sale the appellant was the highest bidder. In terms of the conditions of the auction sale the appellant, on the same day, deposited a sum of Rs. 6,54,500/-. As per the terms of the auction sale the

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balance 75% of the amount had to be paid within 60 days from the issue of the demand letter. However, if sufficient cause was shown then the Chairman could extend time up to a maximum period of 180 days, subject to payment of interest on the balance amount at the rate of 18% per annum. The Demand Letter was issued on 3rd January 1996. The balance sum of Rs. 1963,545/- had to be paid, in terms of the auction sale within 60 days of the said letter. The appellant deposited a sum of Rs. 5,50,000/- on 19th February, 1996. The appellant then asked for extension of time to make the balance payment. By a letter dated 29th March, 1996 the appellant was granted extension of time subject to payment of interest at the rate of 18% per annum. Thereafter the appellant again asked for extension of time on a number of occasions and deposited the amounts in different lots. By a letter dated 2nd September 1996 the appellant again sought an extension of time. To this letter there was no reply. The appellant thereafter paid sums of money. The respondent, even though payments were made beyond time accepted all these payments. The appellant had paid the entire amount payable in respect of that plot. Thereafter the appellant also paid interest on the delayed amounts at the rate of 25% per annum. The respondent also accepted this amount. In spite of having accepted the delayed payments the plot was not delivered to the appellant. The appellant, therefore, sent legal notices on 22nd June, 1999 and on 29th June, 1999. Only after receipt of the legal notices the respondent by letter dated 1st July, 1999 cancelled the allotment and forfeit the earnest money of Rs. 6,54,500/-. The appellant filed a writ petition, which came to be dismissed by the impugned order dated 29th February, 2000. The High Court held that after the expiry of the period the appellant could not have deposited the balance amount unilaterally and without any demand being issued to him. The High Court held that payments made after the extended date were not valid and legal tender of money in accordance with law. On this basis the High Court refused to grant any relief to the appellant. The Supreme Court held:27 "In our view, the order of the High Court cannot be sustained. To be noted that by 27th September, 1996 the entire amount payable for the plot had been deposited and delay in payment was less than 30 days. Thereafter in January, 1997 interest at the rate of 25% per annum, on delayed payments, was also paid. Both the delayed payments and the interest amount were accepted by the respondent. The moment those payments were accepted there 27 R. K. Saxena, v. Delhi Development Authority, AIR 2002 SC 2340. Also see: Bhagwan Singh v. Teja Singh, AIR 1995 P&H 64.

was deemed extension of time. ...on the facts of this case, i.e. after accepting the delayed payments and interest respondent could not have cancelled the allotment." hi the circumstances of the case, the impugned order was set aside. The letter of cancellation was quashed. (4) Brief facts: On October 4, 1989 Union of India floated an invitation to tender for purchase of sugar lo meet the urgent requirement of anticipated scarcity in the Indian market during the Dussehra and Diwali festivals in November, 1989 which culminated in an Agreement dated 24th/25th October, 1989 with the appellants for the supply of 58000 metric tonnes of sugar. The Contract as above inter alia contained the following terms : That the claimant shall arrange shipment of entire quantity of the contracted sugar so as to reach Indian Ports not later than 31st October, 1989; shipment within the contracted delivery period was to be the essence of the contract. In case of delay the seller was to be deemed to be in contractual default with a right to the buyer to cancel the contract. The buyer could however extend the delivery period at a discount as may be mutually agreed between the

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buyer and the seller. That in terms of the payment clause, the payment was to be made by the buyer by way of irrevocable letter of credit covering 100% of the contract quantity and letter of credit was to be established by the buyer within seven days from the receipt of performance bank guarantee and it is upon completion of the period of 7 days from the date of acceptance of the performance guarantee, the letter of credit should have been authenticated and that was to be effected by about 31st October, 1989. In the contextual facts the authenticated bank guarantee was effected only on 2nd November, 1989 i.e. after the expiry of the date of the delivery. The telex messages from Food Corporation of India dated 3rd, 7th and 8th November, 1989 go to show that in fact there was the anxiety of the buyer to obtain the goods and it is on these anxious inquiries, it was contended that the time for delivery obviously stood extended and the essence of the contract been given a go-by. The facts further depict that while the correspondence were had between the parties as regards the delivery schedule, Government of India, after canceling the contract and revoking the letter of cancellation and negotiations finally.on 25th January, 1990 cancelled the contract on the ground that the seller had failed to fulfill its contractual obligations within stipulated time which was mentioned to be on 31-10-89 and the performance bank guarantee of the claimants was also forfeited by FCI. It is by reason of such forfeiture, however, that the matter was referred to arbitration in terms of the arbitration clause in the agreement between the parties. The arbitrators made and published their award to the effect that the claimants were entitled to the refund of the performance bank guarantee amount of $ 29,28,000. The claim of the claimant-appellant herein, however, on account of interest was rejected. The Arbitral Award 'was challenged before High Court and the learned single Judge found tliat FCI's letter dated 8th November, 1989 clearly depicted that they were still interested in taking delivery of the goods and therefore the claimant was justified in asking for fixation of a fresh delivery date. The learned single Judge further found that the findings of the arbitrators in regard to extension of the delivery period and failure to fix the fresh date has resulted in breach of the contract on the part of the Government and the same being purely based on appreciation of materials on record, question of interference therewith would not arise since by ho stretch it can be termed to be an error apparent on the face of the record. The learned single Judge, therefore, sustained the award. In an appeal there from however, the finding of the single Judge was reversed and the Bench of the Delhi High Court dealing with the Appeal in question recorded that the buyer, being the appellant herein, had in fact impliedly accepted 14/15th November, 1989 as the new date of delivery by which the seller was bound lo deliver and the failure of the seller to supply by the said date constituted a breach of contract justifying the cancellation and thus set aside the judgment and order of the learned single Judge as also the arbitral award. It was against this order of the Division Bench of the High Court that a Special Leave Petition was filed before the Supreme Court The Supreme Court of India observed: 28 "In the event the parties knowingly give a go-by to the stipulation as regards the time - the same may have two several effects : (a) parties name a future specific date for delivery and (b) parties may also agree to the abandonment of the contract - as regards (a) above, there must be a specific date within which delivery has to be effected and in the event there is no such specific date available in the course of conduct of the parties, then and in that event, the Courts are not left with any other conclusion but a finding that the parties themselves by their conduct have given a go-by to the original term of the contract as regards the time being the essence of the contract. Be it recorded that in the event the contract comes within the ambit of Section 55, the remedy is also provided therein." After reproducing Section 55 it was further observed: " Incidentally the law is well settled on this score on which no further dilation is required in this judgment to the effect that when the contract itself provides for extension of time, the same cannot be termed to be the essence of the contract and default however, in such a case

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does not make the contract voidable either. It becomes voidable provided the matter in issue can be brought within the ambit of the first paragraph of Section 55 and it is only in that event that the Government would be entitled to claim damages and not otherwise. " In Pollock and Mulla's Indian Contract and Specific Relief Acts, three several cases have been very lucidly discussed, where time can be termed to be the essence of contract : "1. Where the parties have expressly stipulated in their contract that the dme fixed for performance must be exactly complied with. 2. Where the circumstances of the contract or the nature of the subject matter indicate that the fixed date must be exacdy complied with and 3. Where time was not originally of the essence of the contract, but one party has been guilty of undue delay, the other party may give notice requiring contract to be performed within reasonable time and what is reasonable time is dependant on the nature of the transaction and on proper reading of the contract in its entirety." "It needs to be noted here that ..the issue is whether in the contextual facts time was the essence of the contract and in the event the answer is in the affirmative, then and in that event whether there was subsequent extension of time and what is the effect therefor. Herein before in this judgment we did refer to the effect of subsequent extension, but the issue as regards the factum of the time being the essence of the contract was left to be dealt with at the later stage and as such, it would be convenient to note the same at this juncture. ... In'our view the answer to this all important question is in the negative. The contract itself provides reciprocal obligations and in the event of non-fulfilment of some such obligations and which have a 28

M/s. Arosan Enterprises Ltd., v. Union of India, AIR 1999 SC 3804.

direct bearing onto them - strict adherence of the time schedule or question of continuing with the notion of the time being the essence of the contract would not arise. The appeal was allowed and the award was upheld. (5) In one case, the house and land, the subject matter of the contract, were required by the

purchaser for immediate residential occupation. The condition of the contract named a day for completion of the purchase transaction. One more condition was included in the contract, which went on to provide that if, from any cause whatever, the purchase was not then completed, the purchaser should pay interest on the unpaid purchase money from that day until the actual completion of the purchase. In the suit that followed on this matter it was held: "inasmuch as parties to the contract evidently contemplated the possibility of the completion being postponed beyond the date named, time was not the essence" 29. The principle on which this case was decided is obviously applicable whatever the nature of the subject matter of a contract. (6) In a case where the completion of work the was delayed by six months the court observed: " ......................... But, looking to the whole of the deed we are of the opinion that the time of completion was not an essential part of the contract; first, because there is an express provision made for a weekly fine to be paid for every week during which the work should be delayed..; and, secondly, because the deed clearly meant to exempt the plaintiff from the obligation as to the time for completion in case he should be prevented by fire or other circumstances admitted by the architect; and here, in fact, it is expressly found by the arbitrator that the delay was necessarily occasioned by the extra work." 31 (7) In a case decided by the Nagpur High Court the contract was as follows : "The whole of the work will be completed in 4 months from the date of getting permission in writing from Mr.... A fine of Rs.5/- per day will be exacted for every day after that date if the work' is not completed within the above noted time". It was held that time was not the essence of the contract in this case.31

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(8) In yet another case, the contract expressly provided that time will be the essence of the contract but at the same time another clause of the contract made provision for extension of time. Yet another clause authorized levy of penalty in case of non-performance. Based on these facts when a dispute arose between the parties, i.e. the contractor and the Government it was argued on behalf of the Government the time was of the essence of the contract. This contention of the counsel for the Government was negated. It was held that the question whether or not time is of the essence of a contract is a question of the intention of the parties to be gathered from the terms of the contract. Where there is an express provision that time is of the essence of "the contract and at the same time provisions are made for extension of time in certain contingencies without limit or qualification and for levy of penalty, it cannot be said that it was intended that time should bethe essence of the contract.M (9)

In a case, the question to be decided was, whether time was of the essence when the contract provided for certain penalty in case the contract was not completed in time. It was Webb v. Hughes, L. R. 10 Ed. 281. Lamprell v. Billericay Union (1849), 3 Ex. 283. D. W. Roberts v. Shaikh Hyder, AIR 1929 Nag. 140. Shambhulal Pannalal, Secretary of State, AIR 1940 Sind 1.

29 30 31 32

held that: "The agreements do not provide that on failure to complete the work by the given dates, the contract would stand terminated widiout any further act on the part of the parties. Each of the two contracts provided for certain penalty in case the contract was not completed in time, and this would clearly indicate that time was not the essence of the contract, but it was merely a warranty, and never a condition precedent, so as to entail an automatic forfeiture of the contracts on account of any breach in keeping up to the time. An extension of time was obviously in contemplation of the parties in each of the agreements itself - " 33 (10) Some of the above decisions were relied upon in a case decided by the Jammu & Kashmir High Court 34 The case involved some additional factors which were as follows : (i)

The contract between the petitioner contractor and the C.P.W.D. was for construction of 27 km. of road costing Rs. 78,83, 287/-.

(ii)

The time limit for this work was stipulated as six months.

(iii)

The tender of the contractor was not accepted within 90 days, the limit stipulated for acceptance. The contractor informed the authorities by a letter prior to commencing the work that as the matter of final acceptance of the tender had been delayed by the authorities and the rainy season had set in, the work could not be completed in six months as originally stipulated.

(iv)

Out of the 27km length of the road, possession of 2km of land was not given immediately to the contractor, but was given only after 3 months and 8 days.

(v)

On the contractor's request, time for completion of the work was extended on and off in accordance with the provisions made in the contract.

(vi)

Running account bills had to be paid every fortnight but only 29 rvonning account bills were paid whereas 69 bills should have been paid.

(vii)

The contract included an arbitration clause. On account of disputes between the parties an arbitrator was appointed to settle the same.

(viii)

The work on certain unfinished items were given to other contractors. The final measurement of the work were claimed to have been taken in the presence of a

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representative of the contractor, as the contractor, it was alleged, did not turn up on the appointed date. (ix)

The contractor submitted a petition to the Court requesting for issue of an injunction restraining the authorities and other contractors from executing any item of work till the case of the contractor was finally decided.

(x)

The authorities on the other hand urged that the road was very strategic and being a defence road no such injunction should be granted.

In view of the facts mentioned-above it was held that time was not of the essence of the contract. His Lordship observed: "It would be a contradiction in terms that time was of the essence of the contract yet time being extended not once but a number of times. There is one 33 34

Hindustan Construction Co. v. State of Bihar, AIR 1963 Pat. 254. Mohinder Singh v. Executive Engineer AIR 1971, J & K 130.

more circumstance negativing this plea of time being the essence of this contract. In the original agreement running payments had to be made fortnightly. According to the petitioner only 29 running bills had been paid from 1967 to 1970 whereas 69 such bills should have been paid. If time was of the essence of the contract it should be for both the parties and not for only one of them. The respondents could not commit any defaults as far as their part of the performance of the contract is concerned, and insist on the performance of the contract by the other party within the time limit fixed."

The contractor's request for issue of an injunction was, however, turned down. Citing a similar case decided by the Calcutta High Court35 his Lordship observed: "I do not think it is case in which I should exercise my discretion in favour of the petitioner in directing the respondents that further items of work entrusted to other contractors be held up indefinitely, till the Arbitrator decides the petitioner's case. Whether the road is a strategic one, a defence road or not, to hold up the construction and completion of the road would be against all canons of justice. Better roads are a source of convenience to everybody, it may be the army or the civil public."

6.8 EXTENSION OF TIME FOR DELAY A construction contract usually stipulates circumstances under which the time for completion will be extended. A comprehensive list of valid grounds is as follows: If the Works be delayed by: (i) Variation (ii) force majeure, or (iii) (iv) (v) (vi)

(vii)

abnormally bad weather, or serious loss or damage by fire, or civil commotion, local combination of workmen, strike or lock-out, affecting any of the trades employed in the work, or delay on the part of nominated subcontractors or nominated suppliers which the Contractor has, in the opinion of the Engineer-in-charge, taken all practicable steps to avoid or reduce, or delay on the part of other contractors or tradesmen engaged by Employer in executing work not forming part of the Contract, or

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(viii) delay on the part of other contractors or tradesmen engaged by Employer in executing work not forming part of the Contract, or (ix) (x) (xi) (xii)

non-availability of stores which are the responsibility of the Employer to supply, or non-availability or break-down of Tools and Plant to be supplied by Employer, or suspension of work by Employer, or any other cause which, in the absolute discretion of the authority mentioned in Schedule F is beyond the Contractor's control;

35 Ranjit Chandra v. Union of India, AIR 1963, Cal.594 The provisions further stipulate that upon the happening of any such event causing delay, the contractor shall immediately give notice thereof in writing to the Engineer-in-charge within the stipulated time if on that count he intends to seek an extension of time. The contractor shall nevertheless use constantly his best endeavours to prevent or make good the delay and shall do all that may be reasonably required to the satisfaction of the Engineer-in-Charge to proceed with the works. Request for extension of time, to be eligible for consideration, under FIDIC Clause 20.1 of 1999 edition, shall be made by the Contractor in writing not later than twenty eight days after the contractor became aware, or should have become aware of the happening of the event causing delay. The Contractor may, also, if practicable, indicate in such a request the period for which extension is desired. The above provisions are ideal and in practice the provisions are included in other standard form contracts on the lines as above but none of the forms stipulate any time limit for an engineer to communicate extension of time after receiving the application from the contractor. The provisions of such clauses are self-explanatory except perhaps, the meaning of 'force majeure', which is discussed below.

6.8.1 "Force Majeure" and "Vis Major" "Force Majeure" is an expression taken originally from the Code of Napoleon. It means an absolute necessity or compulsion, circumstances beyond one's control. It covers a wider class of events than "vis major" an act of God, and including man-made events such as strikes or wars, but it must be beyond the control of the person alleging it. This clause has to ■ be construed in the light of the general background and the terms of the contract in question, so that differing decisions may be reached in different contracts.36 As such, the question arises, if the provision in the contract, such as the one reproduced earlier, simply states that extension will be granted, "if the work is delayed by force majeure", can it be said to be vague? The question needs to be considered in the light of the fact that there are a number of force majeure clauses differing from one another. In this background, if an agreement is to includes provision "subject to force majeure clause", without any further particulars, it is likely to be held vague. However, if it were to mention "subject to usual force majeure clause", it may not be held as vague but the parties may be allowed to lead evidence to which clause the parties had in mind. ILLUSTRATION In a case it was contended that the agreement was void because of vagueness and uncertainty arising from the use of the phrase "subject to the usual force majeure clause". The argument wa§ that there was no consensus ad idem and that the parties had not specified which force majeure clause they had in mind. The Supreme Court of India observed:37

36 37

Lebeaupin v. Crispin (1920) 2 KB 714. M/s D. Oobindram v, M/s Shamji K & Co., AIR 1961 SC 1285.

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Building and Engineering Contract.';

"We were taken through the Encyclopedia of Forms and Precedents and shown a number of ■ force majeure clauses, which were different. We were also taken through a number of rulings, in which the expression "force majeure" had been expounded, to show that there is* ho consistent or definite meaning. The contention thus is that there being no consensus ad idem, the contract must fail for vagueness or uncertainty. The argument, on the other side, is that this may be regarded as a surplus usage, and if meaningless, ignored. It is contended by the respondents that the addition of the word "usual" shows that there was some clause, which used to be included in such agreements. "The respondents also refer to S. 29 of the Indian Contract Act, which provides ^Agreements, the meaning of which is not certain, or capable of being made certain, are void" and emphasise the words "capable of being made certain", and contend that the clause was capable of being made certain, and ex-facie, the agreement was not void. "Mc Cardie, J. in Lebeaupin v. Crispin, 1920-2 KB 714 has given an account of what, is meant by "force majeure", with reference to its history. The expression "force majeure" is not a mere French version of the expression "vis major". It is undoubtedly a term of wider import. Difficulties have arisen in the past as to what could legitimately be included in "force majeure". Judges have agreed that strikes, breakdown of machinery, which, though normally not included in "vis major" are. included in "force majeure". An analysis of rulings on the subject into which it is not necessary in this case to go, shows that where reference is made to "force majeure", the intention is to save the performing party from the consequences of anything over which he has no control. This is the widest meaning that can be given to "force majeure", and even if this be the meaning, it is obvious that the condition about "force majeure" in the agreement was not vague. The use of the word "usual;" makes all the difference, and the meaning of the condition may be made certain by evidence about a force majeure clause, which was in the contemplation of the parties. "Learned counsel for the appellants relies strongly on a decision of McNairJ. in British Electrical Associated Industries Ltd., v. Patley Pressings, 1953-1 All.ER 94. There, the expression used was "subject to force majeure conditions". The learned Judge held that by "conditions" was meant clauses and not contingencies or clauses in the trade, there was no concluded agreement. The case is distinguishable, because the reference to force majeure clauses was left at large. The addition of the word "usual" makes it clear 'that here some specific clause was in the minds of the parties. The learned counsel also relies upon a decision of the House of Lords in Scammell and Nephew Ltd., v. Auston, 1941 AC 251 where the reference to "on hire purchase terms" was held to be too vague to constitute a concluded contract. It will appear from the decision of the House of Lords that the clause was held to be vague, because no precise meaning could be attributed to it, there being a variety of hire purchase clauses. The use of the word "usual" here, enables evidence to be led to make certain which clause was, in fact, meant. The case of the House of Lords does not, therefore, apply. Both the cases to which we have, referred were decided after parties had entered on evidence, which is not the case here. "Our case is more analogous to the decision referred to in Bishop & Baxter Ltd. v. AngloEastern Trading and Industrial Co. Ltd., (1944) 1 KB 12 namely, Shamrock S.S. Co. v. Storey & Co., 1899-1905 Com cas 21. In speaking of the conditions there, Lord Goddard observed as follows : "Abbreviated references in a commercial instrument are, in spite of brevity, often selfexplanatory or susceptible to definite application in the light of the circumstances, as, for

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instance, where the reference is to a term, clause, or documents of a well-known import like c.i.f. or which prevails in common use in a particular place of performance as may be indicated by the addition of the epithet 'usual' see 1899-5 Com Cas. 21 where 'usual colliery guarantee' was referred to in a charter-party in order to define loading obligations. . "The addition of the word 'usual' refers to something which is invariably to be found in contracts of a particular type. Commercial documents are sometimes expressed in language which does not, on its face, bear a clear meaning. The effort of the Courts is to give a meaning, if possible. This was laid down by the House of Lords in Hillas & Co. v. Arcos Ltd., 1932 All ER 494 and the observations of Lord Wright have become classic, and have been quoted with approval both by the Judicial Committee and the House of Lords ever since. The latest case of the House of Lords is Adamastos Shipping Co. Ltd., v. Anglo-Saxon Petroleum Co., Ltd., 1959 AC 133. There, the clause was "This bill of lading", whereas the document to which it referred was a charter-party. Viscount Simonds summarised on p. 158 all the rules applicable to construction of commercial documents, and laid down that effort should always be made to construe commercial agreements broadly and one must not be too astute in finding defects in them, or rejecting them as meaningless" It was held: "Applying these tests to the present case and in the light of the provisions of S. 29 of the Indian Contract Act, it is clear that the clause impugned is capable of being made certain and definite by proof that between the parties or in the trade or in dealings with parties in British East Africa, there was invariably included a force majeure clause of a particular kind. "In our opinion, the contract was not void for vagueness or uncertainty by reason of the reference in the terms stated, to the force majeure clause. Mr. Daphtary posed the question as to on whom was the burden of proving the usual force majeure clause. In our opinion, if the agreement is not void for uncertainty, that question would be a matter for the decision of the arbitrators. It is too early to say by what evidence and by whom the usual force majeure clause must be established. " (2) The "Force majeure" Clause in an agreement stipulated that neither party to the contract shall be held responsible for any loss or damages or delay in or failure of performance of the contract, if any, to the extent that such loss or damage or delay in or failure of performance is caused by Force Meajure, or causes which cannot with reasonable diligence be controlled or provided against by the parties to the contract. On this backdrop the arbitrator contended that "generator break down cannot be considered as covered under the force majeure clause, because the respondent could diligently control the situation by providing stand by generator sets to avoid production loss and as such cannot avoid its liability to compensate the loss the claimant suffered due to lack of diligence on the part of the respondent." Deciding the validity of the award it was held: "As and when reason has been given by the Arbitrator Court has no occasion to interfere with it by substituting its own -view."38 38

Oil and Natural Gas Commission Ltd, v. M/s. Dilip Construction, AIR 2000 Cal 140.

6.8.2 Bad Weather, Strikes, etc. Generally most contracts include express provision for extension of time on account of inclement weather. However, in the absence of such a provision in the contract, delay caused by bad weather, strikes, etc. will not entitle the contractor for an extension of time. This is for the obvious reason that variableness of the climate or possibility of strikes was within the knowledge of the contractor when entering into the contract. A ship building contract contained a liquidated damages clause. It contained an exception for force majeure and/or strikes at the building yard or machinery workshops or at steel works supplying the ship or at

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the sub-contractor's works. It was held that the universal coal strike of 1912 and abreakdown of machinery but not bad weather constituted force majeure.39

6.9 WRITTEN REQUEST BY A CONTRACTOR - A CONDITION PRECEDENT It must be remembered that non-fulfillment of a condition may deprive a contractor from getting an extension of time. For example, where a contract stipulated that all claims for extension of time for completion must be made in writing, it was held that the oral demand for an extension of time is not sufficient. While sustaining this proposition of law, the Court citing numerous cases observed that: ".. .a condition of this kind is a condition precedent compliance with which must be shown, because it must be assumed that the parties in inserting such provision attached both value and importance to However, much will depend upon the wording of the contract provision and also the conduct of the parties amounting to a waiver of the strict stipulation. Consider for example Clause 5 in the General Conditions of Contract of the Standard Form in use by the C.P.W.D. It reads: "If the contractor shall desire an extension for completion of work on the grounds of his having been unavoidably hindered in its execution or on any other grounds he shall apply in writing to the Engineer-in-Charge within 30 days of the hindrance." The clause will apply "if the contractor shall desire an extension of time." The contractor may plead that he did not desire an extension unless the rates were revised, etc. and hence he did not apply. The question arises whether or not the Engineer-in-Charge is competent to grant extension of time to the contractor in case he does not apply within 30 days of the hindrance occurring in execution of the work. It is submitted that where adequate and proper grounds exist the authority competent to grant an extension of time can do so even in the absence of an application from the contractor. This is particularly so while ordering extras or changes. Clause 12 of the same form includes a provision. "— The time for completion of the work shall be extended in the proportion the altered, additional or substituted work bears to the original contract work. Over and above this, a further period to the extent of 25 per cent of such extension shall be allowed to the contractor." 39 40

Matsoukis v. Priestman (1915) I K.B. 681. Austin - Griffith Inc. v. Goldberg et al., 79, S . E. 2d., 447 Supreme Court of South Carolina, 1953.

The extension of time on this ground has to be granted even if there is no application from the contractor. The provision in other standard form contracts is more or less similar. The FIDIC form uses the wording: "that the Engineer is not bound to make any determination —of extension of time unless the contractor has notified the event causing delay in 28 days," as already stated. The wording at the most may take away the right of the contractor to get an extension but not the power of the Engineer to grant an extension, even in the absence of such notification by the contractor within 28 days. However, it is advisable that the contractor should adhere to the provisions of the contract in this respect to avoid unnecessary controversy and disputes.

6.10

CONDITIONS UNDER WHICH TIME SHOULD BE EXTENDED

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Building and Engineering Contracts

To get an extension of time under the provisions normally incorporated in the standard forms, the following conditions must be fulfilled : (i) The contractor must be hindered in execution of the work. (ii) The hindrance must be caused by any of the reasons included in the contract. (iii) The hindrance must be of such a nature that it would necessitate an extension of time. (iv) The contractor under such circumstances must apply for an extension of time, in writing, to the Engineer-in-Charge within the time stipulated after the happening of the event causing delay. (v) In his application, the contractor must make out reasonable ground for such an extension; and (vi) At the same time make every effort to prevent or make good the delay. If all the above conditions are fulfilled, it is obligatory on the part of the Engineer-inCharge or the competent authority to give a fair and reasonable extension of time.

6.11

WHO SHOULD GRANT EXTENSION OF TIME?

It is important to note that the person designated in the relevant provision should grant an extension of time. For example, according to Clause 5 of the C.P.W.D. Form of agreement, all letters of extension of time to be issued to the contractor should be over the signature of the Engineer-in-Charge as-he is the only officer so empowered contractually to grant extension of time. The provision in the FIDIC form empowers the engineer appointed by the employer, and named as such in Part U, to grant an extension of time. In major projects the Engineer designated is generally a limited company and the Engineer's representative is termed as Team Leader. The Team Leader is not competent to extend the time, it is submitted, unless the Employer and the Engineer authorize him to do so under intimation to the contractor.

6.12 CAN EXTENSION OF TIME BE GRANTED WITH RETROSPECTIVE EFFECT? It is observed in practice that formal extension of time is not granted during the originally stipulated/extended/formally e«tended period, but much later. In such cases the question arises as to whether extension so granted is legal. The question assumes importance because most construction contracts provide for recovery of liquidated damages. There are, it is submitted, three possible constructions of extension of time clauses in so far as the time lor the exercise of power is concerned. Firstly the contract may contemplate that power should be exercised at once upon the occurrence of the event causing delay, for example, non-continuing causes, such as the ordering of extras. Secondly the contract may contemplate that the power should be exercised when the full effect upon the contract programme is known, for example, continuing causes of delay, such as non-supply of drawings, decisions, failure to hand over site, strikes, etc. Thirdly the contract may contemplate exercise of the power at any time before the issue of the final certificate. As the ambit of most modem extension of time clauses usually comprehends delays due to causes of many different kinds, in the absence of clear language to the contrary, the third alternative would normally prevail. Even where the contract contemplates the second

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alternative, the extension of time need not necessarily be granted before the contract date for completion. If, for example, the site is not handedover or the working drawings are not supplied till after the lapse of the contract date for completion, the extent of delay cannot be known or the necessary extension of time cannot be granted until after the stipulated time for completion had expired. This question can be viewed from another angle. As per the decision of the Supreme Court of India, the time limit stipulated for completion is not of the essence and as such it is obligatory on either party, to agree'for an extension of time.41 If the contractor is permitted to carry out the work beyond the stipulated date it can be presumed that the extension of time is by implication granted and the contractor will be under an obligation to complete the work within a reasonable time. Any formal extension subsequently granted can be said to be confirmation of the implied extension. Section 63 of the Indian Contract Act supports this view. SECTION 63 "Prom'see may dispense with or remit performance of promise - Every promisee may dispense ^ith or remit, wholly or in part, the performance of the promise made to him or may extend fJL° time for such performance, or may accept instead of it any satisfaction which he thinks fit. Illustrations (a) A promises to paint a picture of B. B afterwards forbids A o do so. A is no longer bound to perform the promise. (b) A owes B 5,000 rupees. A pays to B, and B accepts in satisfaction of the whole debt, 2,000 rupees paid at the time and place at which the 5,000 rupees were payable. The whole debt is discharged. (c) A owes B 5,000 .rupees. C pays to B 1,000 rupees, and B accepts them in satisfaction of claim on A. T.iis payment is a discharge of the whole claim (d) A owes B, undei a contract, a sum of money, the amount of which has not been ascertained. A without ascertaining the amount gives to B, and B, in satisfaction

-----------------------------------------------------

41

i

AIR 1979 SC 720.

thereof, accepts, the sum of 2,000 rupees. This is a discharge of the whole debt whatever may be its amount, (e) A owes B 2,000 and is also indebted to other creditors. A makes an arrangement with his creditors, including B, to pay them a composition of eight annas in the rupee upon their respective demands. Payment to B of 1,000 rupees is a discharge of B's demand." The provisions of this Section came for consideration by the Supreme Court of India wherein it was observed:42 "The true legal position in regard to the extension of time for the performance of a contract is quite clear under S. 63 of the Indian Contract Act. Every promisee, as the Section provides may extend time for the performance of the contract. The question as to how extension of the time may be agreed upon by the parties has been the subject matter of some argument at the Bar in the present appeal. There can be, no doubt, we think, that both the buyer and the seller must agree to extend time for the delivery of goods. It would not be open to the promisee by his unilateral act to extend the time for performance of his own accord for his own benefit. It is true that the agreement to extend time need not necessarily be reduced to writing. It may be proved by oral evidence. In some cases it may be proved by evidence of conduct. Forbearance on the part of the buyer to make a demand for the delivery of goods on the due date as fixed in the original contract may conceivably be relevant on the question of the intention of the buyer to accept the seller's proposal to extend time. It would be difficult to lay down any hard and fast rule about the requirements of proof of such an agreement. It would naturally be a question of fact in each case to be determined in the light of evidence

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adduced by the parties. Having regard to the probabilities in this case, and to the conduct of the parties at the relevant time, we think the appellants are entitled to urge that their oral evidence about the acceptance of the respondent's proposal for the extension of time should be believed and the finding of the learned trial judge on this question should be confirmed". ILLUSTRATION In a case the date stipulated for completion was 7th Feb. 1949. the agreement provided for recovery of liquidated damages in the event of delay at the rate of £ 50 a week. On 19th Jaunary 1949, the contractor sought a twelve month's extension. The architect merely gave a formal acknowledgement. The work was completed on 28th August 1950. The architect informed on 20th December 1950, extending the time of completion to 23rd May 1949. The contention that the architect must give the contractor a date which he can aim at, and that he cannot give a date which was passed was rejected. It was held that the retrospective extension of time was valid.43

6.13

CONDITIONAL EXTENSION OF TIME

The extension of time for performance of the contract is, in a sense, a modification of the original contract and, therefore, must be agreed to and accepted by both the parties to the contract. 42 43 44

Keshavalal v. Lalbhai T. Mills Ltd. AIR 1958 SC 512. ABC Ltd. v. Waltham Holy Cross V.D.C 1952 2 A11ER 452 AIR 1958 SC 512; Also see: Fernbook Trading Co. Ltd. v. Taggort Supreme Court of New Zealand [1979] I NZLR 556. Mahadeo Prasad v. Mathura Chowdhary, AIR 1931, All 589.

However, it does not require separate consideration. An extension of time by one party of its own accord given for its own benefit, but not accepted by the other party may not result in the formal extension of time45 In the said case a party sought an extension of time for the performance of the contract subject lo two conditions; it was held by the Supreme Court of India that unless both the conditions were agreed upon between the parties there would be no valid or binding extension of time under Section 63 of the Indian Contract Act. In view of the above position in law, it remains to be discussed as to what is the effect, in a construction contract, where either side, may agree for an extension subject to certain conditions, which the other side is not willing to accept. What actually happens in practice is like this. The employer or engineer-in-charge, in case of public works, grants extension of time subject to payment of liquidated damages by the contractor. The contractor repudiates his liability to pay liquidated damages on the ground that the delay in completion was on account of defaults and delays on the part of the owner. On the other hand, the contractor seeks an extension of time subject to a number of conditions including revision of rates for the work done beyond the agreed time limit and payment of compensation. The employer agrees for an extension of time but refuses the liability to pay compensation or revision of rates. The author analyses these cases as under: In the first case, the imposition of penalty or recovery of liquidated damages for delay in completion being an agreed condition of the contract, the owner or his Architect or Engineerin-Charge, as the case may be, wil 1 be fully within his power to grant an extension, subject to the condition of penalty /liquidated damages, if it is his contention that there was no default on the part of the employer.46

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Similarly, in the second case, if it is the contention of the contractor that the delay in completion was on account of defaults on the part of the owner, he may seek conditional extension of time subject to payment of compensation, etc. The contract will remain valid but there would be in the both cases, disputes between the parties about their rival claims, which would, in the end, be settled either amicably or through arbitration or in a Court of law. In other words, it is submitted, that the cases of the above nature fall within the ambit of S. 55 of the Indian Contract Act and not under S. 63 of the said Act. It is observed, that in several cases in public works contracts, the application by the contractor listing causes for delay which include breaches of contract by the owner are accepted in words somewhat bearing resemblance to the words such as: "In view of the facts and circumstances stated by you in your application for an extension of time, the time for completion is extended up to" and yet the penalty/Uquidated damages are shown recoverable. This is an abuse of power to levy penalty, resulting in unnecessary litigations wherein the right to recover penalty/liquidated damages is finally denied in arbitration or court proceedings. 45 46

6.14

Kesharlal v. Lalbhai T. Mills Ltd. AIR 1958 SC 512. Anand Construction Works v. State of Bihar, AIR 1973 Cal. 550.

IF EXTENSION OF TIME NOT GRANTED, EVEN FOR JUST REASONS

If the owner does not grant an extension of time, is a contractor legally within his right to stop work and claim damages? As already seen it is obligatory on the part of the owner to grant an extension of time, if the contractor has fulfilled all the necessary conditions for it. Refusal to grant an extension of time may, under appropriate circumstances amount to the breach of the condition of the contract. The most important question to be decided would be: does the breach go to the root of the contract to enable the aggrieved party to treat the contract as at an end and claim damages? For, if it were found that the breach was so material, the contractor would be justified in declining to proceed with the work. If it is assumed that the owner is willing to allow the contractor to complete the work without extending the time, the ultimate effect might be that the owner has set the time at large, and exonerated the contractor from liquidated damages for delay 47. To recover compensation for delay is a right vested in the owner and he can waive it at any time. If the amount is deducted from the running bills, on this ground, it can also be adjusted in the final bill. The contractor can accept on account payments, under protest. If the owner deducts the amount from the final bill the contractor can claim recovery of the amount so deducted either in arbitration or through the Court. As such, in the opinion of the author, the breach does not go to the root of the contract and the contractor, under the circumstances, is well advised to fulfill his part of the contract, if the owner does not rescind it. The contractor should, however, be careful in protecting his interest by faithfully following the procedure laid down to get an extension of time.

6.15 EXTENSION OF TIME- EFFECT ON COMPENSATION FOR DELAY

382

Building and Engineering Contracts

In India, Section 55 and 56 of the Indian Contract Act deal with consequences of breach of the contract provisions regarding time limit. Section 55 provides for situations where time is deemed to be of the essence of the contract and where it is not so deemed. In a construction contract, which provides for extension of time and/or levy of penalty, time is not deemed to be of the essence of the contract. As such, upon the contractor's failure to complete the work within the specified time the contract does not become voidable. As a result, the third paragraph of Section 55, which is applicable in case of a contract voidable, is not applicable. The second paragraph of Section 55 would apply.48 The second paragraph of Section 55, entities a party to compensation for any loss occasioned to it. Thus, the injured party can, without annulling the contract, askfor compensation in terms of the conditions of the contract and at the same time allow the contract to be performed. If under the provisions of a contract extension of time were given without imposing penalty, the date of completion would stand extended to that extent. As such the contractor can validly claim exemption to pay compensation for delay, to the extent it is 47 48

AIR 1958 SC 512. See Art 6.5.

covered by such an extension. It is important that such an extension of time must be given, in case of public contracts, by a competent authority and in writing. The mere fact that the contractor was allowed and encouraged to continue the performance even after the due date may not suffice to claim exemption from payment of compensation for delay. Similarly, if the amount of compensation is not fixed, by the person competent to do it, soon after the due date, it might amount to a waiver of his right to fix the compensation and recover it under the contract.49

If, however, there is power to extend the time for delays caused by the owner, and such delays have in fact taken place but the power to extend the time has not been exercised due to failure to consider the matter-within the time expressly or implication limited by the contract, the owner may have lost the benefit of the clause. The contract time has in such a case ceased to be applicable because of the owner's act of prevention, there is no date from which penalties/liquidated damages can run because any purported extension of time given is too late, and therefore, no liquidated damages can be recovered. By analogy it can be said that a purported extension of time that is too late can have an equally invalidating effect in cases where no element of breach by the owner is present and the cause of delay is a matter otherwise within the contractor's sphere of responsibility as e.g. bad weather.50 Thus, unless there is a clear stipulation, it is not open to the owner, where the contract date has ceased to be applicable, to make out a kind of debtor and creditor account allowing so many days or weeks for delay caused by himself, and, after crediting that period to the contractor, to seek to recover from him damages at the liquidated rate for the remainder.51 ILLUSTRATION In a case, the contract permitted an extension of time for "extras or other causes beyond the control of the contractor." Liquidated damages were to be $ 1000 per day. There was delay of ninety-nine days and extension of time for forty-six days. The owner, sued for $ 53,000. The trial judge found that forty-five days delay had been caused by the owner's delivery of certain machinery in a defective condition requiring considerable repair work and that this was a breach of the contract by the owner. He accordingly awarded $ 8000 liquidated damages. The Court of Appeal of British Columbia, applying Wells v. Army and Navy Society Ltd., held that on these facts no liquidated damages could be recovered.52

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The case of Wells v. Army and Navy Society Ltd. decided in (1901) and relied upon in the above decision is also noteworthy, it is submitted, for a categorical statement of interpretation of extension of time clauses. Such clauses usually provide for an extension on account of "causes beyond the contractor's control." A breach by the owner can as well be argued to be a cause beyond the contractor's control. If the owner is entitled to recover liquidated damages by making assessment of the delay caused on account of several factors, he may not be allowed to include the delay caused by the breach of contract on his part under the category: "other causes beyond the contractor's control". ILLUSTRATIONS 49 50 51 .52

State of Rajasthan v. Chandra Mehan, AIR 1971, Raj. 229. See Hudson's Building and Engineering Contracts, 10th ed. Page 644. Dodd v. Churton (1897) 1 Q.B. 562. Perini Pacific Ltd. v. Greater Vancouver Sewage (1966), 57, DLR (2d), 307, Canada.

( 1 ) In the case of Wells v. Army and Navy, contractors undertook to erect buildings for a company within a year, unless delayed by alterations, strikes, sub-contractors, "or other causes beyond the contractor's control." Another provision made the decision of the directors of the company in matters of time to be final; and liquidated damages were payable if the work was not completed within a time considered reasonable by them. There was one year's delay. The principal cause was the sub-contractors, for which the directors were prepared to allow three months. The contractor contended that this was insufficient, and that the delay was caused by alterations, and also by the delay in giving possession and providing plans. The Court found on the basis of evidence that there was substance in all the complaints, and it was impossible to say to what extent each one contributed to the delay, but the words "or other causes beyond the contractor's Control" could not include the breaches of contract or other acts of the owner in not giving possession and failing to supply plans and drawings in due time, and consequently, it was held, liquidated damages could not be deducted.53

(2) In a contract for the construction of a canal the time limit for completion was stipulated to be 30 months. The work remained incomplete due to non-fulfdlment of the conditions of contract by the Department. The contractor claimed compensation in the form of revised rates for the work done after the expiry of the original contract period. The arbitrators recorded a finding that there was delay in the execution of the work which was on account of nonfulfillment of the contract conditions for which the appellants were responsible and there were substantial changes in the working conditions and therefore the appellants were liable to pay damages/compensation towards the quantities of items that remained incomplete on the stipulated date of completion, and had to be completed thereafter. The arbitrators held that they had the power to grant damages under the provisions of the Contract Act notwithstanding the terms of the contract and it was stated that the appellants themselves accepted this position. The arbitrators found that the claims by the contractors were justified and awarded damages calculated on the basis of prevailing rates of labour, machinery, spares and P.O.L. 30 months after the commencement of the work, that is, during the extended period of execution of the items in question. The award was challenged in the Court. In appeal, on behalf of the contractor reliance was placed upon the decision of the Supreme Court in M/s. Tarapore Company's case.54 The State placed reliance upon Continental Construction Co. Ltd. v. State of M.P.55 to contend that specific escalation clause in the contract would bar award of extra cost. The Kamataka High Court held:56 "The effect of extension of time on damages claimed by the contractors has been exhaustively considered by several authors ijx several standard text books and a few of them are Halsbury's Law of England 4th edition, para 1281; Keating on Building Contracts at para 16] and 53 54 55 56

Wells v. Army and Navy etc. Society (1902) 86 LT, 764, Hudson's Building and Engineering Contracts- 10th Ed. Pp. 630. ,AIR 1984 SC 1072. AIR 1988 SC 1166. State of Kamataka v. R.N.Shetty & Co., E.& C , AIR 1991 Kant. 96 (103).

384

Building and Engineering Contracts

Hudson on Building and Engineering Contracts, 10th edition at page 647, which view is reiterated in Emdon on Building Contracts. All these textbooks are to the effect that when the time fixed by the contract ceases to be applicable on account of some act or default by employer, a provision is generally inserted to extend the time. When the power to extend time has been properly exercised, the contractor will be liable to pay liquidated damages. In a true sense and on an examination of the matter in its proper perspective, what comes up for consideration in such a case is determination of the question as to what are the rates applicable as a result of the extension of time granted and not awarding of damages as such. The enhancement in the rates itself will constitute the damages. When the contract itself does not bar such rates being given and the arbitrators in the case on hand on a consideration of the material on record, have arrived at the rate at which the contractors will be entitled for payment of extension of the contract time because of certain lapse on the part of the appellants and the rate being just and proper one, it cannot be said that the arbitrators have committed any error apparent on the face of the record calling for interference at the hands of this Court." In the course of its judgment the High Court negated the plea and held that mere presence of "price adjustment" clause wouldnot come in way of the relief. The Supreme Courts decision relied upon by the State was distinguished by observing "there were specific clauses which barred payment of extra charges and no such specific clauses are available in the case on hand".

Consequences where time is of the essence of the contract Where time is of the essence of the contract, a failure to perform by the stipulated time will entitle the innocent party (i) to terminate the performance of the contract and thereby put an end to all the unperformed obligations of both the parties to the contract and (ii) claim damages for loss of the whole transaction on the basis of the fundamental breach of the contract. However, the innocent party, if he accepts the belated performance instead of avoiding the contract, cannot claim damages for any loss occasioned by the non-performance of the reciprocal promise at the time agreed, unless at the time of such acceptance he gives notice to the promissor of his intention to do so.

Exemption Clauses and the Fundamental Breach Thus, it appears that under the Indian law, in spite of there being a contract between the parties whereunder the contractor has undertaken not to make any claim for delay in performance of the contract occasioned by an act of the employer, still a claim would be entertainable in one of the following situations: (i) if the contractor repudiates the contract exercising his right to do so under Section 55 of the Contract Act, (ii) the employer gives an extension of time either by entering into supplemental agreement or by making it clear that escalation of rates or compensation for delay would be permissible, (iii) if the contractor makes it clear that escalation of rates or compensation for delay shall have to be made by the employer and the employer accepts performance by the contractor in spite of delay and such notice by the contractor putting the employer on terms. Thus, il may be open to the contractor, in the above situation, to prefer a claim touching an apparently excepted matter subject to a clear case having been made out for excepting or excluding the claim from within the four corners of "excepted matters". However, a party in

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Time for completion, Delay in completion

385

its petition must show or prima facie suggest why such claims must be taken out of the category of excepted matters.57 6.16 PROCEDURE OF TERMINATING CONTRACT AFTER EXPIRY OF TIME LIMIT FOR COMPLETION Before discussing the procedure for termination of the contract the conclusions and the principles very well established and considered herein above can be summed up: 1. In a construction contract mere stipulation of time limit for completion does not make that time the essence of the contract. 2. Even if the agreement clearly stipulates that the time shall be deemed to be of the essence of the contract, it shall cease to be of the essence if the contract contains stipulations regarding extension of time and imposition of penalty/liquidated damages. 3. Upon non-completion of the work either due to default(s) of the owner or of the contractor, the contract does not automatically come to an end on the expiry of the date of completion. 4. Either party to the contract is bound to grant extension of time, if sought for by the other party. The Other party seeking extension, if it is guilty of having caused the delay, will be liable to make good the losses suffered by the injured party due to such delay either in accordance with the provision of the agreement or in the absence of any such provision in the agreement under Section 73 read with paragraph 2 of Section 55 of the Contract Act. 5. The extension to be agreed should be a reasonable extension. As to what is a reasonable extension, it is a question of fact and will depend upon facts and circumstances of each case. For example, if a contract involves construction work costing rupees fifty million, originally agreed to be completed within 10 months and if only half the work is completed within the stipulated time the reasonable extension may be about 4 to 5 months. The Procedure If a defaulting party is likely to continue to default, the innocent party is not bound to grant an extension of time every time. In such an eventuality, although Section 55 does not so 1 stipulate, it is open for the innocent party to give subsequent notice making the extended time the essence of the contract. It is necessary that while giving such notice the intention of the party giving the notice should be very obvious from the notice itself inasmuch as the matter would be open to the scrutiny by the Court. The question whether the time 57

General Manager, Northern Railways vs. Sarvesh Chopra, 2002(1) Arb. LR 515.

prescribed in the notice is or is not the essence of the contract would naturally depend upon the facts and circumstances of each case. The mere fact that the notice gave a certain time to perform the contract would not necessarily lead to the conclusion that the time prescribed was tne essence of the contract. In all such cases, the Court has to look to the pith and substance of the notice and not at the letter of the notice and decide as to whether time was or was not essential to the subsistence of the contract. The real intention of the party who gives notice must be clear from the notice itself. It may in certain cases be necessary to rely upon surrounding circumstances. Nevertheless one has to largely look to the notice itself.58

386

Building and Engineering Contracts

After the time is extended and made the essence, upon expiry of the extended time, which was made the essence of the contract, the contract does not automatically come to an end. Section 55 makes such an agreement voidable. It must however be remembered that the only right which (the innocent party) gets in such a case is to avoid the contract. The contract does not automatically get determined. He has to further expressly or in unambiguous words determine the contract under S.64 of the Contract Act.59

SECTION 64: "Consequences of rescission of voidable contract-When a person at whose option a contract is voidable rescinds it, the party thereto need not perform any promise therein contained in which he is promisor. The party rescinding a voidable contract shall, if he has received any benefit thereunder from another party to such a contract, restore such benefit so far as may be, to the person from whom it was received." Section 64 of the Contract Act requires the person rescinding the contract to restore any benefit received by the party under the contract. In other words, in a construction contract, the contractor will be entitled to receive the value of the work done. That however, wi 11 not prejudice the right to get compensation due to delay vested in the innocent party under Section 55 read with Section 73 of the Indian Contract Act. ILLUSTRATIONS (1) A.P. State Electricity Board - Appellants called for quotations from 8 companies including the plaintiff on 13-12-1966 for supply of materials. An order was placed on 5-5-1967. The order stipulated that the goods should be supplied before 30-6-1967. The plaintiff sent the goods on 26-9-1967. The goods were received allegedly pending decision of the competent authority. The appellant's Superintending Engineer (Operation) cancelled the purchase order by a letter dated 9-11-1967 and the plaintiff was requested to take back the goods through letters dated 16-11-1967, 2-2-1968, and 2-5-1968. Instead of taking back the goods the plaintiff fded a suit seeking recovery of the cost of materials supplied. The trial Court on a consideration of the entire material placed before it, held in favour of the plaintiff and decreed the suit as prayed for. In the High Court it was contended on behalf of the appellants \that the contract being a commercial one time was the essence of the contract and the delivery made by the plaintiff is no delivery at all in the eye of the law.The High Court took note of the~ following factors : 58 59

T. Venkata Subrahmanayam v. V. Vishwanandharaju. AIR 1968 AP 190 . AIR 1968 AP 190.

1 In the purchase order there was nothing to show that time was intended to be the essence of the contract though the date was specified before which the supply of the goods was to be effective. 2. The conduct in the past established that in earlier transactions like the one in question, the Board never intended time as of the essence and goods were accepted by imposing penalty. 3. The Board did not reject the goods when offered and the goods were accepted after the sample was approved and without putting any condition as to its verification and acceptance by superior officers. 4. Though the plaintiff's offer was valid for 30 days the Board placed an order subsequent to the expiry of that period. It was held : "For the foregoing reasons agreeing with the Court below, I am of the opinion that time was never intended to be treated as the essence of the contract by the parties. If that is so, the Board is not entitled to cancel the order and the cancellation cannot be treated to be valid in the eye of the law."

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Time for completion, Delay in completion

387

(2) In a case the architect purported to give notice to the contractors under CI. 25(1) (of JCT 63 contract terms) stating that in his opinion they had failed to proceed regularly and diligently and that unless an appreciable improvement was shown within 14 days the contract would be determined. By a subsequent letter the employer purported to determine the contract. The contractor alleged that the notice of determination was wrongful and amounted to repudiation of the contract. The contractors refused to accept the repudiation and elected to proceed with the work. The employer claimed an injunction to restrain the contractors from remaining on the site. Observing that what is involved is the application of an uncertain concept to disputed facts the injunction was refused. 61

6.17 WHEN NO TIME LIMIT IS SPECIFIED FOR PERFORMANCE OR SPECIFIED TIME INAPPLICABLE - CONSEQUENCES When a contract for sale stipulates a time limit in that event, the time is to be considered as an essence of the said contract and the said contract is enforceable and the parties willing to perform the same can ask for a decree for specific performance against the other parties immediately on expiry of the said period. However, when time is not stipulated in the contract it is expected that the same would be performed by the parties wifiiin a reasonable period. In a given case, the plaintiff is entitled to wait for a reasonable time and thereafter the suit can be brought within the general period of limitation, being three years. The decree for specific performance cannot be refused on the ground that there was no time stipulated for the same.62 Where the contract stipulated that the defendant shall execute sale deed within one month after the receipt of permission of competent authority, it was held that the time was not of the essence and the plaintiff could call the defendant to execute the sale deed even after the one 60 61 62

A. P. State Electricity Board v, Patel & Patel, AIR 1977 AP 172. London Borough of Honslow v, Twickenham Garden Developments Ltd. Chancery Division (1970) 7 BLR 8 1 . P. Poppan and another v. Karia gounder and others, 2002 (2) Arb. LR 666 Calcutta; Also see: Lala Suymer Chand Goel v. Rakesh Kumar, 2002(Suppl.) Arb. LR 66 (Allahabad).

month lime had elapsed." Where, however, a suil was filed for specific performance after nine years, it was held thai the plaintiff did not act reasonably and the suit was not maintainable.64 Section 46 of the Indian Contract Act "46. Time for performance of promise where no application is to be made and no time is specificd-Where, by the contract, a promisor is to perform his promise without application by the promisee, and no time for performance is specified, the engagement must be performed within a reasonable time. The explanation to the Section adds that the question "what is a reasonable time" is, in each particular case, a question of fact." The above Section will be applicable in a case where the time fixed for completion has ceased to be applicable and the contractor is continuing the work under the contract. ILLUSTRATION In a contract stipulating date for completion and a power to certify extension, no extension was either applied for or granted. Six months later the owner exercised power of forfeiture under the clause. The contractor brought an action for breach of contract contending that the clause ceased to have any application after the expiry of the time fixed by the contract for completion. It was held that the contract date having passed without any extension, the duty of the contractor was to complete the week within a reasonable time. 65

6.17.1 When time limit is not specified-Oral Evidence whether admissible?

388

Building and Engineering Contracts

"Where a written contract is silent as to time of performance, a reasonable time is to be presumed without reference to parol (oral) evidence.66 However, in another case, the Court held that in order to determine what constitutes a reasonable time, the Court should allow the parties to testify as to any conversation they had before the agreement was signed. In this case the trial Court did not allow such a testimony on the ground that it tended to vary the terms of the written agreement. Reversing this ruling of the lower Court the appellate Court held that oral evidence was not offered to vary the terms of the written contract but to show what the situation was when the parties entered into the contract and to deteraiine what was a reasonable time for the performance of the contract.67 6.18

TIME AND PLACE OF PERFORMANCE

The provisions of the Indian Contract Act other than those considered above, pertaining to time and place of performance include Sections 47 to 50, which are self Explanatory and reproduced below: SECTION 47 "Time and place for performance of promise, where time is specified and no application to be made. "When a promise is to be performed on a certain day, and the 63 64 65

Rakha Singh v. Babu Singh, 2003(1) Arb. LR 22 ( P & H.). Suryagandhi v. Lourduswamy, 2003(1) Arb. LR 234 ( Madras). Joshua Henshaw & Sons v. Rochdale Corporation, (1944), K . B': 381 Hudasan's B & E. C: 10th Ed. Page 697. Also see : Electronic Industries v. David Jones (1954) 91 C.L.R. 288 (Australia). 6 6 Giffels and Vallet Inc. v. Goldberg et al 79, SE. 2d 447, Supreme Court of South Carolina 1953. 6 7 Steinmn v. Olafson, 149 N.Y.S. 2d, 3d 3 1 Supreme Court, Appellate Term Second Dept. 1955.

promisor has undertaken to perform it without application by the promisee, the promisor may perform it at any time during the usual hours of business on such day and at the place at which the promise ought to be performed. Illustration "A promises to deliver goods al B's warehouse on the 1st January. On that day A brings the goods to B's warehouse, but after the usual hour for closing it, and they are not received. A has not performed his promise."

SECTION 48 : "Application for performance on certain day to be at proper time and place. "When a promise is to be performed on a certain day, and promisor has not undertaken to perform it wiithout application by the promisee, it is the duty of the promisee to apply for performance at a proper place and within the usual hours of business." "Explanation :- The question "What is a proper time and place is, in each particular case, a question of fact". SECTION 49 :"Place for performance of promise where no application to be' made and no place fixed for performance. When a promise is to be performed without application by the promisee, and no place is fixed for the performance of it, it is the duty of the promisor to apply to the promisee to appoint a reasonable place for the performance of the promise, and to perform it at such place. Illustration "A undertakes to deliver a thousand maunds of jute to B on a fixed day. A must apply to B to appoint a reasonable place for the purpose of receiving it, and must deliver it .to him at such place."

Chapter-6

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Time for completion, Delay in completion

SECTION SO : 'Terformance in manner or at a time prescribed or sanctioned by promisee." The performance of any promise may be made in any manner, or at any time which the promisee prescribes or sanctions. Illustrations (a) B owes A 2,000 rupees. A desires B to pay the amount toA's account with C, a banker. B, who also banks with C, orders the amount to be transferred fromhis account to A's credit, and this is done by C afterwards, and before A knows of the transfer, C fails. There has been a good payment by B. (b) A and B are mutually indebted. A and B settle an account by setting off one item against another, and B pays A the balance found to be due from him upon such settlement. This amounts to a payment by A and B, respectively, of the sums which they owed to each other. (c) A owes B 2,000 rupees. B accepts some of A's goods in reduction of the debt. The delivery of the goods operates as a part payment. (d) A desires B, who owes him Rs. 100, to send him a note for Rs. 100 /-by post. The debt is discharged as soon as B puts into the post a letter containing the note duly addressed to A."

♦ ♦♦

Chapter 7

Penalty / Liquidated Damages 7.0

INTRODUCTION

It is considered desirable to commence by defining some important terms repeatedly used in this chapter. (i) Damage: Damage means and includes loss of money, comfort, health or the like. (ii) Damages: Damages mean money compensation claimed by the injured party for the injury done. (iii) Compensatory Damages: Damages, which are ascertained with the fundamental consideration to place the innocent party in the position he would have occupied had the contract been performed according to its terms, are said to be compensatory. (iv) Penalty: A penalty is the sum named in a contract by way of compensation; the amount recoverable is not necessarily the sum actually named, but the value of the precise damage suffered by the injured party not exceeding the sum named. It falls under the category: Unliquidated damages. (v) Liquidated Damages: Liquidated damages are the actual sums named in the Contract, which the parties have themselves calculated, would be a fair compensation for the breach of the contract. 7.1

PROVISIONS OF THE INDIAN CONTRACT ACT Section 74

:

Art. No.7.3

7.1.1 Provisions in the Standard Form Contracts P.W.D. for B-1&B-2 C.P.W.D. Form

CI. 2 Cl.2

M.E.S. Form MoS&PIGOI FIDIC Form 1992 (Amended) FIDIC Form 1999 Edition 7.2

CI. 50 CI. 49 CI. 47.1 & 47.2 CI. 8.7

PURPOSE OF LIQUIDATED DAMAGES

From the definition of liquidated damages, it would be clear that the purpose of liquidated damages is to compensate the injured party for the loss suffered. The injured party is not to make profit out of this provision. "The fundamental provision upon which the rule of damages is based is compensation. Compensation is the value of the performance of the contract that is what the injured party would have made had the contract been performed.1 It, therefore, follows that although parties may have agreed to a fixed sum payable as damages, if such a sum exceeds the actual loss, the injured party will get nothing more than the actual loss suffered. And this precisely is the meaning of the term 'penalty'.

7.3 PENALTY AND LIQUIDATED DAMAGES DISTINGUISHED From the above consideration, it would be clear that there is no distinction between the two ways of naming a sum as compensation. The Common Law of England, however, recognizes the distinction between these two provisions. The Common Law doctrine of damages is considered here to show that the Indian law on the subject differs from it and the latter is, in a way an improved form of the former.

The Common Law Doctrine Of Damages Where parties name a penal sum as due and payable on the breach of a contract, the real damages and no more are payable. The sum named is only the maximum of damages. On the other hand, if parties by consent assess a fixed measure of damages (liquidated damages), to avoid the difficulty that must often be found in setting a pecuniary value on obligations rot referable, on the face of them to any commercial standard, the entire sum so fixed becomes due and payable. The distinction so made, on the face of it, looks very well. The trouble is that even now the Courts have not arrived at clear or certain rules for deciding to which of these two classes a given stipulation of penal or seemingly penal sum belongs. In construing these terms, the Court will not of necessity accept the phraseology of the parties but either term may be substituted for the other, at the discretion of the Court, after a full consideration of the intention of the parties at the time the contract was made as expressed by the whole instrument. Even the addition of negative words to purposely exclude the other alternative, for example "as liquidated damages and not as penalty" will not be decisive. This unhappy position in interpreting the Common Law doctrine of damages is completely eliminated in the Indian Contract Act of 1872.

Section 74 Of The Indian Contract Act The provision made in the Indian Contract Act (Section 74) reads as follows:

74. Compensation for breach of Contract where penalty stipulated for "When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of

1

Ficara v. Belleav. 1 17, N.E. 2d 287, Supreme Judicial Court of Massachusetts, 1954.

penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved tohave been caused thereby, to receive from the party who has broken the contract a reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for. ''Explanation - A stipulation for increased interest from the date of default may be stipulation by way of penalty. "Exception - When any person enters into any bail-bond, recognizance or other instrument of the same nature, or, under the provisions of any law, or under the orders of the Central Government or of any State Government, gives any bond for the performance of any public duty or act in which the public is interested, he shall be liable, upon breach of the condition of any such instrument, to pay the whole sum mentioned therein. "Explanation - A person who enters into a contract with the Government does not necessarily thereby undertake any public duty, or promise to do an act in which the public is interested." The language of the Section has made its interpretation difficult. The Section provides that reasonable compensation is payable. It provides at the same time, that such reasonable compensation would be receivable whether or not actual damage or loss is proved to have been caused by the breach. If it is a case of reasonable compensation then surely such reasonableness would depend on the facts and circumstances of each case. But the Section provides that it makes no difference whether or not actual damage or loss is proved. Then again, the last part of the sentence provides that such reasonable compensation is not to exceed the amount named in the contract or the penalty stipulated for in the contract. Analysis of this Section shows that the following is the intention of the Legislature:2 (1) The plaintiff must prove his damage in a general sense. (2) The contract made by the parties estimating their damages is in itself an evidence. (3) If there is no other evidence of damages, one can conceive of certain cases where this evidence alone will be considered sufficient. (4) The sum named however, is not conclusive evidence, that is to say, if there is other evidence or circumstances showing that it was excessive, the Court will not consider itself bound by it. (5) If, on the other hand, the other evidence and circumstances indicate that the damage equals or may equal or is likely to exceed the amount named, the Court will abide, by it, and lastly (6) In case (4) above, that is to say where the other evidence shows that the sumnamed is unreasonable, the injured party will have to prove his damages irrespective of the figure named. With the help of decided cases, the main provisions of the Section can be analysed as follows3 : (i) The section does not make any distinction between penalty and liquidated damages. The section is clearly an attempt to eliminate the somewhat elaborate refinements made under .toe English Common Law in distinguishing between stipulations providing for liquidated damages and stipulation in the nature of penalty "..the Indian Legislature has sought to cut across the web of rules and presumptions under the English Common Law, 2 3

Anand Construction Works v. State of Bihar AIR 1973. Cal. 550. Mahadeo Prasad v. Siemen Ltd., AIR 1934 Cal. 285.

by enacting a uniform principle applicable to all stipulations naming amounts to be paid in case of breach, and stipulations by way of penalty."4

(ii) Although parties may have named a sum payable as damages, the Court will award 'reasonable' compensation. "But that does not mean that compensation can be awarded even though no loss whatsoever has been caused. For the very concept of award of compensation is bound up with loss of damage that results from a breach of contract, all that Section 74 permits is award of compensation, even where the extent of the actual loss or damage is not proved and gives discretion to the Court to fix the amount." (iii) Even if, in a case the reasonable compensation in the opinion of the Court is more than the sum named in the contract the Court is at liberty to grant no more than the sum named. "In assessing damages the Court has, subject to the limit of the penalty stipulated, jurisdiction to award such compensation as it deems reasonable having regard to all the circumstances." (iv) If the sum is named in a contract payable as damages on the breach of the contract, it is open to the claimant of compensation to prove that the said amount represents a bona fide pre-estimate of the damages consequential to the breach complained of. The burden is always on the plaintiff to prove the extent of damages.

Reasonable Compensation The words of the Section give a wide discretion to the Court in the assessment of damages. Although the discretion of the Court in the matter of reducing the amount of damages agreed upon is left unqualified by any specific limitation, the expression 'reasonable compensation' used in the Section necessarily implies that the discretion so vested must be exercised with care, caution and on sound principles. For example, the measure of damages for failure to complete the building in time, where time is of the essence of the contract, is the rental value of the building for the period of delay and not the rent paid by the owner for the house he occupied.5 The above otherwise well settled position in the law stands unsettled by the Supreme Court of India's decision in the ONGC v. Saw Pipes Ltd. case6: In AIR 1963 SC 1405, the five Judge Bench of the Supreme Court of India, laid down the law that S.74 eliminates the distinction of penalty and liquidated damages. However, in the ONGC v. Saw Pipes case an attempt is made to reopen the distinction between penalty and liquidated damages. 4 5 6

S.ABhat v. V.N. Jamadar, AIR 1959, Bom. 452; Fateh Chand v. Balkishan Dassv AIR 1963 SC1405. Lindbergv.Brandtefa/ 112, NE.2d 746, Appellate Court of Dlionis, 1953. Oil and Natural Gas Corpn. Ltd. v. SAW Pipes Ltd, AIR 2003 SC 2629.

It was observed: "..If the compensation named in the contract is by way of penalty, consideration would be different and the party is only entitled to reasonable compensation for the loss suffered. But if the compensation named in the contract for such breach is genuine pre-estimate of loss which the parties knew when they made the contract to be likely to result from the breach of

it, there is no question of proving such loss or such party is not required to lead evidence to prove actual loss suffered by him. Burden is on the other party to lead evidence for proving that no loss is likely to occur by such breach." The arbitral tribunal in the ONGC case, after considering the decisions rendered by the Supreme Court in the cases7 of Fateh Chand, Maula Bux and Rampur Distillery (supra) arrived at the conclusion that "in view of these three decisions of the Supreme Court, it is clear that it was for the respondents to establish that they had suffered any loss because of the breach committed by the claimant in the supply of goods under the contract between the parties after 14th November, 1996. In the words we have emphasized in Maula Bux decision it is clear that if loss in terms of money can be determined, the party claming the compensation 'must prove' the loss suffered by him.... all that we are required to consider is whether the respondents have established their case of actual loss in money terms because of the delay in the supply of the Casing Pipes under the contract between the parties". Finally, the arbitral tribunal held that as the appellant has failed to prove the loss suffered because of delay in supply of goods as set out in the contract between the parties, it is required to refund the amount deducted by way of liquidated damages from the specified amount payable to the respondent. Setting aside the award it was observed: "It is apparent from the aforesaid reasoning recorded by the arbitral tribunal that it failed to consider Sections 73 and 74 of the Indian Contract Act and the ratio laid down in Fateh Chand's case (supra) wherein it is specifically held that jurisdiction of the Court to award compensation in case of breach of contract is unqualified except as to the maximum stipulated; and compensation has to be reasonable. ... Section 74 emphasizes that in case of breach of contract, the party complaining of the breach is entitled to receive reasonable compensation whether or not actual loss is proved to have been caused by such breach. Therefore, the emphasis is on reasonable compensation..." It was held: (1) Terms of the contract are required to be taken into consideration before arriving at the conclusion whether the party claiming damages is entitled to the same; (2) If the terms are clear and unambiguous stipulating the liquidated damages in case of the breach of the contract unless it is held that such estimate of damages/compensation is unreasonable or is by way of penalty, party who has conrmitted the breach is required to pay such compensation and that is what is provided in Section 73 of the Contract Act. 7

Fateh Chand v. Balkishan Dass, AIR 1963 SC 1405 : Manal Bux v. Union of India, AIR 1970 SC 1955 : Union of India v, R. D. & C. Co., AIR 1973 SC 1098:

(3) Section 74 is to be read along with Section 73 and, therefore, in every case of breach of contract, the person aggrieved by the breach is not required to prove actual loss or damage suffered by him before he can claim a decree. The Court is competent to award reasonable compensation in case of breach even if no actual damage is proved to have been suffered in consequences of the breach of a contract. (4) In some contracts, it would be impossible for the Court to assess the compensation

arising from breach and if the compensation contemplated is not by way of penalty or unreasonable, Court can award the same if it is genuine pre-estimate by the parties as the measure of reasonable compensation. For the reasons stated above, the impugned award

directing the appellant to refund the amount deducted for the breach as per contractual terms requires to be set aside and is hereby set aside." The finding at serial No 3 above is patently opposed to the well-established principle that if there is no loss, there is no compensation or at the most token compensation but not the sum named, it is respectfully submitted. The five Judge Bench of the Supreme Court in Manal Bux Case had held: "..Where the Court is unable to assess the compensation, the sum named by the parties if it be regarded as a genuine preestimate may be taken into consideration as the measure of reasonable compensation, but not if the sum named is in the nature of a penalty. Where loss in terms of money can be determined, the party claiming compensation must prove the loss suffered by him." (Emphasis supplied). The decision of the Supreme Court in the case of ONGC v. Saw Pipes Ltd. has been much criticized for increasing the scope of public policy and is at variance with the larger Bench decisions on the earlier occasions in respect of interpretation of Section 74 and as such does not lay down good law, it is respectfully submitted.

7.4 STIPULATIONS MADE IN CONSTRUCTION CONTRACTS Standard forms of contracts in general (and in cases of public works in particular) invariably stipulate a sum, such as one per cent or half per cent of the contract price per day, (or per week), payable as damages by the contractor for the period the work remains unfinished after the stipulated or extended date. The Standard Contract Form, prepared by the Ministry of statistics and Programme Implementation, Government of India stipulates compensation for delay at the rate Vi % of the contract price per week of delay, subject to a maximum of 10% of the contract price. Almost all standard forms limit the liability of the contractor to pay liquidated damages from 5% to 10% of the contract sum. These stipulations are open to criticism. Main objections that can be raised against them are considered below : A fixed sum when to be named as liquidated damages in a contract, should be a genuine estimate of the likely damages. The loss that the owner of a proposed construction work will suffer, due to delay in completion of work, would obviously depend upon factors like type of work, purpose of construction, etc. Even where two works of the same type are concerned the loss would not be the same but would depend upon other considerations. Contract price and the lime limit are not ihe only criteria. Thus, stipulating a l 'ixed percentage of estimated cost for all types of works under different circumstances is nol justified. Although it is true that the fixed sum named is only ihe maximum amount and the actual amount may vary and would be fixed by the competent authority; the amount so fixed would have to be reasonable. If it is not, the contractor may take the matter to the Court. In this dispute as already seen the Court would award reasonable damages. Thus, ultimately, what the owner would get will be reasonable compensation. There is no benefit to the owner by naming a sum higher than the genuine probable loss. If time limit within which the proposed work is to be completed is, in the opinion of the contractor who is willing to undertake the work, inadequate, he would provide for damages likely to be payable. It would not be illogical to consider that the contractors would increase the tendered sums or prices so as to account for damages at the highest rate named in the contract. It may so happen that during the discharge of the contract there would be no delay. Even if there were delay in completion, the contractor would pay reasonable compensation and not the sum named. The owner is thus put to loss for he has to

pay the contractor at the enhanced contract price or rates. On the other hand such provision, in the opinion of the author, puts the employer in a disadvantageous position if the actual loss is more than the sum named because the compensation cannot exceed the sum named. ILLUSTRATIONS The challenge to an arbitral award was primarily on the ground that the arbitrator arbitrarily disallowed the penal recovery on stipulated material in pursuance to Clause 42 of the Agreement. Clause 42 of the Agreement stipulated that the contractor was to see that only the required quantities of materials were issued. It was further the term of the Agreement that the difference in quantity of cement actually issued to the contractor and the theoretical quantity including the authorised variation, if not returned by the contractor, shall be recovered at twice the issue rate without prejudice to the provision of the relevant conditions regarding return of materials governing the contract. So, relying on this clause, it was contended that the Department rightly recovered the penal rate for the excessive use of material. On the other hand, in defence it was contended that the difference between the actual consumption and theoretical as pointed out under Clause 42 had been gone into by the arbitrator. He found that the actual loss has not been proved, meaning thereby that the arbitrator on the basis of the record provided before him was not satisfied with the calculations arrived at by the Department and, therefore, disallowed the double recovery. The arbitrator has given reasons for not accepting the double recovery as the D.D.A. failed to prove the loss. Hence, relying on Section 74 of the Indian Contract Act he concluded that the respondent since could not prove loss was not entitled to recover any amount on this account. The Court held that the objection to the award was not sustainable.8 (2) The defendant in a suit had placed orders on 20-2-1985 and 28-2-1985 for supply of five machines with the plaintiff, subject to the terms and conditions that if supply was not effected on or before 15-3-1985, penalty of 1% on the total value of the supply would be imposed for every three days of delay subject to. the maximum of 10%. The plaintiff has also intimated by letter dated 5-3-1985 that the penalty clause was not agreeable to them as the machines ordered are special in nature, however, agreed to supply the same within the stipulated period and the defendant had sent a reply dated 15-3-1985 intending to relax the 8

M/s. Jagan Nath Ashok Kumar v. Delhi Development Authority, AIR 1995 Del 87.

machines were kept ready for inspection within three months. further extension and not to apply penalty clause. On 1-7-1985, the defendant had sent a letter to the plaintiff extending the time for supply of the machines up to 15-7-1985, in the default they would impose penalty clause. On 2-7-1985, the plaintiff informed the defendant that the machines were ready for inspection. The defendant also carried out the inspection. The defendant had sent a letter dated 7-8-1985 demanding to rectify some defects pointed out by the Engineers, before dispatching the machines, which were rectified. The machines were supplied between 29-8-1985 and 23-1-1986. It is the case of the defendant that there was delay of 44 to 215 days. The defendant settled the bills after deducting the penalty amount of 10%. Hence, the suit was filed. penalty clause provided the The Plaintiff sought for

On behalf of the appellant/plaintiff it was argued that in the very first letter dated 5-3-1985, the plaintiff had communicated to the defendant that the penalty clause was not agreeable, that penalty clause was not binding on the plaintiff as the same was illegal, unlawful and onerous and that the delay in supply of machines was due to severe power cut in their area and curfew was clamped by the Government for ten days which was beyond their control, however, the machines were supplied in the year 1985 itself; and that even if the plaintiff had supplied the machines earlier, the defendant could not have used then as there was no electricity connection in their factory. The appellant/plaintiff further argued that the defendant had not let in evidence to show the alleged loss or damages suffered by them due

to delay in supply of machines hence, the penalty levied was unjustifiable and that the time was not the essence of the contract. The Learned single Judge, held that delivery was effected beyond the stipulated period, hence the plaintiff was liable to pay penalty. In appeal It was pointed out that admittedly electricity connection was given to the defendant's factory premises only on 5-6-1986 whereas the machines were supplied in the year 1985 itself and no evidence was let in by the defendant to show the actual loss sustained by them. It was held : "The plaintiff failed to prove the loss suffered by him in consequence of the breach of the contract committed by the defendant and we are unable to find any principle on which compensation equal to ten per cent to the agreed price could be awarded to the plaintiff. The plaintiff has been allowed Rs. 1,000/- which was the earnest money as part of the damages. Besides, he had use of the remaining sum of Rs.24,000/- and we can righdy presume that he must have been deriving advantage from that amount throughout this period. In the absence therefore of any proof of damage arising from the breach of the contract, we are of opinion that the amount of Rs. 1,000/- (earnest money) which has been forfeited, and the advantage that the plaintiff must have derived from the possession of the remaining sum of Rs.24,000/during all this period would be sufficient compensation to him. 9

7.5 WHY STIPULATE FIXED SUM? The idea of stipulating a fixed sum as damages seems to have its origin in the Common Law doctrine of damages. As already mentioned liquidated damages are payable in 9

M/s. Macbrite Engineers v. Tamil Nadu Sugar Corporation Ud., AIR 2002 Mad 429.

cases of contracts of uncertain value, where it is difficult to assess the damage and decide the amount of compensation in advance. However, most construction contracts are neither of uncertain value nor is it very difficult to ascertain the probable loss due to delay. It will be wrong to assume that Courts would ordinarily award total damages agreed to between the parties. As such the stipulation by way of fixed sum is not justified. The injured party can claim, and would normally be awarded reasonable compensation if no provision by way of penalty or liquidated damages is made in the contract. The injured party can claim damages for the breach of contract under the provisions of Section 73 of the Indian Contract Act. But in that event, for a successful claim, the injured party has to prove thai: (i) the loss or damage has been caused, (ii) the loss or damage arose in the normal course of things from such breach, or which the parties knew when they made the contract to result from the breach of it. Also such compensation is not payable for any remote or indirect loss or damage sustained by reason of such breach. In order to ensure that the Contractor does his best to complete the work within stipulated or extended time, it is better to draft the clause so that Section 74 of the Indian Contract Act is applicable, rather than Section 73. The stipulation by way of penalty or liquidated damages is, therefore, justified. But to name a fixed sum arbitrarily and without regard to the probable loss is not justified. A better way to handle this problem of damages is suggested below.

7.6 ALTERNATIVE METHOD SUGGESTED Whenever possible, the liquidated damages to be stated in the form of a specific number of rupees per week, should be the owner's genuine estimate of what he will lose in income by reason of the delay in completion. When it is not possible to ascertain correctly the probable future loss the contract may incorporate the provision for payment of 'reasonable damages'. The stipulation of penalty or liquidated damages suggested above is likely to be criticised as an 'uncertain provision'. In other words, it may be said that the contractors would not know what exactly they are agreeing to. In the opinion of the author the provision would be no more uncertain than a provision which states " .. one per cent of contract price or such smaller amount as may be fixed". It may be wrong to think that the parties would have to take recourse to legal action for deciding as to what is 'reasonable sum'. Both the parties would incur expenditure if dispute is to be referred to the Court. Therefore, if the reasonable sum is worked out on sound principles suggested below, there should be no difficulty in a parties agreeing to it. The authority that is to determine the amount of compensation will have naturally to account for the following: (i) Estimated losses to the owner because he could not utilize the property on the time scale he had anticipated. (ii) Interest charges which the owner must pay during delay and (iii) Cost and expenses of litigation.; If the amount of compensation is so decided the Court would have no reason to reduce it and the contractor would give as much consideration before he decided to challenge it as he would have given had the provision been "..or such smaller amount as fixed by the authority". 7.7 CLAUSE RELATING TO LIQUIDATED DAMAGES — WHEN CAN IT BE EVOKED? To attract the provisions of Section 74 it is not necessary that the entire contract should come to an end; breach of each term thereof can be visualized in advance and taken care of by providing an adequate clause for liquidated damages so that the parties to the contract can proceed to work out the contract in future and settle the question of damages that have accrued on the basis of the rate that has been put as a pre-estimate at the commencement of the contract. If the very purpose of putting a genuine pre-estimate is to avoid litigation and introduce certainty in computation of the difficult question of assessment of damages, it seems to be in the highest degree unlikely that the intention would have been that the clause of liquidated damages will not come into operation till the entire contract has been broken.10 ILLUSTRATIONS

(1) State of Rajasthan v. Chandra Mohan In January 1955, ' C entered into an agreement with the State, undertaking the construction of an aqueduct. According to the terms of the agreement the work was to be completed by 'C on or before 9-1-1956. There were heavy monsoons in Rajasthan in the year 1955, which caused damage and delayed the completion of the work. 'C continued the work and applied for an extension of time. The extension was not formally granted, but he was allowed to continue the work. The work was completed on 8th March 1957. The final bill was also prepared, but it was not paid. ' C claimed a refund of the security deposit and the amount of

the final bill. The Public Works Department (Irrigation) though it accepted the amount, claimed to deduct a penalty of Rs. 15,000/- alleged to have been imposed by the Chambal Control Board. After making the deduction , the balance amount was paid to 'C. The representation was made by ' C to the department, but having failed, the suit was instituted for the recovery of the balance amount, and interest thereon. After having considered die evidence on record, the learned District Judge held that the penalty of Rs 15,000/- was unreasonable. He held that 1% of the estimated cost of the suit work which comes to Rs. 3.750/- will be a reasonable compensation. It may be noted that the Chief Engineer had come in to the witness box. He had clearly and categorically stated that on account of delayed completion of the work, there occasioned, in fact, no loss to the Government. Aggrieved by the judgment, the State filed an appeal, 'C cross-objected. Dismissing the appeal filed by the State and allowing the claim the Rajasthan High Court held :"1. In view of the statement of the Chief Engineer (Irrigation) himself, it is difficult for us to hold that the department sustained any loss on account of the breach of the contract in not having completed the work within the stipulated' time. 10 Mohanlal v. B.G.Deshmukh, AIR 1985 Bom. 188.

"2. There is also another aspect of the case. ... The penalty was imposed by the Chambal Control Board on 9-8-1958. According to the terms of the contract, the Chambal Control Board had no authority to fix any penalty in terms of the contract. It was the Chief Engineer (Irrigation) who alone was authorised to determine the compensation for a breach of the contract and , as a matter of fact, it should have been done soon after 9-11-1956 when the plaintiff was not able to complete it. Clause 2 of the agreement provides that the compensation shall be deducted from time to time as the delay would occur in the progress of the work.."

It was finally, held that the plaintiff was not at all liable to pay the compensation. (2) A contract for the supply of 55,00,000 bricks involving average lead of 11 miles within six months was awarded to a contractor who did not possess the requisite number of trucks to complete the job. The correspondence showed that the matter came to such a pass that it was not possible for the contractor to complete the job without incurring a heavy loss. At the earliest opportunity he stopped the work and virtually compelled the Government to annul the contract so that some other contractor might complete the job. At this stage it was practically impossible to assess the actual amount of damages suffered by the Government in view of the nature of the work involved in the contract. If a contract of this nature is annulled before completion it is not a question of finding out the difference between the contract rate and the market rate of the materials to be supplied. There could be no ready market for the same. Whoever would be given the said contract, at that stage, would have to supply the same from the quarry. There would be a question of delay in the construction of the road. There would be the possibility of the Government suffering damages because of idle labour caused by the non-supply of the materials for the construction of the road. There might be many other factors which would result in damages because of such breach. The parties knew beforehand that if the contract could not be carried out to its completion it would not be possible for the Government to lead evidence of actual loss and accordingly they must have assessed such loss on the basis of a certain percentage of the value of the contract. It was held11 : "that the amount mentioned in Clause 2 of the conditions of the contract was not assessed by way of penalty but was a genuine pre-estimate of the damages in the facts and circumstances of this case."

(3) In a case, the Madras High Court held that if there is no evidence to show that the, amount fixed is unconscionable, the full sum is payable and the party claiming compensation need not prove that he has actually suffered any loss or damage. 12

7.8 EXTENSION OF TIME AND PENALTY FOR DELAY Construction contracts invariably include provisions for levy of penalty or recovery of liquidated damages on the one hand, and extension of time for completion on the other hand. The P.W.D. forms include such provisions in Clauses 2 and 5 of the B-l, & B-2 forms. C.P.W.D. as also other departments like, the M.E.S. and the Railways also incorporate similar provisions.PIDIC form includes such Clauses at Sr. No. 44.1 to 44.3 and 47.1 and 47.2. One improvement noticed in the FIDIC form is the provision for 11 12

Anand Construction Works v. State of Bihar , AIR 1973, Cal. 550. T. K. Sundaram v. Co-operative sugar Ltd. Chittor, AIR 1988 Mad. 167.

reduction of the rate of compensation if part of the work has been taken over by the employer, on the pro rata basis. However, the total compensation is not reduced. The importance of extension of time provisions vis-a-vis the recovery of liquidated damages cannot be ignored. The extension of time clause is of benefit to both the contractor and to the owner. Its benefit to the contractor is that in the event of delay by bad weather or strikes etc. for which he is not responsible; his liability to pay liquidated damages gets reduced to the extent that delay is caused by such factors. This clause is also of substantial benefit to the owner, since in the absence of an applicable cause of this kind, the liquidated damages provisions will cease to have effect where even a part of the delay is due to some act or default on the part of the employer or his agents or any other matter for which he would be held responsible. Generally the terms of the contract confer power on the engineer to determine the length of the extension of time. Some contracts make his decision final and binding. In the latter capacity his role is quasi-arbitral in character. The two provisions of extension of time and recovery of liquidated damages often become a great source for a number of litigations. In almost every project there will be some reasons for justifying extension of time. The reasons could be the factors "beyond the control of the contractor" or breaches of contract conditions committed by the owner or his engineer/architect. The quantum of extension of time granted is invariably considered inadequate and disputed by the contractor. At times there is considerable delay in granting an extension of time. Extra work, excessive variation in quantities and in particular the time of ordering them, add to difficulties in assessing the extension. There can be delays caused by the contractor. The question is how to assess the quantum of liquidated damages recoverable from the contractor. Or, can it be said that the time of completion is left open and if so, under what circumstances? This question assumes importance because if the time of completion is left open, the owner cannot recover penalty or liquidated damages. There is no precise answer to the difficult question inasmuch as all the circumstances may have to be taken into account and the matter decided on a case-bycase basis. The following illustrations, however, can serve as guides inhelping one to reach a correct answer in a given case. * ILLUSTRATIONS (1) Where the work is delayed due to non- availability of materials and delay in supply of drawings, it was held by the Gauhati High Court":

13 O. & N. G. Commission Nazira v. M/s S.S.Agarwalla & Co., AIR 1984, Gau. 11.

"Under CI. 2 of the contract, penalty could be imposed in the form of compensation for delay if the work was "not done by the contractor with due diligence" which is to be read with the other relevant provision, CI. (5), which provided for extension of time. It appears from the evidence that the plaintiff had from time to time brought to the notice of the defendants the causes due to which the execution of the contract was being delayed and on 20-6-66 he also wrote to the defendants, vide Ext. 5, for extending the time of completion of the work. This request for extension was not rejected and therefore, the defendants were not justified in imposing the penalty for delayed execution of the work." (2) T contracted to execute a road construction work for F; the work to be commenced 14 days after the date of work order and to be completed within 15 weeks, that is on or before 30th December 1975. The agreement incorporated provision for the recovery of liquidated damages at $ 500 a week payable by T to F for delay. The agreement further provided for time to be extended for, inter alia, 'delays caused by other contractors on the site, delays in installation of services or exceptional circumstances'. On 18th November 1975, T applied for extension of time on account of additional work and delays by other contractors. On 2ud March 1976, the engineer granted an extension up to 24th March 1976. On 29th April, a further extension was granted by the engineer up to l8t June 1976. The delays by other contractors caused the summer job to be carried on during winter resulting in further delays on account of exceptionally bad weather. In the process the completion got delayed by 46 weeks. The question to be decided was whether F's breach relieved T of liability under the liquidated damages clause. The authority of Perini was relied upon. In the said case14 the British Columbia Court of Appeal held that where a building contract contains a clause providing that the owner may extend the time for completion upon application by the builder, by reason of extras or delays occasioned by strikes, lockouts, force majeure 'or other causes beyond the control of the contractor', the concluding words must be construed narrowly and with reference to the preceding specific causes of delay and so as not to include defaults of the owner which would unreasonably result in making him the judge of the extent of his own default. Accordingly, the Court held that in view of the default under the implied terms of the contract the employer having delivered defective machinery for incorporation in the plant being erected by the contractor, which caused delay in completion, the contractor was thereby left on his own to decide the date of completion and was released of his liability to pay liquidated damages even though the contractor's own tardiness may have caused some of the delay. The observations in Wells v. Army and Navy Co-op. Society Ltd. (1902) were cited with approval, it is submitted. The guiding principles emerging were to ascertain firstly, if on the whole, the conclusion is that the defaults of the owner were such that in their cumulative effect they were inconsistent with their claim on completion within the stipulated time, and if so, to reject fully the proposition in effect 'never mind now much delay may have been caused by the conduct of the building owner, the builder will not be relieved from penalties if he too has been guilty of delay in the execution of the works" The case was ultimately decided on the authority of Perini and it was held that there was no jurisdiction in the engineer to extend time on account of F's breach and that, that breach set the completion date open with the effect that T was not liable to pay liquidated damages.15 The law seems to be well setded by a series of authorities16 that where the reason for the contractor's failure to complete on time is wholly or pardy due to the fault of the owner, the owner cannot recover liquidated damages unless the contract provides otherwise. The provision of liquidated damages is unenforceable if expressed in a manner, which is inconsistent with the other clauses to which liquidated damages relate. 14 15 16

Perini Pacific Ltd. v. Greater Vancouver Sewerage and Drainage Disrtict (1966). Fembrook Trading Co. Ltd. y. Taggart , Supreme Court of NewZealand [1979] I NZLR 556 Wells v. Army & Navy Co-operative Society Ltd:, K.B. Div. (1902) 86 LT 764; Miller v. London County Council , K.B. Division (1934) 151 LT 425; Peak Construction (Liverpool) Ltd. v. McKenney Foundations , Court of Appeal (1970) I BLR III; Percy Bilton Ltd. v. Greater London Council, House of Lords (1982) 20 BLR.

ILLUSTRATION A contract for erection of 123 dwellings stipulated the dale for completion as 6th December 1976. The agreement provided for recovery of 'Liquidated and Ascertained Damages' at the rate of £ 20 per week for each incomplete dwelling. The architect granted various extensions and give an extended completion date of 4th May 1977. Possession of dwellings was taken over by the owner as and when completed. The last houses were not taken over until 29th November 1977. However, between 4th May and 29th November 1977 the architect issued various instructions to the contractors. The owner retained 26,150 pounds as liquidated damages but did not claim damages for the period beyond 29. November 1977. The contractor disputed both the extension of time granted and the owner's right to deduct liquidated damages. An arbitrator issued an interim award on both the points and the matter came before the Court. The Court had to decide the following main contentions:That since the agreement contained no express provision for sectional completion the liquidated and ascertained damages provisions were rendered unenforceable by reason of the operation of Clause 16(e) of the contract. Clause 16(e) provided for the sum payable after taking possession in respect of the period during which the works remained incomplete. The liquidated damages Clause 22 permitted the owner to deduct liquidated damages not only on all the dwellings but all the works up to the date of practical completion irrespective of the fact whether possession was taken during the progress of the work. It was held that there was no provision for sectional completion in the Articles of Agreement, and as such provisions of Clause 16 and Clause 22, which provided for liquidated damages were unenforceable. However, it was observed that the finding of the Court "does not in any event prevent" the owner from claiming damages for breach of the contract. 17 Provisions of Standard forms like FIDIC and HA stipulate that the contractor shall pay tne relevant sum stated in the Appendix to Tender as liquidated damages. The sum stipulated therein even if it is nil, constitutes an exhaustive agreement as to damages payable or not payable by the contractor in the event of his failure to complete the work on time. The amount nil does not permit a claim for damages in general.18 Two questions arise for determining, which are of considerable importance: The first is to what extent the decision of the engineer is binding, if at all on payment of liquidated damages. The second relates to the practice of the engineers in the public works departments in India to use cyclostyled forms for communicating extension of time. This communication invariably ends with the sentence, "This extension is granted subject to the right to recover liquidated damages" and gives rise to the question: How far does the exercise of such an extension protect the right to recover liquidated damages? The answer to the first question seems to be that subject to scrutiny by the Court or arbitrator, (if the decision is referable to the arbitrator), the decision is final. The decision 17 18

Bramali & Ogden Ltd. v. Sheffield City Council, QB Div (1985) I Con LR 30. Temloc Ltd. v. Errill Properties Ltd. Court of Appeal, (1987) 12 Con LR 10 15A.

may be that t h e architect certifies l h e full amount for paymenl wilhoul any deduction, in spite of delay in completion. In rare forms of contract, it might deprive the owner of his right to recover liquidated damages. However, most modern forms exclude certification or deduction of liquidated damages by the engineer. For example see Clause 47.1 of FIDIC

conditions 1992 (amendments) and Clause 8.7 of the 1999 edition. As far as the contractor is concerned, he can also challenge the deduction of liquidated damages in arbitration or a Court. In most of the cases where the engineer is not specifically empowered to take the liquidated damages into account in his certificate for payment, the absence of any reference to them in the final certificate obviously cannot affect the owner's right to deduct liquidated damages. As regards the second question raised above, the P.W.D. engineers do not gain any specific advantage by reserving the right to recover damages. The right to grant extension is with one engineer and the right to impose penalty is with the other engineer. The correct procedure, it is suggested, should be, that the engineer granting an extension of time must clearly declare the extension allowed on merits and justified by the facts stated by the contractor in his application. He can do so from time to time without reserving the right to recover liquidated damages, realising that such damages cannot be recovered under the facts of the case. Once a stage has been reached when, allowing for all extensions of time then justified, the works should have been completed, the case should be forwarded to the other engineer who is empowered to levy penalty for the period beyond that point. The second engineer must never impose penalty for the earlier period or else his decision will be open to attack and not final. During such extended period with penalty, whether factors including breaches of contract, if any, committed by the owner or his agents can justify reduction of damages or not will be doubtful. However, an event, which could qualify as an act of God, might suspend or reduce the damages.19

7.9 LIQUIDATED DAMAGES PROVISION-A MERE RIGHT TO SUE Any stipulation for unliquidated damages in a contract gives rise only to a right to sue on default and no right to the amount. That right to sue will furnish a cause of action for the suit. This position has been well settled.20 In Union of India v. Raman Iron Foundry21, the observations of the Bombay High Court were cited with approval, it is submitted. In the said case Hon'ble Mr. Chagla C.J., as he then was, observed: "In my opinion it would not be true to say that a person who commits a breach of the contract incurs any pecuniary liability, nor would it be true to say that the other party to the contract who complains of the breach has any amount due to him from the other party... .As already stated, the only right which he has is the right to go to a Court of law and recover damages. Now, damages are the compensation which a Court of law gives to a party for the injury which he has sustained. But, and this is most important to note, he does not get damages or compensation by reason of any existing obligation on the part of the person who 19 20 21

Ryde v. Bushell (1967) EA 817 (Bast Africa). State v. M/s M K .Patel & Co. AIR 1985 GUI 179. Union of India v. Raman Iron Foundry,AIR 1974 SC 1265.

has committed the breach. He gels compensation as a result of the fiat of the Court. Therefore, no pecuniary liability arises till the Court has determined that the party complaining of the breach is entitled to damages. Therefore, when damages are assessed, it would not be true to say that what the Court is doing is ascertaining a pecuniary liability which already existed. The Court in the first place must decide that the defendant is liable and then it proceeds to assess what that liability is. But till that determination there is no liability at all upon the defendant."

The Supreme Court observed: "This statement in our view represents the correct legai position and has our full concurrence." It was further observed: "The claim is admittedly one for damages under Clause 14, but so afar as the law in India is concerned there is no qualitative difference in the nature of the claim whether it be for liquidated damages or for unliquidated damages... .It therefore makes no difference in the present case that the claim of the appellant is for liquidated damages. It stands on the same footing as a claim for unliquidated damages. Now the law is well settled that a claim for unliquidated damages does not give rise to a debt until the liability is adjudicated and damages assessed by a decree or order of a Court or other adjudicatory authority".22 ILLUSTRATION A contract with the State of Kamataka included a clause which made the purchaser thereunder liable to pay damages to the State as may be assessed by the State in addition to the forfeiture of the security deposit, in case of breach of any of the conditions of the contract. By reference to the words Tor any breach of conditions set forth hereinbefore', the Supreme Court observed:23 2 "On a plain reading of the words it is clear that the right of the second party to assess damages would arise only if the breach of conditions is admitted or if no issue is made of it. If it was the intention of the parties that the officer acting on behalf of the State was also entitled to adjudicate upon a dispute regarding the breach of conditions the wording of clause 12 would have been entirely different. It cannot also be argued that a right to adjudicate upon an issue relating to a breach of conditions of the contract would flow from or is inhered in the right conferred to assess the damages arising from a breach of conditions." It was therefore, held : "... the powers of the State under an" agreement entered into by it with a private person providing for assessment of damages for breach of conditions and recovery of the damages will stand confined only to those cases where the breach of conditions is admitted or it is not disputed."

7.9.1 Vishwanath Sood v. Union of India, AIR 1989 SC 952 This case, decided by the Supreme Court, raises a very delicate situation in construction contracts which contain provisions as under : Clause 2 of the General Conditions of Contracts of the CP.W.D. and the State P.W. D. empowers the Superintending Engineer to decide the rate of compensation and/or penalty for delay in completion of the work by the contractor and further makes his decision final and 22 23

Vishwanath Sood v. Union of India.AIR 1974 SC 1265 (1272-73). State of Kamataka v. Rameshwara Rice Mills, AIR 1987 SC 1359 (1316).

binding. Clause 5 or 6 of the Printed Forms provides for suitable extension of time to be granted to the contractor for appropriate reasons shown to the satisfaction of the Divisional or Executive Engineer, who generally is the Engineer-in-charge of the work.

Strictly speaking under Clause 2 there is no role to be played by the Engineer-in-charge and conversely under Clause 5 or 6 by the Superintending Engineer. The two officers are likely lo decide differently on the same factual matrix. The Engineer-in-charge may grant extension of lime on the grounds on which the contractor, on the one hand, submits an application and the Superintending Engineer may impose penalty for the same extended

period, on the other hand. The resultant situation did not pose any problem in the field prior to the above decision of the Supreme Court. The Supreme Court in the case under study declared that the decision of the Superintending Engineer is excluded from the scope of the arbitration clause. This, with great respect, it is submitted, is an erroneous decision based on certain presumptions which themselves can be proved wrong or will be proved wrong by improper exercise of authority by the engineerofficers. This case has been fully studied and discussed in the author's title "The Law of Arbitration' Second Edition by Sarita Patil and lhe author is in respectful agreement with the views expressed therein. 24 It is hoped that in an appropriate case, the Supreme Court will reconsider the above decision and at least clarify or restrict its scope if not to hold clearly that it was not correctly decided. Until then the Courts would have to find out ways and means to obviate the likely injustice, an excellent example of which is to be found in the decision of the Andhra Pradesh High Court in the case dealt with in Chapter 16.25

7.9 RELEASE OF LIQUIDATED DAMAGES It is in the essence of liquidated damages and penalties that they shall run as from a fixed date. It is, therefore, essential to specify the time limit within which the work is to be completed. It is not necessary to state, "time shall be of the essence of the contract". The owner may lose his right to liquidated damages under the following circumstances: 1. The provision for extension of time is made in the contract but extension of time is not granted in spite of just reasons26: Most contracts call for a written notice from the contractor cornmuhicating happening of an event causing delay within the stated time limit. It must be noted that this is a condition precedent to the consideration of the contractor's request for an extension of time, and should be scrupulously followed by him. 2. When any act of the owner or the engineer / architect, not covered by the terms of. the contract, renders it impossible for the contractor to complete the work on schedule, he is relieved of his obligation to pay damages.27 24 25 26 27

B.S. Patil on The Law of Arbitration, Revised and Enlarged Second Edition 1992. by Santa Patil, Pp. 66-70. Yelforu Mohan Reddy v. Rashtriya Ispathnigam Ltd., Yishakhapatanam, AIR 1992 A.P. 81. Westwood v. The Secretary of State for India (1963) 7, L.T. 736.23. See Art. 7.8 and illustrations under it. See Art. 7.8 and illustrations under it.

3. II' Ihe architect/engineer gives a certificate of satisfactory completion and certifies the balance due lo the contractor, such a certificate is likely lo be held as conclusive and Ihe owner cannot deduct liquidated damages.2" However, such a certificate must have been given by the architect/engineer al his own discretion and without undue influence of one of the parties. 4. The penally clause for delay in completion applies only lo completion by the contractor himself. If according lo provisions of the contract, the work is taken out of the hands of Ihe contractor, the clause ceases to apply and the original contractor is freed from its liabilities.29

7.10.1

Effect of Payment without deduction

The right to recover liquidated damages will not be lost, unless special provision is made in the contract by paying the contractor moneys otherwise due to him, or by permitting the completion of the work after the due date for completion However, if provision for deduction from money due is made it may be construed to be mandatory and exclusive, and in such an event failure to make the deduction may disentitle the employer from recovering the damages. ILLUSTRATION A contract contained a stipulation that in the event of delay the contractor undertook to forfeit and pay to the owner £20 a week, to be paid and retained by the employer for each and every week during which such work shall remain unfinished. Interim payments were released for 14 months after the completion date without retaining any sum for liquidated damages. On these facts it was held that by conduct the employers had disentitled themselves from recovering liquidated damages. 30

7.10.2

Owner's Obligations

It would be worthwhile to consider as to what happens when the contractor quits the unfinished job after the time limit has expired. It "would not be incorrect to assume that liquidated damages would be recoverable from the time fixed for completion (originally agreed or extended) until the work was abandoned, but thereafter the owner will be entitled only to unliquidated damages31. The owner in such a case is, however, under the obligation not to increase the amount of damages by : (1) unreasonable delay in taking over the job, and / or (2) failure to complete it diligently. 28 29 30 31

See Hudson's Building and Engineering Contracts 10th Ed. p. 642. Re Yeadon Waterworks Co. & Wright (1895) 72 LT 538. Laidlaw v. Hastings Pier Co. ( 1874). See Hudson's Building and Engineering Contracts 10th Ed, p. 633.

7.11 RIGHT TO LIQUIDATED DAMAGES EXCLUDES RIGHT TO UNLIQUIDATED DAMAGES By providing, for compensation in express terms, the right to claim damages under the general law is necessarily excluded, and, therefore, in the face of that Clause it is not open to the owner to contend that the right is left unaffected. In Chunilal V. Mehta & Sons Ltd. v. C.S. and M.Co. Ltd.32 it was held : "Where parties name in a contract reduced to writing a sum of money to be paid as liquidated damages they must be deemed to exclude the right to claim unascertained sum of money as damages. The right to claim liquidated damages is enforceable under S. 74 of the Contract Act and where such a right is found to exist no question of ascertaining damages really arises. Where the parties have deliberately specified the amount of liquidated damages there can be no presumption that they at the same time, intended to allow the party who has suffered by the breach to give a go-by to the sum specified and claim instead a sum of money which was not ascertained or ascertainable at the date of the breach."

Chapter - 7

7.12

406

Penalty / Liquidated Damages

EFFECT OF TERMINATION / FORFEITURE

It now remains to be seen if the above observations of the Supreme Court of India can apply to interpreting normal provisions in standard form contracts which provide for liquidated damages for delay in completion and forfeiture of security deposit and right to recover compensation for the extra expenditure incurred. For example, see Clause 2 and 3 of B-l and B-2 forms of the C.P.W.D. form, or of Clauses 63.1 to 63.3 of (1992 amended) FIDIC conditions 32

of contract. The observations in the case above were made where the parties had provided for liquidated damages in the event of termination of the contract. As such it is doubtful that the said observations will be attracted to cases and contract in which liquidated damages for delay in completion and unliquidated damages for terminating or abandoning the contract or committing a fundamental breach by the contractor are provided. It is submitted that' the provisions of the agreement will be given effect to unless the termination is based on delay alone in which event the above observations of the Supreme Court of India can be relied upon. If there is abandonment of the. contract or any other breach mentioned in the agreement provision empowering the owner to enter upon the premises, seize the contractor's tools and plant, and execute the balance work either by himself or through another contractor, as is generally provided in the conditions of the contract in common use including FIDIC, the owner's damages wouldprobably arise under two main heads, namely i) damages for delay, and ii) additional cost if any, for completion. The provision of liquidated damages in most contracts cover only the first of these two conditions. Normally the effect on this clause will be that the owner will be entitled to liquidated damages prior to the date of rescission or determination of the contract and thereafter he will be entitled to recover unliquidated damages only. However, if the contractor disputes the recovery of liquidated damages, then, in effect the entire question is to be 32

AIR 1962 SC 1314.

adjudicated by a Court or arbitrator as the case may be. This is, of course, subject to express stipulations otherwise made in the contract.

7.13 BONUS PROVISIONS Construction contracts sometimes contain provisions designed to give the contractor a financial inducement to complete the contract before the date scheduled for completion of works. Such provisions when inserted are to be found in association with the liquidated damages clause.' To earn bonus under such a provision, the contractor must comply with the terms of the bonus clause. If the contractor can prove that there was any hindrance by the owner or his agent, he is entitled to recover damages to the extent he incurred losses under the bonus clause.33 If the contract contains provision of bonus for expedition, and a power to extend time, the intention of the parties as to whether bonus should be calculated with reference to the new completion date, substituted by the operation of the extension of time clause, has td oe ascertained from the provisions of the particular contract. No general rule can be laid down. In one case it was held that the extension of time clause only applied to save the contractors from liquidated damages, and not to give them additional bonuses.34 In that case the contractors having received bonus for early completion, claimed further bonus in respect of time taken, as they alleged, by extra work.

407

Building and Engineering Contracts

♦♦♦

33 34

Bywaters v. Camick (1906) ; Hudson's Building and Engineering Contracts, 10th Ed. P. 557. Ware v. Lytterton Harbour Board 1882 NZLR SC 191.

Chapter 8

Quality of Work, Defects and Maintenance J 8.0

INTRODUCTION

In a classic form of a building or construction contract, the owner and his professional advisers such as architects, structural engineers, etc. assume responsibility for the design of the building or the structure as the case may be. The professional experts prepare detailed drawings and specifications of materials and workmanship, which are to be the basis for executing the work. The duty of the contractor is to carry out the work exactly in accordance with the drawings and specifications. In this regard most contracts provide that if any work has been executed with unsound, imperfect or unskillful workmanship, or that any materials or articles provided by the contractor for the execution of the works are unsound or of a quality inferior to that contracted for, the contractor must rectify the work at his own expense. In this chapter it is proposed to discuss obligations of the parties associated with the execution of a contract work in relation to quality of materials, workmanship, defective work and maintenance. The discussion is with reference to the conditions usually incorporated in the standard form, contracts.

8.1

CONDITIONS IN THE STANDARD FORM CONTRACTS

Every tenderer prior to submission of tender and the contractor after he enters into a contract must read the provisions of the agreement to understand duties and liabilities. Some such provisions relating to the subject-matter of this chapter include: (i) MoS&PI, GOI Clauses : 33 to 36 (ii) B-l & B-2 Standard Forms of State Government Clauses and CPWD,Form Clauses : 6,7, 11, 14, 17 MES Form No Clauses 44, 46 (iii) Railway Form Clauses 27, 50 FIDIC Form Clauses : 7.1, 7.2, 7.3 Clauses under the headings : General obligations, Labour, Materials, Plant and Workmanship. (iv) FIDIC Form 1999 Ed. Clauses : 7.1 to 7.8, 9 to 11.

8.1.1 MoS&PI, GOI Clauses : 33 to 36 This form under the heading 'Quality control', in four short and simple terms, lays down the rights and liabilities of the employer and the contractor. Clause 33 empowers the nodal officer or his nominee (equivalent to Engineer or Engineer's representative) to check the work and notify the defects that are found. The clause further stipulates that such power and checking shall not affect the contractor's responsibilities. The contractor, if directed, will be bound to uncover and test any work that the nodal officer or his representative considers may have defects.

Clause 34 stipulates that if the test is ordered lo be carried out not specified in the specifications and the defect is confirmed, the contractor will bear the cost of tests and any sample and if the defect is not detected, it will be a compensatory event. The use of the words 'compensatory event' in place of cost of tests and sample can be construed to entitle the contractor to claim loss of time and productivity if caused by the direct result of such instruction besides the cost of tests and samples. Clause 44 lists the compensatory events and this figures under sub-clause (d). Clause 35.1 deals with correction of the defects, which have been notified, by the nodal officer or his representative before the end of defects liability period, which period begins at completion of the work and is defined in the contract data. It further stipulates that the defects liability period shall be extended for as along as defects remain to be corrected. This stipulation gives rise to a doubt as to whether the extended period empowers the nodal officer or his representative to notify further defects during such extended period. It is submitted that the extension is only for the purpose of correcting the defects notified within the original period specified in the contract data. Clause 35.2 stipulates that the contractor shall rectify the defect every time it is notified within the period specified in that respect by the nodal officer or his nominee in the notice. Clause 36 provides for contingencies in the event of the contractor not having corrected any defect that had been notified. This clause empowers the nodal officer or his nominee to assess the cost of defect rectification and makes the contractor liable to pay the said amount.

8.1.2 FIDIC Form 1999 Ed. Clauses: 7.1 to7.8, 9 to 11 FIDIC 1999 edition contains the provisions at serial number 7, 9,10 and 11 of the General Conditions of Contract. Clause 7 .1 to 7. 6 are relevant to the present discussion. Clause 7.1 deals with the manner of execution making the contractor to carry out the work in the manner specified by the contract, in a proper workmanlike manner in accordance with

recognized manner and with properly equipped facilities and non-hazardous materials except otherwise specified in the contract. Clause 7.2 deals with 'samples' of materials and relevant information to be submitted by the contractor for approval by the Engineer. Clause 7.3 empowers the Employer's personnel to have full access at reasonable time to the site for inspection. It further provides that the contractor shall give notice of any work 'ready for inspection' (RFI) before it is covered up. The Engineer may inspect the work or may inform the contractor that he may not.be required to do so. If the RFI notice is not given, lhe Engineer has a right lo direct the contractor to uncover the work and reinstate and make good al lhe contractor's cost.

Clause 7.4 deals with Tests specified in the contract and expressly provides that if on account of any delay on the part of the engineer to attend the tests after giving 24 hours notice to thai effect, the contractor suffers delay or incurs any cost, the contraclor is entitled to extension of time and payment of additional cost, if he has given notice to that effect to the Engineer. Clause 7.5 and Clause 7.6 make the contractor liable to make good the defect pointed out by the engineer and to ensure that the rejected item or work complies with the contract. The contractor's liability continues notwithstanding any previous test or certification by the engineer to remove and replace any plant or materials which are not in accordance with the contract and to remove and re-execute the defective work or any work urgently required for the safety of the works for any cause. Clause 9 deals with tests after completion, undue delay in carrying the tests by the contractor and failure by the contractor to carry out the tests empowering the engineer to carry oul the tests at the risk and cost of the contractor, retesting in case the works fail to pass the tests on completion and consequences of any work's failure to pass the tests on completion, payment at reduced rates/cost or other remedies provided in clause 11.4. Clause 11 deals with defects liability. Apart from making the contractor liable for rectification of the defective works at the cost of the contractor, it provides that if the defective work is attributable to any cause, for which the contractor is not responsible, he shall be notified and the provisions of the variation clause will be attracted. The employer is entitled to an extension of defects liability period on account of any works, section or item of plant is not put to use for the purpose for which they are intended by reason of a defect or damage, which shall not exceed two years. The wording of this clause may entitle the employer to point out the defects noticed during the extended period, which is not to exceed two years, it is submitted. Consequences of failure to remedy defects by the contractor is the subject matter of clause 11.4 which contains provisions entitling the employer to adopt any one of the three alternatives as follows: (a) Carry out the work himself or by others in a reasonable manner at the cost of the contractor and the contractor shall pay the employer the costs; (b) Require the engineer to agree or determine a reasonable reduction in price; or

(c) If the defect or damage deprives the employer of substantially the whole benefit of the works, terminate the contract and recover all sums paid for the works, cost of removal and financing costs including clearing the site and returning the materials and plant to the contractor. Where, however, Ihe cause of deled is not attributable to the contractor he is entitled to access the site, search tor the reasons and will be entitled to payment of additional sum lor the expenses incurred by him as specified in clause 11.7 and 11.8. Clause 11.9 pertains to issuance of performance certificate by the engineer to the contractor within 28 days after the latest of the expiry dates of the defects notification periods. Clause 11.10 declares that for unfulfilled obligations, the contract will continue to subsist even after the performance certificate is issued and Clause 11.11 deals with the contractor's liability

to clear the site and remove his materials, equipment, rubbish, etc. within 28 days failing which the employer may sell or otherwise dispose of the remaining items at the cost of the contractor. The provisions of the other standard forms are more or less similar to the above two forms and are not reproduced or analyzed to avoid repetition.

8.2

CONTRACTOR'S IMPLIED OBLIGATIONS

The implied obligations of a contractor, or interpretation of express warranties, as to the quality of work, generally fall under three heads: (i) Materials, (ii) Workmanship, and (iii) Design. The contractor's responsibility to rectify the defective work at his own cost arises only when it can be proved that he has not complied with the drawings, specifications and directions of the engineer. The general principle to be adopted can be stated thus: "Where a contractor agrees to produce a certain result, he is responsible if the result is not produced; but, where the owner assumes to specify the manner of construction, to produce the result, the owner assumes the responsibility if the work does not turn out as expected. If the plans are insufficient to produce the result desired, the contractor is not responsible if he carries out the plans"1 ILLUSTRATIONS (1) In a case the contract contained a clause that the waterproofing shall be watertight. The specifications provided how the walls should be built and how the waterproofing should be done. However, when one of the walls cracked and was found not to be watertight, the owner brought in the suit to recover damages. It was held by the Court ■that "where an owner specifies how foundation walls should be built and waterproofed, the contractor does not warrant that they shall be watertight, though the contract represents that they shall be watertight."1 1

Kuhs v. Flower City Tissue Mills Co. 104, Misc 243, 171 NYS 688. i

i

( 2 ) I n L yn c h v. Th r o n e ( \ ) 5 G ) t h e s p e c i f i c a t i o n s e xp r e s s l y p r o vi d e d t h a t t h e w a l l s w e r e to be nine-inch brick walls.

Th e

wo r k w a s d o n e wi t h

go o d q u a l i t y

materials and

411

Building and Engineering ('onlracts

wo r k m a n s h i p a n d e x a c t l y i n a c c o r d a n c e w i t h t h e s p e c i f i c a t i o n s . H o w e v e r , t h e wa l l s d i d n o t ke e p o u t t h e d r i vi n g r a i n . Th e b u i l d e r w a s h e l d n o t li a b l e .

When Contract is Silent Where a contractor agrees to build a work for a specified purpose, and the contract is silent as lo the manner of construction, the law reads into the contract a stipulation that: (i) (ii) (iii)

the contractor will do his work in a good and workmanlike manner; the contractor will supply good and proper materials, and the completed structure will be reasonably fit for its intended purpose. ILLUSTRATIONS

(1) In one case, the contractor agreed to erect a garage with a concrete floor. The floor as built was ruined by frost. The owner refused to accept the work done in this manner. The contractor, thereupon, brought the action to compel the owner to accept the work as built. The trial Court granted the contractors judgment on the grounds that the owner did not specify any depth for the foundation, nor did the specifications, provide that the concrete floor should not be laid during freezing weather. The Appellate Court reversed the judgment.3 4

(2) In T. V. Borough Council v. The Greater London Council, the Court was to lay down a

standard of duty to be implied in the agreement. It was held that the contractor undertakes to provide dwellings constructed in good and workmanlike manner, of materials which were of good quality and reasonably fit for human habitation. (3) The owner in one case after getting designed a roof by an architect contracted to get it built by a contractor. No architect was engaged to supervise the construction. The design was faulty and made insufficient provision for ventilation of the roof space and timbers. The result was a serious attack of rot. The contractor was held liable for failure of his duty to warn the owner of the obvious inherent danger.5

(4) Builders proposed to develop an estate of some forty houses. The plots were laid out.

Prospective purchasers purchased the plots but at the time no contract was entered into for the erection of the houses. In the next three months the builders did a good deal of work in laying the foundations. They put in hardcore and a layer of four inch concrete above it. They started to build houses. After this, contracts were signed. According to the terms of the agreement, the builders had undertaken at their own cost and charge and in a proper and workmanlike manner to erect, build and complete a messuage or dwelling house in accordance with th e plan and specification supplied to t h e purchaser who agreed to 2 3 4 5

1 W.L.R. 303. Minemount Realty Co. v. Ballentine, 162 A 594, 111 N.J. Ed. 2. 398. Court of Appeal (1979) 13 BLR 63. Brunswick Construction Ltd v. Nowlan, Supreme Court of Canada, (1974) 21 BLR 27.

buy t h e same lor t h e named price. There was nothing in the specifications about the foundation, except that at the site concrete was to be four inches thick and laid to required levels. On the plan it was mentioned "four inch site concrete on hardcore". The houses were completed and the purchasers occupied the houses. All seemed lo appear well, but two years later there was trouble in one house and three'or four years after in the other houses. The floors were cracking and breaking up. The cause was found

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to be the hardcore, which contained a large quantity of sodium sulphate. The builders were not to be blamed for, they had no way of suspecting the hardcore. The builders used all reasonable care, skill and judgment in their work. It was held: 6 "The quality of materials is left to be implied; and the necessary implication is that they, should be good and suitable for the work. I knew that the builders were not at fault themselves. Nevertheless this is a contract; it was their responsibility to see that good and proper hardcore was put in as it was not put in, they are in breach of their contract". It was observed that the builder can try and sue their suppliers, if they can prove against the suppliers but they have to take responsibility so far as purchasers are concerned. 8.3

NOMINATED SUPPLIER / SUB-CONTRACTOR

The next question that may be considered is the responsibility of the contractor for the materials supplied for use in work by the supplier nominated by the owner and/or his architect/engineer. The answer to this question, prima facie appears to be that for defective materials the contractor cannot be held responsible. However, express terms of the contract and any admissible surrounding circumstances have to be taken into account. ILLUSTRATION hi a contract, in RIBA form, which contained no express provision as to the liability for quality of nominated materials, the contractor was duty bound to accept and comply with the instructions of the architect. The architect, nominated 'S' as supplier of concrete units and sent to the contractor quotation from S instructing to accept it, which the contractor did. The quotation contained provisions limiting the liability of S, if the goods supplied proved defective. Under the main contract, the contractor could make reasonable obligations to nominated sub-contractors, but no such right in respect of the nominated suppliers. The concrete units supplied by S proved defective causing delay in completion. The contractor exercised his right to determine the contract on the ground that the work got delayed for more than one month 'by reason of architect's instructions'. The owner claimed damages for wrongful repudiation. The question was whether the contractor was responsible for the implied warranty, in which event, it was conceded that the contractor was not entitled to terminate the contract. It was observed. "The employers, through their architect, having directed the contractor to buy from a manufacturer who had substantially limited his liability, it would not be r e a s o n a b l e t o 6

Hancock v. B. W. Brazier (Anerley) Ltd. Court of Appeal (1966) 2 All ER 901.

s u p p o s e t h a t t h e p a r t i e s w e r e i n t e n d i n g t h e c o n t r a c t o r t o a c c e p t a n u n l i mi t e d l i a b i l i t y. . . "a n d held that the contractor was not liable.

7

The decision mentioned above is based on the main fact that the contractor did not have any freedom to negotiate the supply terms with the nominated supplier. If it could be shown that the contractor could, and it would be the expectation that he would, or at least it would be his responsibility if he did not, deal with the manufacturer on terms attracting the normal conditions or warranties as to quality or fitness, the contractor would be held liable by the nominated supplier. In such a situation, a contractor is well advised to give his supplier specifications of the main contract and buy on such terms that he may not have to bear the loss if the materials prove to be defective. ILLUSTRATIONS hi a contract for supply of work and materials for roofing of the houses, the contract specified use of 'Somerset 13' tiles, which were manufactured by only one manufacturer. The contractor obtained supplies from their own suppliers, who in turn obtained them from the (1)

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manufacturer. Some of the tiles had manufacturing defects which were not patent, but latent. In less than a year the tiles began to disintegrate and the owners claimed the cost of re-roofing of the houses. It was urged on behalf of the contractor, that since he did not choose the tiles and the defect could not have been discovered by any reasonable inspection, he was not liable. It was observed: "The question is whether he warrants the material against latent defects. It was held: "The loss was not caused by Somerset 13 tiles being unsuitable for the contract purpose; it was caused by the tiles which were supplied being of defective quality. ..There are in my view good reasons for implying such a warranty if it is not excluded by the terms of the contract. If the contractor's employer suffers loss by reason of the emergence of the latent defect, he will generally have no redress if he cannot recover damages from the contractor. But if he can recover the damages, the contractor will generally not have to bear the loss: he will have brought the defective material from a seller who will be liable under - the Sale of Goods Act - - because the material was not of merchantable quality." (2) A contract for construction of a factory building provided for the design, supply and erection of a superstructure including the roof and roof lights to be carried out by the nominated sub-contractors who were specialists in 'system built' superstructures. The subcontractor completed his work in May 1967 and the main contractor in August 1968, a major leak occurred in the roof of the factory. The cause of the leak was found by an arbitrator to be due 85% to the defective design of the roof lights, 12% to the use of inferior material and 3% to bad workmanship. It was held by the trial Court : (a) The main contractor was responsible for so much of the damage as was due to the use of inferior material, by and bad workmanship of the subcontractor; and (b) The main contractor was not responsible for the loss which was due to the defective design of the roof lights. The appeal from the above decision was dismissed. 8 (3) 'flie main contractor had carried out the construction ol' buildings with R.C .C.'. frames. 7 8

Gloucestershire County Council v. Richardson, House of Lords (1969) 1 AC 480. Norta Wallpapers (Ireland) Ltd v. John Sisk &Sons (Dublin) Ltd. Irish Supreme Court, (1977) 14 BLR 49.

The white ceramic tile external cladding was done by nominated sub-contractors. The cladding began to fall. The architect blamed bad workmanship. The main contractor blamed the design. Eventually, the owner decided to remedy the defects by a resin injection process. The architects recommended the sole British licensee of the process be employed by the main contractor to remedy the defects. The main contract Was varied accordingly. The licensees being employed by the main contractor and not technically nominated sub-contractor. The remedial works were not successful. The owner alleged breach of implied warranty of fitness for purpose of the resin injection process. It was held that the main contractor was not liable in the contract. It was suggested that the owner should have taken an express warranty from the main contractor or direct warranty from the specialist sole licensees. 9

Guarantee by Contractor The principle forming the basis of the above cases is likely to be varied by express terms of the contract. For example, if a contractor is to submit tender in accordance with specifications which include a guarantee "that all material employed in the work will be first-class and without defect and that all work specified" would remain defect-free for a certain period the contractor will accept the risk involved. ILLUSTRATION A roofing contractor's tender was accepted for providing roofs on buildings under construction. The roofs of the buildings were to be covered by a fluted steel deck and a layer

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of insulation and roofing felt was to be attached to the steel deck by a compound of fireresistant material known as 'Curadex'. The contract contained a stipulation as a part of which the contractor guaranteed "for a period of five years that all work specified above will remain weather-tight and that all material and workmanship employed are first class and without defect." It was held that the guarantee extended to damage to the roof arising out of faulty design and the owner was entitled to recover the cost of repairs to the roof. 10

8.4 INTERPRETATION OF SPECIFICATIONS The specifications are written instructions which supplement the drawings, to set forth the complete technical requirement of the work. The requirements such as arrangement, dimensions and types of constructions which can more readily be expressed graphically are shown on the drawings. The specifications on the other hand cover those features, which can be described in words. Thus, quality of materials and workmanship are usually the subject matter of the specifications. Both drawings and specifications are integral parts of the contract documents. As such great care should be exercised to see that there is no conflict between the drawings and 9 10

University of Warwick v. Sir Robert McAlpine QB (1989) 42 BLR 6. Steel Co of Canada Ltd v. Willand Management Ltd; Supreme Court of Canada (1966) 58 DLR (2d) 595.

specifications, in spite of due care, occasionally, conflict may result between the drawings and specifications. In such cases, it is customary in engineering and architectural practice to apply a rule of interpretation according to which specifications are said to govern. That is, so far as the conflicting part of the work is concerned, the intention of the parties to the contract is to be gathered from the specifications and not from the drawings. This is not, it may be noted, a rule of law and to avoid a dispute, the contract should include an express provision to this effect. The modem day contracts do include express provisions under the heading : "Interpretation Clause". Occasionally conflicts between the various parts of the specifications may be the causes of disputes in construction contracts. More often than not such a conflict arises on account of violation of a basic rule of specification writing, namely either specify the methods or specify the results. Consider for example, the specifications of cement concrete. The specifications sometimes state the proportion in which cement, sand, coarse, aggregate and water shall be mixed, together with the time for mixing and allowable slum. It also specifies an ultimate twenty-eight day compressive strength that the concrete must develop. Such specification, as already mentioned, may relieve the contractor of the responsibility of the final results, if the contractor has faithfully followed the method. Where construction of a finished product is split into a number of independent items and the contract includes separate specifications for each item, the specifications of each item are to be read in conjunction with trade practice and in relation to all the specifications. ILLUSTRATION A contract called for the construction of concrete spillways for a flood control project. The specifications of the concrete work permitted deviation in line and grade for the finished spillways. However, the specifications for erecting the formwork for laying concrete provided that "forms shall be true to line and grade". The specifications of formwork were interpreted by

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the Government to mean that no deviation in the formwork was permitted. Accordingly, the contractor was required to erect the forms with extreme accuracy. The contention of the contractor was that the specifications of the formwork were not to be read literally. His interpretation was that the specifications for the formwork read with specifications of the finished spillways permitted him to erect the formwork within the tolerances allowed for the structure. The Government's insistence and continuous inspection and directions that all forms meet an exact standard were excessive. He, therefore, claimed compensation on this ground. It was held that the contractor's interpretation was reasonable and correct. The Court observed: "The end product contemplated by the contract was a specified mass concrete structure with the wooden forms being but the means to be employed in achieving that end product. It would be unreasonable to assume that the parties intended to contract for a less than perfect end product while intending that the forms be built with mathematical exactness".-1 8.5 DESIGN FAILURE 11

Kenneth Reed Const. Corp. v. The United States, U.S. Courts of Claims, No. 144-70 (Mar 16, 1973).

In Ihe final analysis, the word "design" can be considered to be wide enough lo include materials, their quality, strength and also workmanship. Thus in a typical building contract wherein the contractor is supplied with a full set of contract documents prepared by the owner 's architect/engineer consisting of Bill of Quantities, drawings, specifications, etc and the contractor faithfully follows the same in executing the work, he is not responsible lor defects, if any.

ILLUSTRATIONS (1) A contractor successfully tendered for the design, supply and installation of bulk storage and handling plant. The plant was to be built on reclaimed harbour land. The contractor did in fact propose the design of the foundation and prepared the first drawings. But by the time the agreement was made the "design" of the foundation had been agreed, after participation of the owner's consulting engineer in the determination of its form. That agreed design extrapolated in a drawing, was expressed to be part of the contract work. These drawings showed ring beam foundations for the storage bins. Subsidence occurred when the bins were erected and filled. It was held that the contractor's liability was to execute the work as per the drawings in a workmanlike manner. The contractor did this, according to the arbitrator.12 (2) M contracted with B to build a warehouse. Consultant structural engineers carried out the actual design work. The bills of quantities described the work to be watertight. The basement floors subsequently developed cracks and water penetrated necessitating remedial work resulting in delay and losses. The two issues to be determined were:

(a) whether the defects were the result of inadequate design and/or faulty workmanship. (b) If the cause was design failure whether M, was liable because of performance specifications in the bills of quantities. It was held: "I should require the clearest possible contractual condition before I should feel driven to find a contractor liable for a fault in the design, design being a matter which a structural engineer is alone qualified to carry out and for which he is paid to undertake, and over which the contractor has no control. .. I decline to hold that the specification in the bill of quantities makes the contractor liable for the mistakes of the engineer." 13

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(3) A contract was entered into for the supply, and to fit and hang doors for shops "to suit opening, steel sheet outside area, fit Rivers 4 point non-breakout locking system operated by key from inside, hinge, stops, etc." The contractor fitted the door as per the express terms but upon an existing wooden frame made out of a soft wood. Thieves later broke into the shops by forcing the door away from the frame with a jimmy. It was held that the contractor was in breach of an implied term to provide burglar proof protection.14 12 13 14

Cable (1956) Ltd. v. Hutcherson Brothers Pty Ltd., High Court of Australia, (1969) 43 ALJR 321. John Mowlem & Co. Ltd v. British Insulated Callenders Pension Trust Ltd. Q. B. Div. (1977) 3 Con. LR 63. Reg. Glass Pty Ltd. v. Rivers Locking Systems Pty. Ltd; High Court of Australia (1968) 120CLR 576.

I n a package deal of industrialized buildings, the builder is responsible for the design failure, if any. However, he can sue the design engineer/architect to recover loss, if any. The common intention of all parties to the contract being that the engineer should produce a design which would be fit for the purpose for which it was required. 15

8.6

REMOVAL OF IMPROPER WORK

A contract usually contains many clauses dealing with improper work, defects, maintenance, etc. According to one of the standard clauses, the opinion of the architect or engineer as to improper work and any material arising thereunder is made final. Another clause normally provides for making good defects after completion. The arbitration clause usually provides that defects after completion will be subject to review by the arbitrator. The proper and harmonious interpretation of these different clauses will be to make the first condition mentioned above applicable to improper work noticed in the course of construction until the work is 'green'. All work may be considered green for this purpose until the engineer or architect has examined it during one of his visits. If, after inspecting the work during one of his visits, the architect or engineer has not condemned the work, and if the contractor has obviously treated it as finished, the first clause will no longer be applicable. It is obvious, that, however careful an engineer or architect may be while inspecting the work at his periodical visits, defects in materials and work may possibly be overlooked or covered up in the intervening period. If in fact the work is badly done and defects follow, the engineer or architect is not without power and the owner is not without his protection. The defence often attempted to be raised on behalf of the contractors who are guilty of executing defective work, is that the owner or his architect/engineer saw the work but no disapproval was expressed. Such a defence is not available, unless some matter was expressly brought to an engineer's attention, he was expressly asked to give his approval and that he gave it. Even in such a case the estoppel would only be for the patent defects and not to latent defects, which the engineer was unaware of when he gave his approval. The rule is that the architect is not duty bound to the contractor to point out defective work during the progress.16 The defects and maintenance clause will be applicable in such cases. Under that clause, however, the engineer or architect no longer has the last say in the matter, his decision can be challenged by the contractor and the matter referred to the arbitrator.

8.7

DEFECTS AND MAINTENANCE CLAUSE

As mentioned above, the defects and maintenance clause is inserted in a contract to empower the engineer or architect for protecting the interest of the owner in case defects appear in the work subsequent to completion. The clause, as seen in the example clauses referred to in Art.

15 16

Greaves & Co. (Contractors) Ltd. v. Baynham Meikle & Partners, Court of Appeal (1975) 4 BLR 56. East Ham. B. C. v. Sunley (1966) AC. 406 Also see. (1962|) 1 W.L.R 585.

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8.1.1 and 8.1.2 above, usually provides for the rectification of defects by the contractor at his own cost. The word "delect" in this context includes any breach ol" contract affecting the quality of work, whether structural or merely decorative and whether due to faulty material or workmanship, or even design, if the design is the contractor's obligation under the contract. Obviously the contractor could not be held responsible for rectifying defects for an indefinite period following completion. The clause usually stipulates a period of six months to one year during which it is expected that latent defects, if any, may possibly show themselves. When the guarantee period is named in the contract, the contractor's obligation to rectify the defects extends only to defects, which have been discovered during the fixed period. It is not necessary that the cause or the reason of these defects be discovered during the fixed period. 17

It is customary for the 'defects period' to run from the date of completion. Completion usually means certified completion. The engineer or architect, therefore, must give the completion certificate, without delay. Where completion of 'several works' is mentioned in the clause, it has been held that the expression 'several works' refer to the whole of the works collectively, and not to each part severally. The defects and maintenance clause is not only advantageous to the owner but also to the contractor, inasmuch as it ends the contractor's liability at a definite date unless very special circumstances exist. A contractor should not regard this clause with disfavour because even in the absence of a 'defects maintenance clause', the contractor remains liable for rectifying the defects after completion. If he fails to make good the defects brought to his notice, the owner may deduct charges incurred in remedial work from sums due to the contractor under the contract. If full payment has already been made, the owner can sue for damages for defective work. In the absence of an express stipulation to the contrary the contractor is not liable to make good the 'wear and tear' during the maintenance period. His liability will arise only if it can be shown that wear and tear are the direct result of defects for which he is liable. Further, under the defects and maintenance clause, the contractor is not liable to restore works if they are damaged by fire, storm, etc, during the maintenance period. The precise obligation of the contractor under a defects liability clause depends upon the construction of the clause incorporated in the contract by the parties. It is made clear that whatever may be the wording of the clause, the contractor should give notice to the engineer with a copy to the owner of his having substantially completed the work accompanied by a written undertaking to finish with due expedition any outstanding work during the defects liability period. It is then for the engineer to issue Taking-over certificate or a substantial completion certificate or to give instructions as to all works which are required to be completed by the contractor before the issue of such a certificate. The FIDIC form, as already seen stipulates 28 days time limit for the engineer lo do so. In other 17 18

Cunliffie v. Hampton Wick L.E. (1983) 9 TLR (378). Cunliffie v. Hampton Wick L. E. (1983) 9 TLR (378).

cases, the contractor can maintain the plea that the engineer unduly delayed the issue of the completion certificate to prolong the defects liability period, if he follows this procedure.

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According to the FIDIC form 1992 (Amended Edition) clause 49.2 the contractor's obligations under the clause are: a)

To complete the work, if any, outstanding on the date stated in the taking-over certificate, and

b) To execute all such work as amendment, reconstruction, and remedying the defects, shrinkages, or other faults. It needs to be noted that the liability extends to defects noticed by the engineer within the defects liability period even though notified within 14 days after the expiry of the defects liability period.

8.8 COST INCURRED IN PROVIDING REMEDIAL MEASURES Can the owner refuse to pay the contract sum or so much of it as has not been paid, if the contractor's work is defective? The answer to this question is considered below in the light of

the usual stipulations made in the contracts and referred to in Art. 8.1. Usually the contracts include express stipulations, one of which requires the contractor to remove and reconstruct bad, unsound, imperfect or unskillful work. Where, however, the defective work is structurally sound and cannot practically be removed except at an expense out of proportion to the good to be attained, the owner has the option, to accept the work and pay for it at reduced rates than agreed to in the contract. In other words, in the case of a substantial but defective performance, the contractor can claim and will be entitled to the contract price less the damages for the defective performance. The owner can, upon proof of defective construction, have the contractor's recovery reduced by the amount that would reasonably be required to remedy the defects and make the structure conform to the plans and specifications. Of course, the owner^ in making repairs, is not permitted to charge the contractor with the cost of materials, which are more expensive, or have the building placed in a better condition than what was called for in the contract between the two.18 Generally, the contractor is responsible for rectification or remedial work: (i) if the use of materials, plant or workmanship is found to be not in accordance with the contract. (ii) where the contractor is responsible for the design of part of the permanent works and there is any fault in such design; or (iii) neglect or failure on the part of the contractor to comply with any express or implied obligation on his part under the contract. If the necessity of rectification is due to other causes, the contractor deserves to be paid for such work, as he may have to carry out. The FIDIC form expressly provides this. In other 18 Talbot Quevereanx Construction Co. v. Tandy 260 S.W. 2d 314 St. Louis Court of Appeals, 1953.

forms it will be an implied obligation of the owner to pay for any remedial work, for which the contractor is not responsible.

8.9

TAKING POSSESSION IS NO BAR TO CLAIM DAMAGES

The owner is not estopped from claiming damages for a breach of a building contract by taking possession and moving into the building. The failure of the contractor to construct the building in accordance with the plans and specifications was a violation of the contract and the taking of possession of the premises by owner cannot be considered as a discharge of the

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contractor's liability.19 The position may not be the same if at the time of taking possession the owner is aware of the defects.

8.9.1 Contractor may not be Liable for Patent Defects If the defects are obvious or if circumstances are such that the knowledge of imperfections may be imputed to the owner, he may be liable to pay for the defective work. Unless he promptly objects to the shortcomings in the work and makes payment at reduced rates, he may not be able to recover compensation for such patent defects after accepting the work done. ILLUSTRATION In a case20 the dispute was regarding improper expansion joint in a concrete runway. The contract had a clause included in it which stated that "acceptance shall be final except as regards latent defects". The specifications provided for 6" depth whereas the contractor relying on alleged trade practice provided the joints equal to only one-sixth of the runway depth. The contention of the Government (owner) was that it did not discover die shallow joints because they were covered immediately with a joint sealer, and as such the defect was latent, and it was entitled for reimbursement of its cost to correct the defect. The Armed Services Board of Contract Appeals held that no latent defect existed because the deficiencies were readily discoverable by placing a sharp object into the cuts. In fact, it said, evidence showed that the government's on site inspector did this and "thus knew or should have known of the alleged deficiency". In conclusion it was held that since the deficiency was patent the government's acceptance was final and conclusive.

8.10 ENGINEER'S/ARCHITECT'S DECISION FINAL In standard form contracts, which contain arbitration clause and also those, which do not include arbitration clause, provisions are normally included which stipulate that the decision of the architect or engineer as regards the quality of work, as the case may be shall be final and binding on all parties to the contract. The arbitration clause in such contracts, if provided, normally opens with a statement "Except where otherwise provided in the contract all questions and disputes ... shall be referred to .... Arbitration ..." The excepted matters usually include quality of materials, workmanship, and removal of improper materials and/or work, etc. In some contracts, financial claims arising out of such decisions are not excluded from the scope of the arbitration clause. 19 20

Michel v. Efferson, 65 So, 2d, 115, Supreme Court of Louisiana 1962. Appeal of Federal Const Co. AS.B.C.A. No. 17599, 73-1 BCA 10003 (1973).

The reasons for such a provision appear lo be lhal (i) disputes on Ihese mailers could be so innumerable lhal il may be virtually impossible lo have lhe contracts concluded lo the satisfaction of all concerned in a reasonable time; and (ii) the disputes may be on certain points about which the opinions of experts may vary. As lo the validity of this provision, the following observations of the M. P. High Court 21 lay down the correct legal position it is submitted: "The rule is well settled that where parties to building or construction designate a person who

is authorized to determine questions relating to its execution, and stipulate that his determination shall be final and conclusive, such parties are bound by his determination of those matters which he is authorized to determine, except in cases of fraud or such gross

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mistake on his part as would necessarily imply bad faith, or a failure to exercise an honest judgment, i.e. on grounds of collusion or misconduct. "Where the contract provides, as here, that the work shall be done to the satisfaction, approval, or acceptance of an architect or engineer, such an architect or engineer is thereby constituted the sole arbitrator between the parties, and the parties are bound by his decision in the absence of fraud and mistake. More so, where there is a stipulation that his certificate made or approval is a condition of the contractor's right to receive payment, such certificate or approval must be, as it is, conclusive as to all matters within his authority."

8.10.1

Engineer/Architect Must Act Judicially

Where a person is appointed as an authority to adjudicate on certain matters and whose decision becomes final and binding on both the parties and where such a person happens to be an employee or agent of one of the parties, it is all the more necessary for him to act in a judicial capacity and not in an administrative capacity, or departmental capacity.22 Though the contractor is bound by his contract, still he has a right to demand that, notwithstanding those preformed views of the engineer, that gentleman shall listen to the argument and determine the matter submitted to him as fairly as he can, as an honest man; and if it be shown in fact that there is any reasonable prospect that he will be so biased as to be likely not to decide fairly upon those matters, then the contractor is allowed to escape from his bargain and to have the matters in disputes tried by one of the ordinary tribunals of the land. 23

8.10.2

Court Can Examine the Matter

If the contractor is not satisfied with the decision of the engineer/architect, he can have the matter examined by the Court in an appropriate proceeding. The Court, when the mailers 21 22 23

Dandakaranya Project v. P. C. Corporation AIR 1975 M.P. 152. Hickman & Co. v. Roberts 1913 AC 229, Cited with approval Heavy Electrical (India) Ltd v Pannalal AIR 1973 MP7. Bristol Corp. v. John Arid & Co. 1913 AC 241; See AIR 1973 MP7.

come before il has always ihe power to examine whether the officer whose decision is made final has acted judicially or administratively. If the Court finds that the officer had acted judicially, the Court may uphold his decision. But if the Courl finds that the officer had acted administratively, in that event the Court has jurisdiction to set aside the acts not

performed judicially. 24

8.10.3 Whether the Owner is Bound by Certificate, Satisfaction or Approval This aspect requires further consideration. The reason is that there can be two possible views: Firstly, it can be said that the contract together with drawings, bills of quantities (if enclosed), specifications, etc. precisely define the contractual requirements as to sufficiency of the work. In this view, if the work under a contract has to be completed to the satisfaction of the engineer or architect, it may mean that his duty is merely to see that the requirements of the contract are met. This we may call the objective satisfaction of the engineer/architect.

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Secondly, it may be that the engineer's/architect's standard is that to which the parties have submitted themselves and that it constitutes the only provision in the contract about quality, or it may be that his standard, (which we may call subjective satisfaction) is an added protection, so that the performance under the contract must satisfy both the contract requirements and the certifier. If the first view is taken as correct, the owner can show, despite the satisfaction of the engineer/architect, that the work is nevertheless not in accordance with the contract, then he is not precluded from suing for breach of contract, or from setting up this allegation as a defence to a claim by the builder for the price of the work. On the other hand, if the second view is considered correct not only is the owner precluded from disputing sufficiency of the work but also that in some cases he may not be permitted to allege that under special provisions of the contract the certificate or approval should not have been given, for example, because of the contractor's failure to obtain written authorization for extras, etc. These two apparently conflicting views may not in practice pose any serious problem. The Courts treat the provisions as 'quasi-arbitration' and strict rules of arbitration may not be applied. Therefore, where it can be shown that the certifier, while acting with complete impartiality and good faith has taken an incorrect view of the consideration which should govern his decision, and has erred in the principles which he applied in reaching it, there is little doubt that the decision of the engineer/architect given in his certificate or approval will be disregarded by the Court; very much so in cases where he has given the decision violating the principles of natural justice or by fraud or collusion. In conclusion, it can be said that if there is some injustice likely to be caused by the 24 South India Rly Co. Ltd v. S. M. Bhashyam Naidu, ATR 1935 Mad. 356. See AIR 1973 MP 7.

provision in the contract making the engineer's or architect's decision final and binding, both the contractor and the owner may have recourse to court proceedings or arbitration, against the decision or certificate given by the engineer or architect.

ILLUSTRATIONS (1) The background leading to the fding of a writ applications is briefly slated thus. Many

parts of the State were devastated by the super-cyclone, which hit coastal Orissa on the 29th day of October, 1999. It was of such high velocity that it destroyed the lives and properties and hundreds and thousands of people were rendered homeless having the open sky as the only roof over their heads. In order to provide some shelter to these helpless persons, a decision was taken by the State Government to procure polythene rolls and sheets for the purpose of being used as temporary shelter. Some procurement was made through various organizations and orders were placed with them. That apart, an advertisement was published by the SRC in the National dailies and different newspapers of the State for supply of polythene rolls and sheets and blankets by private/individual suppliers for distribution to the cyclone/flood affected people of the State. The items, specification, rate and quantity to be supplied were specified. The terms and conditions were also laid down and it was provided that the private/individual suppliers shall have to supply the intended material to the SRC through the Managing Director, OSIC on first come-first-served basis by the 7 th day of December, 1999 at the latest. The consignment of the material was to reach the Orissa State Warehousing Corporation godown and to be received by the MD, OSIC or his authorized representative who will hand over the same to the quality checking squad which was to function under the control of the Director, Export Promotion and Marketing, Orissa (in short,

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EPM). The said terms and conditions further provided that: polythene rolls/sheets supplied by the private/individuals by the Quality Checking Squad, the materials found to be conforming to the specification as per the advertisement will be accepted by the MD, OSIC for further necessary action on payment of claim bills by him. The materials found to be not conforming to the specification as per the advertisement will be rejected outright and the suppliers shall have to immediately take back their materials. No claim, whatsoever, will be entertained for the rejected/returned materials." It was the case of the petitioners that in response to the advertisement, they procured polythene rolls/sheets as per the specifications laid down therein and transported the goods to Bhubaneswar. However, for reasons best known to the authorities, they avoided to take prompt action in putting the material to test in order to ascertain as to whether or not it was as per the specification laid down in the Advertisement, with the result that hundreds of trucks loaded with polythene rolls and sheets were stranded in and around the stadium. In the meanwhile, however, the SRC and others continued to receive material supplied by the PRC and OSIC which, according to the petitioners, was not subjected to any test. In substance, it is the case of the petitioners that by this act, though material not in accordance with the specification supplied by PRC and OSIC, who had in turn procured material from certain private parties, were accepted, no action was taken to accept their (petitioners) material in spite of their repeated requests made in that behalf. The inaction on the part of the authorities resulted in huge loss to the petitioners not only because of demurrage and truck hire charges but also by way of loss of profits as they had purchased the material from outside the Stale on payment for being supplied to the SRC. It was observed: 25 "...It, therefore, appears, that the polythene supplied earlier, at least by Packing India at the rate of Rs. 70/- per Kg was of sub-standard quality. Likewise, we also strongly suspect and, this suspicion is on the basis of the material placed before us, that all was not well in the

supplies made through the OSIC and PRC as with respect to those supplies, the State is significantly silent as to which test was applied and whether the tensile strength of the material was tested. ... This, obviously, shows that different standards were adopted and while goods loaded in hundreds of trucks were discarded on the ground that they could not pass the required test including that of the tensile strength and goods loaded in hundreds of trucks were not tested, orders were placed and supplies accepted from the OSIC which had procured the material from suppliers in and out of the State, and goods received through the PRC were even accepted without test and payment therefor had been made to it (PRC) in advance. It was held: " In the above facts and circumstances, we are of the view that this is a matter which requires a thorough investigation by an independent agency, which in our opinion, is the Central Bureau of Investigation; more so, when crores of public money is involved." However, the prayer of the petitioners for acceptance of the polythene tendered by them without subjecting the same to the test of tensile strength was not allowed." It was further held: "It is no doubt true that the advertisement in question did not prescribe for such a test. However, this was introduced as the quality checking squad was of the view that the material not having a particular tensile strength will not serve the purpose for which it was intended. Thus, it cannot be said that the action of the authorities in laying down the specification for putting the material to the test of tensile strength, was unreasonable. However, the action of the authorities in accepting the material tendered by the.PRC or through the OSIC without subjecting the same to proper test and the test of tensile strength, was unreasonable. ... It will,

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however, be open to the petitioners if they are so advised, to approach the common law forum for the loss/damage, if any, incurred/suffered by them on account of the inaction of the authorities in not issuing a corrigendum and thereby putting them (the petitioners) in a situation which is not of their making." (2) Disputes between the parties arose out of two contracts, one of which was admittedly a concluded contract against which supplies were made. It was dated 4-3-1994 which was subsequently amended on 12-5-1994. Another was a disputed contract as no supplies were made against this contract. The facts were as follows: On 25-11-1993 SAIL made an offer for 10,000 MTs of CRC i.e. first lot as per the description: 25 M/s. Narendra v. Special Relief Commissioner, Orissa, AIR 2001 Ori 95.

"Cold rolled steel sheets in coils (semi-killed quality) specification ASTM A366, rolling tolerance as per ASTM A568 with full thickness tolerance." On 20-1-1994 TSU responded by forwarding a set of TSG specifications sheets (for sub-lots) of Thyssen Steel Group (hereinafter referred as 'TSG') as TSU were in turn lo re-sell the steel lo TSG. These were as under :"Prima cold rolled steel in coils, Class I in commercial quality according to ASTM A366, Analysis at SAE 1008 temper rolled, fully annealed, matte finish, surface roughness 30-50 micro inch, oiled, no welds, Rockwell Hardness 40-60 on the B scale, cul edge, edges cut on the pickle line prior lo cold reduction is acceptable, thickness tolerances according to ASTM 568 (aim for MAX 1/2 thickness standard). The material must be free of defects, scratches, laminations, crossbreaks, carbon smut, saw tooth edges etc. and suitable for continuous coil coating, levelling into flat sheets and/or slitting." Negotiations resulted in dropping the the words "Class F'.However, the words used were "Prime cold rolled, mild steel sheets in coils.." with agreed specifications which suggested Class II category material. Disputes were referred to arbitration and in his award the arbitrator relied upon the expert opinion and the dictionary meaning of the word 'prime', ignored the specifications, and awarded compensation for defective supply of materials. In an appeal challenging the award it was observed:26 " One cannot be oblivious of the fact that it was because of appearance of word 'prime' by way of amendment that the theory of 'prime' material being the best and the top class material was switched in ignoring the fact that the quality was Class II for unexposed application which means that the steel should be used by way of hidden material but the Arbitrator treated it as a top class material which always is in exposed form." " Intention of the parties is most relevant factor in interpreting the contract. If the contract suffers from inconsistencies or unintelligibility of a particular term of the contract it is always the intention of the parties which is the guiding force. The Supreme Court has in State of Tamil Nadu v. Anandam Viswanathan (1989) 1 SCC 613 : (AIR 1989 SC 962) laid great emphasis that the intention of the parties is always relevant factor before the Arbitrator or the Court when it is called upon to interpret or construe the contract. The relevant observations are as under (para 27): "In our opinion, in each case the nature of the contract and the transaction must be found out. And this is possible only when the intention of the parties is found out. The fact that in the execution of a contract for work some materials are used and the property/ goods so used, passes to the other party, the contractor undertaking to do the work will not necessarily be deemed, on that account, to sell the materials. Whether or not and which part of the job work relates to that depends as mentioned hereinbefore, on the nature of the transaction."

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In respect of the opinion of the expert it was observed: " To accept the opinion of an authority on the subject is one thing and to ignore it or overlook it merely on the ground that expert witness has not been confronted with it is another thing. It cannot be gainsaid that the duty of the expert is to depose and not to decide. The only function of the expert is to furnish the data with the necessary scientific criteria so as lo 26 Thyssen Stahlunion Gmbh, v. Steel Authority of India, AIR 2002 Del. 255.

enable me Judge lo come lo an independent conclusion. Data and analysis are provided by the expert. Conclusions are drawn by the Court. In certain cases expert may give his opinion. But such an opinion is not binding on the Court. In other words, Court does not become functus officio to draw the conclusion if the expert has also given the opinion or the finding." It was held: "From the above it can safely be concluded that the finding in this regard suffers from bias, legal as well as factual misconduct, non-application of mind and inherent infirmity."

8.10.4 Distinction between Engineer (Certifier) and Arbitrator Distinction between the functions of an engineer as an arbitrator and as a certifier, have been correctly put forth it is respectfully submitted, by the Andhra Pradesh High Court. It was observed: 27 "12. It is necessary to keep in mind the distinction between the functions of the Arbitrator and the Engineer (or Certifier) dealt with in the same contract. Essentially, the Engineer or certifier is perforrning an administrative rather than a judicial function. He has been described as a 'preventor of disputes' while the arbitrator is a person who comes into the scene after a 'dispute' (which could not be prevented) comes into existence, (ReCarus -Wilson and Greene, (1886) 18 QBD7). The engineer or certifier does not become an arbitrator merely because the words 'adjudge' or 'exclusive Judge' is used. The position may generally be different if, disputes are to be decided by a single person, and the words 'reference', 'dispute' 'decision' are used, (see Y. Parthasarathy v. State of A.P (1988) I Andh LT 809 where the relevant Supreme Court and other decisions have been reviewed). It is also possible that in some contracts, the same person is described as an 'Engineer' or 'certifies' at one stage and later as an 'Arbitrator'. (Eagleshamv. Mc Master, (1920) 2 KB 169; Neale v. Richardson, (1938) I All ER 753). An Engineer or certifier who is to decide certain questions with reference to a contractor would be liable for negligence unless, of course, he is also clothed with judicial functions as an arbitrator. (Suteliffe v. Thackrah, (1974) AC 724; Arenson v. Casson Beckman Rutley (1977) AC 405. "13. It is the duty of the Engineer or Certifier to apply the provisions of the contract strictly. Any evidence showing that he has taken extraneous or irrelevant matters into consideration, will deprive his -certificate of validity. (Panamena Europea Nevigaction v. Leyland (1947) AC 428). He may become disqualified on the ground of interest in the subject-matter and net known to the party and not merely because of being employed by the opposite party; or on the ground of fraud and collusion before or after the contract; or because of undue interference by or improper pressure of the employer; conduct which falls short of the high standard or fairness, discreetness and impartiality expected of him in relation to the issue or refusal of the certificate or decision; unreasonable refusal to give consideration to the matter upon which he is requested to certify; breach of contract by the employer having the effect of preventing the contractor from obtaining, a certificate."28 . . 27 28

Yelluru Mohan Reddy v. Rashtriya Ispathnigam Ltd., AIR 1992 AP 81 (86-87). Hudson Building Contracts, 10th Ed. 1970. pp 470-471; 498-499.

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426

Measurement, Valuation and Payment! Chapter 9 9.0

INTRODUCTION

Usually, in a building or construction contract, it is provided that payment on account be made from time to time by installments and on the certificate of the engineer or architect. Disputes sometimes arise in respect of measurement of the work, or the certificate of the engineer or architect, or payment to the contractor. Legal principles governing such disputes are considered in this chapter.

9.1

PROVISIONS OF THE LAW AND THE STANDARD FORM CONTRACTS

The relevant provisions of the law and the Standard Form Contract conditions referred to in this Chapter are as follows : (A) Sections of the Indian Contract Act Art No. 2 8 72 Order VIII Rule 6 of the Civil Procedure Code (B) Standard Form Contract (1) P.W.D B-1&B2 (2) CPWD. (3) M.E.S. (4) Railways (5) FIDIC1987Ed. 1992 amendments

9.9 9.10 9.11.1

Clause No 6 to 9 6 to 9 61 to 68 44 to 51

55.1 to 58.3; 60.1 to 60.10; 63.1 to 64.1 67.1 & 67.2; 67.3,69.4 12.1 to 12.1 to 12.4 12.4

(6) (7) FJX>IC1999Ed. Standard Contract Clauses MoS&PI, GOI General conditions 5 to 8 42 and 43.

9.2 INTERIM PAYMENT CERTIFICATE (IPC) Unless the contract provides for a specific form in which an engineer or architect is to issue his certificates, all that is required is that the document must clearly appear to be the expression, in a definite form, of the exercise of the opinion of the engineer or architect,

in relation to the matter provided for by the terms of the contract. This point assumes importance particularly when there is a specific lime limit laid down for either parly lo the contract lo lake some action after receipt of the certificate from an engineer or architect. If ihe alleged document does not clearly appear to be an exercise of opinion under the relevanl terms of the contract regard being had to 'form' 'substance' and 'intent', either parly may insist that the engineer or architect should issue a proper certificate, on receipt of which alone, ihe time limit will begin to run.

9.3

WHERE A CONTRACT IS SILENT ON INTERIM PAYMENTS

If a contract makes no mention of interim payments, ordinarily the contractor must complete the work before he is entitled to payment. ILLUSTRATION A contract between the owner and the general contractor for concrete work for a building contained no provision about the time or manner of payment. After two months, when the work had progressed up to the first floor the contractor sent a bill for work done up to that time. The owner refused to pay the bill whereupon the contractor stopped the work. In a suit that followed, the contractor claimed the amount of the bill presented plus damages for breach of contract. The Court held that: "Where a contract is made to perform work and no agreement is made as to payment, the work must be substantially performed before payment can be demanded." 1

9.4

ROLE OF AN ENGINEER OR ARCHITECT IN GRANTING CERTIFICATES

Granting or withholding certificates is one of the most important functions of the engineer or architect. Employed by the owner as a skilled servant, the engineer or architect also acts in the capacity of the responsible agent of the owner. Thus, he must not only use his utmost skill to see that the work is done properly, but as an agent must act in the interest of the owner to the fullest extent permitted by the contract. However, many construction contracts include a stipulation that the decision of the engineer or architect shall be final and binding upon both parties. When the engineer or architect agrees to act under this clause, he undertakes the duty towards both parties of holding the scales even, and deciding between them impartially as to the amount payable by one to the other. Clearly, in this capacity he acts as a quasi-arbitrator. The legal significance of this is that his decisions are held to be final and binding and cannot be set aside except on the ground of fraud or collusion. (See Art. 8.10).

Guiding Principles An attempt is made below to highlight some important principles which need to be noted by the engineer/architect. 1

Stewart v. Newbury 220 NY 379 115, N.E. 984, (1917).

9.4.1

Certificates must be given by the Engineer or Architect

Unless a contrary provision is made in lhe contract, the engineer or architect himself musl give a cerlificale. However, he may rely upon the measurements made by another person on

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his behalf. The certificate will not be binding or conclusive if it is shown that the engineer or architect has acted corruptly or abrogated his duty. 2

9.4.2

Independent exercise of Judgment

There is no general rule of law prohibiting the influencing of certifiers. Apart from fraud, a duty not to influence can only be imposed by an implication arising from contract. There is, after all, nothing to prevent a party from requiring that work shall be done to his own satisfaction. He might then choose to act on the recommendation of an agent. If an agent is named in the contract, it may be plain that he is to function only as the alter ego of his master and then his master can tell him what to do. 3 Whether it is the act of the master (owner) or the servant (agent), there may arise a question whether the dissatisfaction must be reasonable, or whether it can be capricious or unreasonable so long as it is conceived in good faith. This question will again depend upon the implication to be drawn from the contract. Most modern contract forms are drafted in such words that it is safe to presume that the dissatisfaction must be reasonable. In any case the tendency of the Courts seems to be to require the dissatisfaction to be reasonable. The main question that arises is whether the engineer/architect is, or is not intended to function independently of the owner. In public works contracts, the engineer-in-charge is the authorized representative of the owner. The appellate authorities too are representatives of the public bodies. In such cases the engineer functioning 'independently' remains so in theory only. However, when forms like the FIDIC are used, the provisions invariably empower the engineer to decide first, and next inform the owner of his decision . Undoubtedly, these provisions by implication require the engineer to function independently of the owner. However, it is noticed that when FIDIC conditions are adapted in India, invariably there is appended the Conditions of Particular Applications (COPA) which limit the powers of the engineer to decide certain matters independently of the employer. An engineer or architect performing this delicate task must attempt to function independently by not imposing his own subjective satisfaction, but by an exercise of judgment to ensure that the requirements of the contract are met. When an engineer is called upon by the role in the contract provision to act as a third party, the satisfaction of a third party operates only within the requirements of the contract; that is to say, it is not permissible for the third party to put on one party to a contract, obligations, such as those related to quality, outside the contract.4 9.4.3 2 3 4

Certificate in respect of quality or quantity, or both Haugen et al v. Rupach et al 260m P. 2d, 340 Supreme Court of Wash: 1953. Minister Trust Ltd v. Traps Tractor Ltd Queens Bench Division (1954) 3All ER 136. , Commell Laird & Co. Ltd. v. Manganese Bronze & Brass Co. Ltd. 1934 referred to in (1954) 3 All ER 136.

Where Ihe provisions of a contract stipulate merely to certify 'that the work has been satisfactorily carried out', the question may arise if the words mean and cover only the quality of work done or also cover the amount and value of materials and labour used. In a case it was held that the certificate was to confine to only actual quality of work done. In the said case, the surveyor refused to give a certificate unless only he was supplied with information about the amount and value of materials and labour. The contractor was held to be entitled to recover the amount due to him without the surveyor's certificate.5 However, most modern

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forms of contract in use provide for the certificate to cover the quality as also the value of the work done.

9.4.4

Rules of Natural Justice : if and when required to be followed

An architect or engineer in a typical building or construction contract, has to discharge a great number of functions, both great and small, which call for the exercise of his skillful professional judgment. As already stated, he must throughout retain his independence in exercising that judgment. As long as he does this, and unless the contract so provides, he need go no further and observe the rules of natural justice, taking due notice of all complaints and giving both parties a hearing. It is the position of independence and skill that gives the parties proper safeguards and not just imposition of rules requiring something in the nature of a hearing. For the rules of natural justice to apply, there must be something in the nature of the judicial situation.6 Here again a distinction must be attempted in cases where a professional architect or engineer is retained by the owner for a project and the engineer who is in the employment of the owner. In the case of the former, one can assume 'independence' but in the latter such an assumption will be open to doubt. As a guiding principle, it may be well to remember that whenever the subject matter of decision is routine, in the course of transaction, open to be reviewed either at the time of issue of final certificate or otherwise in arbitration proceedings, following strict rules of natural justice may not be necessary. Interim certificates may fall under these categories. In other cases and particularly when the contract stipulates the decision to be final and binding on one or the other party, it is advisable to follow the rules of natural justice and give hearing in a meeting fixed after due notices to both the parties. In any case the rule must not only be remembered but also followed that 'if the engineer or architect hears one side, he must also hear the other'.

9.4.5

Decision on Claims

An architect/engineer empowered to issue interim payment certificates or for that matter final certificates, may have no power to decide liability as to an amount payable to or allowable by the contractor unless the terms of the contract permit him to do so. Often question of delay is 5 6

Panawera Europa Navigation Compania Limitada v. Frederick Leyland & Co. Ltd House of Lords (1947) AC 428. Hounslow Borough Council v. Twickenham Garden Developments Ltd Chancery Division (1970) 7 BLR 81.

accompanied with claims of compensations. In such an event the engineer/architect may not be empowered to decide the liability for the amount in variance with the terms of the contract.7 However, most modern standard form contracts provide for reference of "a dispute of any kind whatsoever" between the owner and the contractor, in the first place, to the engineer. FIDIC form of contract, for example, expressly empowers the engineer to decide the claims by way of additional sum to be added to the contract price.8 In such an event the engineer or architect is clothed with the jurisdiction to decide each and every claim, manner, right or issue referred to him for his decision. It is advisable to follow the time schedule specified in the contract. It has to be kept in view that under the relevant clauses pertaining to settlement of disputes, two types of disputes or differences are contemplated between the parties. They are :

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1.

Disputes or differences in connection with the contract when the contract work is in progress.

2.

Disputes or differences after the completion of the contract or its rescission when the stage of final bill is reached and the disputes pertain to the claims arising from such final bill.

In both these disputes and differences between the parties, the procedural gamut and the requirements of clauses would be equally applicable. For example, under FIDIC 1992 amended edition relevant clauses are 67.1 to 67.4. Clause 67.1, provides for reference of dispute of any kind between the employer and the contractor to the engineer for his decision to be given within 84 days after the day on which he received reference. Upon his failure to give decision or his decision not being acceptable to either party, either the employer or the contractor may give notice to the other party, on or before the 70th day of expiry of the 84 days period or receipt of the decision, of his intention to refer the dispute to arbitration. Clause 67.2 provides for the parties to attempt settlement of such dispute within 56 days after the day the notice to commence arbitration was given. Clause 67. 3 provides that if the decision of the engineer has not become final or amicable settlement has not been reached, the dispute shall be settled by arbitration. Clause 67.4 provides that if the decision of the engineer has attained finality because no notice of intention to commence arbitration was given but either party fails to comply with the decision, reference to arbitration can be made without following the procedure under Clause 67.1 and 67. 2. What happens if the procedure is followed for a dispute, which arose when the work is in progress and arbitration is not commenced and the dispute is revised and claim is updated after the completion of the work? It is advisable to follow the procedure de novo.9 7 8 9

See John Laing Construction Ltd v. County & District Properties Ltd Q. B. Div. (1982) 23 BLR.I. See for example, FIDIC Clause 67.1 of the 1992 Amended Ed. M/s. Shetty's Construction Co. PvL Ltd. v. M/s. Konkan Railway Corpn. Ltd., AIR 2000 SC 122. See Chapter 17.

It is pertinent to note that the contractor can raise the claim during currency of the contract lor the future period also and the arbitral tribunal will have jurisdiction to decide the future claim as well. It is, therefore, not necessary to wail for completion of the work, if the claim had been raised and the procedure has been followed to commence arbitration proceedings. It was held by the Supreme Court in a case: 10 "It is not possible to hold that the claim No. I in so far as it relates to fulure period during which the contract work continued is beyond the scope of reference or outside the ambit of arbitration clause. The aim of arbitration is to settle all the disputes between the parties and to avoid further litigation."

9.4.6 Engineer/Architect: When may become functus officio Under the terms of certain standard form contracts, an engineer after having given his final certificate becomes functus officio and is thereby precluded from issuing any valid certificate thereafter." Under the settlement of disputes clauses, if the engineer fails to give his decision within the period named in the contract for him to do so, he may not be able to give his valid decision even if the other party has not yet invoked the provisions of the arbitration clause. For example, the FIDIC form clause 67.1 of the 1992 amended edition, gives the engineer eighty-four days time to give notice of his decision after the day on which he received reference and thereafter empowers either party to invoke provisions of the arbitration clause

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on or before the seventieth day, after the day on which the said period of eighty-four days expired. After the expiry of the limitation of eighty-four days, the right accrues to either party to refer the matter to arbitration and as such decision given by an engineer after eighty-four days may not be valid or may not have the effect of prolonging the period of limitation, it is submitted. The matter, however, will be different if both the parties decide to abide by accepting the said decision. Clause 67.2 which provides for amicable settlement and a period of fifty-six days between the day on which the notice of intention to commence arbitration of such dispute is given and the day on which the arbitration proceedings may commence, will enable the parties to accept such a belated decision which will be the basis of an amicable settlement of their disputes.

9.5 ISSUE OF INTERIM CERTIFICATE - DOES NOT AMOUNT TO ACCEPTANCE OF THE WORK DONE An interim certificate given by the engineer or architect usually indicates a qualified approval by him, of the work done at the time the certificate is given. Such an interim certificate does not preclude the engineer from requiring bad, unsound, imperfect or unskillful work to be removed and taken away and reconstructed. Neither interim certificate nor payment made on its basis prevents the owner from subsequently questioning the quality of work already approved.12. Interim certificates are subject to readjustment in the final certificate. The engineer/architect in other words, is entitled to take a fresh view as to the state of works each time he issues an interim certificate. 13 10 M/s. Shyama Charan Agarwala and Sons, v. Union of India, AIR 2002 SC 2659. Also see Ch.17. II H. Fairweather Ltd. v. Asden Securities Ltd., Queens Bench Div. (1979) 12 BLR 40. 12 Newton Abbot Development Co. Ltd v. Stockman Bros (1913) 47, T.L.R. 616. 13 London Borough of Camden v. Thomas Mclnery & Sons Ltd Q. B. Div. (1986) 9 Con LR 99.

9.6

CERTIFICATES AS CONDITION PRECEDENT TO PAYMENT

The conditions of a contract usually make it abundantly clear that the contractor must produce a certificate from the engineer before he can claim payment from the owner. A certificate is thus a 'condition precedent', which must be fulfilled before the payment. Therefore, if a certificate is honestly withheld in good faith the contractor cannot maintain action for the amounts alleged to be due to him.14 9.7

WHEN CONTRACTOR CAN RECOVER PAYMENT IN THE ABSENCE OF CERTIFICATES

The certificates are described as 'good' and 'not good' depending upon whether they are in conformity with the contract or not. It is the duty of the engineer or architect to issue certificates as and when due. The contractor can recover payment in the absence of a certificate, if he has duly performed his contract but the engineer or architect has wrongfully refused to grant him a certificate to that effect. The rule with reference to obtaining the certificates of an architect, engineer or other third person, when required by the contract, does not apply if it

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is made to appear that the owner without sufficient justification thereof causes the certificate to be withheld. In such a case, the contractor is excused from the necessity of obtaining the certificate. If the engineer/architect is satisfied that there has been a substantial performance of the contract, it then becomes his duty to issue the certificate, and if he does not do so, his conduct is regarded as arbitrary and capricious. If the architect is in collusion with his principal, or yields to his opposition to the issuance of the certificate when such opposition is not justified, then in such cases the contractor has a legal excuse for not obtaining a certificate as a condition precedent to recovering on his contract. 15 ILLUSTRATIONS (1) In a case, the employer instructed the architect not to issue a certificate until the contractor had submitted his account for extra and he had received it. The architect wrote to the contractor to see the employers "because in fact of their instructions to me I cannot issue a certificate whatever my own private opinion in the matter". On the above facts it was held that the employer improperly influenced the architect and as such the contractor could recover payment in the absence of the certificate.16 (2) A contract contained a provision empowering the contractor to deterrnine the contract "if the employer interferes with or obstructs the issue of any such certificate" of interim payment. When the work was nearing completion, suspecting overpayments, the employer appointed an independent surveyor to carry out valuations and measurements, which had previously been done. Based on the valuation by the surveyor, the architect issued a 1 4 1 5 1 6 Dunlop & Ranken Ltd. v. Hendall Steel Structures Ltd Q.B. Div (1957) 3 All ER 344. Haungen et al v. Raupech et al, 260, p 260, p 2d, 340, Supreme Court of Wash, 1953. Hickman & Co. v. Roberts, House of Lords, (1913) AC 229. cc

'''lil'icalc for 1287 pounds as against 5,785 pounds. The contractor pointed out several hes and lapses on the part of the surveyor. It was observed: 17 'T think without "tempting an exhaustive enumeration of the acts of the employer which can amount lo obstruction or interference, that the clause is designed to meet such conduct of the employer as refusing to allow the architect to go on to the site for the purpose of giving ilis certificate or directing the architect as to the amount which he should arrive al on some niatlcr within the sphere of his independent duty." It was held that negligence, errors or "missions by someone who, at the request, or with the consent, of the architect is appointed to assist him in arriving at the a correct figure to insert in his certificate does not mount to interference. Interference connotes 011e intermeddling with something, which is not 's business, rather than acting negligently. ,alc

(3) In a case the employers instructed their surveyor not to apply day-work rate for part of the works but that he was to use estimated quantities and apply a measured rate. The contractor provided that the decision of the surveyor with respect to value was to be final a»d without appeal. The contractor alleged that the certificate was not honestly made or given in exercise of, or in reliance upon, his own judgment, but was made and given by reason of the interference of and in obedience to, the direction and orders of the employer. Il was held that

«

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the act of the employer amounted to interference with tire surveyor's functions and the final certificate issued by the surveyor was not conclusive and binding °n the contractor.18 9

-8 FAILURE TO MAKE INTERIM PAYMENTS CONSTITUTES BREACH OF CONTRACT

A construction contract usually provides for installment payments on the basis of certificates to be granted by the engineer or architect. Where the owner has failed to honour such certificates by making payments to the contractor, his failure amounts to a breach of contract. Upon such default, the contractor can stop the work and may abandon the contract and seek compensation on the basis of fair and reasonable value of a work done.19 The observations of the United States Supreme Court in this issue in an opinion case ^'•"....in a building or construction contract like the one in question, calling of the Performance of labour and furnishing of materials covering a long period of time and involving a large expenditure, a stipulation for payments on account, to be made from time 10 time during the progress of the work, must be deemed so material that a substantial failure to pay would justify the contractor in declining to proceed... "As is usually the case with building contracts, it evidently was in the contemplation of tfie parties that the contractor could not be expected to finance the operation to completion without receiving the stipulation payments on account as the work progressed. In such cases a substantial compliance as to advance payments is a condition precedent to the contractor's obligation to proceed."20 17 18

19 20

By Lord Tucker in R. B. Burden Ltd v. Swansea Corporation House of Lords (1957) 3 All ER243. Page v. Iindaff and Dinas Powis Rural District Council, Q. B Div. (1901), 2 HBC 316. White v. Livingston, 75 N/Y.S.S. 466. 69, App. Div. 361 Affirmed 174 N.Y. 538. Ceurim Stone co. v. P.J. Carlin Construction Co. 248U.S.334.63, L Ed. 275, 285.

The Supreme Court of India also has held lhal failure lo make payment of interim bills and withholding of 'substantial amount over a very long period without any reasonable cause' amounts lo a breach of contract and may justify stoppage of the work by lhe contractor and rescinding lhe contract. It was observed: "..In commercial transactions, time is ordinarily of the essence and in the agreement, with which we are concerned, the payment of bills, by a particular date was expressly mentioned. The intention, obviously, was that Durga Datt

would receive payments for work executed as soon as the amounts became due. Rungta did 1 not pay these amounts, which were also within his own knowledge either by the 10" of the following month or even within a reasonable time after the presentation of the bills. In these circumstances, we are of the opinion that CI. (5) was breached by 20

Rungta." It was finally held: "The case is thus covered by S. 55 of the Indian Contract Act and Durga Datt was entitled to rescind the contract, when the very important condition of the agreement was broken by Rungta. We confirm the finding of the ludicial Commissioner in this part of lhe case." From the above case, the words, "substantial failure to pay" need careful consideration. In the absence of an express provision in the contract empowering the contractor to terminate the contract, on the owner's failure to pay interim bills, the contactor should resort to the last step cautiously. Where the owner is unable to honour an interim certificate due to temporary

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difficulties, which he is likely to overcome shortly, the contractor's act of terminating the contract may be premature. The contractor must satisfy himself that either the owner is unwilling to pay or unable to pay, before he acts under this provision. The non-payment by the owner may be because the owner disputes the amount certified. It seems that merely because the owner disputes the certificate, he cannot avoid liability to pay if the certificate has been properly issued under the terms of the contract. The certificate must be honoured.21 The owner has the right under most contracts to invoke the provisions of the arbitration clause. As to which disputes in respect of non-payment can be referred to arbitration, the following observations of the Calcutta High Court are illuminating.22 "... learned counsel for the appellant was not very wrong when he submitted that every kind of non-payment of the price stipulated in a contract containing the arbitration clause cannot be considered to be a repudiation giving rise to a dispute. A non-payment may arise by reason of one's inability to pay, while not disputing liability thereof. A nonpayment, on the other hand, may be the result of repudiation or denial of its liability to pay. Thirdly, a non-payment of price may mean failure to fulfill ones' obligation under the contract to pay within the time stipulated. When there is no repudiation or denial of liability a simple non-payment or default in payment may not give rise to a dispute which can be referred to arbitration. On the other hand, when there is denial of liability and by reason thereof payment is not made by a party from whom demand is made by the other party, the same would be a case of repudiation. In our view the third kind of case mentioned by 2U Mahabir Prasad v Durga Datta, AIR 1961 SC 990. 21 Killby & Oayford Ltd v. Selin Court Ltd Court of Appeal (1973) 3 BLR 104. 22 Nandlal M. Verma & Co. Ltd v. Alexandra Jute Mills Ltd AIR 1989 Cal. 6(8).

us, thai is, failure to pay within the time provided in the contract, depending upon the terms of the particular arbitration clause, could be validly lhe subject-matter of a reference to arbitration.."

9.8.1

Writ Petition if Maintainable to enforce obligation of State to pay?

The question is whether a writ of mandamus could be issued to direct payment of amounts due under a contract. What one party claims is payment of amount due for the services

rendered pursuant to the contract entered into between the parties. Broadly speaking, a writ of mandamus cannot be used to enforce an obligation to make payment under a contract. The Supreme Court had held that "a writ of mandamus may be granted only in a case where there is a statutory duty imposed upon the officer concerned and there is a failure on the part of that officer to discharge that statutory obligation.23 The chief function of the writ is to compel the performance of public duties prescribed by statute and to keep subordinate tribunals and officers exercising public functions within the limits of their jurisdictions. Any duty or obligation falling upon a public servant out of a contract entered into by him as such public servant cannot be enforced by the machinery of a writ under Article 226. This view has not been departed from in the decisions reported which deal with the cases arising under Article 1.4 of the Constitution.24 However, it was held that there is no statutory duty or a public duty cast on the respondents to make payment of the amount to the petitioners in the sense that no payment is enforceable by the issue of a writ of mandamus. It is just an obligation arising out of a contract between the parties in which the proper remedy will be a suit.25 In the said case all the petitioners mainly challenged the show cause notices. However, along with the prayer

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of certiorari to quash the show cause notice, the petitioners had also pointed out that large amounts were due from the corporation to them towards non-payment of the fulfillment of contract. The corporation had disputed the claim The High Court is not deprived of its jurisdiction to entertain a petition under Article 226 merely because in considering the petitioner's right to relief questions of fact may require to be determined. In a petition under Article 226 the High Court has jurisdiction to try issues both of fact and law. Exercise of the jurisdiction is, it is true, discretionary, but the discretion must be exercised on sound judicial principles. When the petition raises questions of fact of a complex nature, which may for their determination require oral evidence to be taken, and on that account the High Court is of the view that the dispute may not appropriately be tried in a writ petition, the High Court may decline to try a petition.26 However, the judicial control over the fast expanding maze of bodies affecting the rights of the people should not be put into watertight compartments. It should remain flexible to meet the requirements of variable circumstances. Mandamus is a very wide remedy which must be easily available "to 23 24

25 26

Lakhrai v. Dy. Custodian, Bombay (AIR 1966 SC 34) Ramana v. LA. Authority of India, (1974 SC 1628); Dwarkadas Marfatia and sons v. Bombay Port Trust, 1989 (3) SCC 293 (AIR 1989 SC 1642) ; Central Inland Water Transport Corporation Ltd. v. Brojo Nath, AIR 1986 SC 1571 : 1986 Lab IC 1312). Namakkal South India Transports v. Kerala State Civil Supplies Corpn Ltd., AIR 1997 Ker. 56. Smt. Ounwant Kaur v. Municipal Committee, Bhatinda, (1969) 3 SCC: (AIR 1970 SC 802).

reach injustice wherever it is found. Technicalities should not come in the way of granting that relief under Article 226. 27

If the action of the State is related to contractual obligations or obligations arising out of the tort, the Court may not ordinarily examine it unless the actions has some public law character attached to it. Broadly speaking, the Court will examine actions of State if they pertain to the public law domain and refrain from examining them if they pertain to the private law field. The difficulty will lie in demarcating the frontier between the public law domain and the private law field. The question must be decided in each case with reference to the particular action, the activity in which the State or the instrumentality of the State is engaged when performing the action, the public law or private law character of the action and a host of other relevant circumstances28 The question was also examined by the Apex Court in the background of Article 14 of the Constitution of India and it was observed: 29 "There is an obvious difference in the contracts between private parties and contracts to which the State is a party. Private parties are concerned only with their personal interest whereas the State while exercising its powers and discharging its functions, acts indubitably, as is expected of it, for public good and in public interest. The impact of every State action is also on public interest. This factor alone is sufficient to import at least the minimal requirements of public law obligations and impress with this character the contracts made by the State or its instrumentality. It is a different matter that the scope of judicial review in respect of disputes falling within the domain of contractual obligations may be more limited and in doubtful cases the parties may be relegated to adjudication of their rights by resort to remedies provided for adjudication of purely contractual disputes. However, to the extent, challenge is made on the ground of violation of Article 14 by alleging that the impugned act is arbitrary, unfair or unreasonable, the fact that the dispute also falls within the domain of contractual obligations would not relieve the State of its obligation to comply with the basic requirements of Article 14. To this

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extent, the obligation is of a public character invariably in every case irrespective of there being any other right or obligation in addition thereto." It was finally held: "Even assuming that it is necessary to import the concept of presence of some public element in a State action to attract Article 14 and permit judicial review, we have no hesitation in saying that the ultimate impact of all actions of the State or a public body being undoubtedly on public interest, the requisite public element for this purpose is present also in contractual matters. We, therefore, find it difficult and unrealistic to exclude the State actions in contractual matters, after the contract has been made, from the purview of judicial review to test its validity on the anvil of Article 14." 27

28 29

Anadi Mukta Sadguru Shree Muktajee Vandasji Swami Suvarna Jayanti Mahotsav Smarak Trust v. V. R. Rudani, (1989) 2 SCC 691 : (AIR 1989 SC 1607), the said issue has been squarely dealt with in paras 17 and 22 (of SCC) . Life Insurance Corporation of India v. Escorts Ltd., (1986) 1 SCC 264 : (AIR 1986 SC 1370 at p. 1424). Kumari Shrilekha Vidyarthi v. State of U.R, (1991) 1 SCC 212 : (AIR 1991 SC 537).

Yel another decision referring to interference in contractual matters is one reported in Hindustan Petroleum Corporation Ltd. v. Dolly Das 30 , wherein it was held "if the facts pleaded before the Court are of such a nature which do not involve any complicated questions of fact needing elaborate investigation of the same, the High Court could also exercise writ jurisdiction under Article 226 of the Constitution in such matters. There can be no hard and fast rule in such matters." In one of the latest decision on this aspect it was observed as follows 31 :

"While the jurisdiction of the High Court to entertain a writ petition under Article 226 of the Constitution cannot be denied altogether, Courts must bear in mind the self-imposed restriction consistently followed by High Courts all these years after the constitutional power came into existence in not entertaining writ petitions filed for enforcement of purely contractual rights and obligations which involve disputed questions of facts. ..The position is also well settled that if the contract entered between the parties provide an alternate forum for resolution of disputes arising from the contract, then the parties should approach the forum agreed by them and the High Court in writ jurisdiction should not permit them to bypass the agreed forum of dispute resolution. ... This Court from time to time disapproved of a High Court entertaining a petition under Article 226 of the Constitution in matters of enforcement of contractual rights and obligation particularly where the claim by one party is contested by the other and adjudication of the dispute requires inquiry into facts." Thus, the position is clear that once the State action is attacked to be unreasonable, unfair and against public interest irrespective of the sphere, the State action is amenable to judicial review. Essentially, the only limitation of the High Court is the self-imposed restriction. A few relevant factors in exercising the self-imposed limitation under Article 226 of the Constitution of India in the matter of payment of Contractors' bills are32 : (1) When there is no disputed question of fact requiring adjudication on detailed evidence. (2) When no alternate form is provided in the resolution of any disputes pertaining to a contract. (3) When claim by one party is not contested by the other and the contest does not require adjudication requiring detailed enquiry into facts.

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The above full Bench decision of the Kerala High Court was followed by the Madras High Court.33

9,8.2 Arbitration Clause Bars Court's Jurisdiction In contracts, which contain arbitration clause, the court has no jurisdiction to go behind a certificate of the engineer or architect or any supervising officer.34 Exception 1 and 2 30 31 32 33 34

(1999) 4 SCC 450. Life Insurance Corporation v. Smt. Asha Goel, (2001) 2 SCC 160 : (AIR 2001 SC 549. State of Kerala v. T. V. Anil, AIR 2002 Ker. 160. Swaminathan Construction, Petitioner v. The Divisional Engineer, National Highways Thanjavur, AIR 2003 Mad. 202. Oram Builders Ltd. v. M.J. Pemberton and C. Pemberton, Q. B. Div. (1985) 2 Con LR 94.

lo Section 28 of ihe Indian Contract Act save the conlracls lo refer tu arbitration from being declared void. Ilr; said Section as amended by Indian Contract (Amendment) Act 1996, Act I of 1997) with effect from January 8,1997 reads: SECTION 28: "Agreement in restraint of legal proceedings void "Every agreement:

(a) By which any parly thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings, in the ordinary tribunal, or which limits the time within which he may thus enforce his rights, is void lo that extent; or (b) Which extinguishes the rights of any party thereto, or discharges any party thereto from any liability, under or in respect of any contract on the expiry of a specified period so as to restrict any party from enforcing his rights, is void to that extent. "Exception 1: Saving of contract to refer to arbitration dispute that may arise:

This section shall not render illegal a contract by which two or more persons agree that any dispute which may arise between them in respect of any subject or class of subjects shall be referred to arbitration and that only the amount awarded in such arbitration shall be recoverable in respect of the dispute so referred. "Exception 2: Saving of contract to refer questions that have already arisen

Nor shall this section render illegal any contract in writing, by which two or more persons agree to refer to arbitration any question between them which has already arisen, or effect any provisions of any law in force for the time being as to references to arbitration." ILLUSTRATIONS (1) Brief facts of the case are that the appellant M/s. 'FCC entered into a contract with the

respondent M/s. 'HZL' for supply of metallurgical coke in pursuance of a tender offered and concluded and as per the contract, the appellant-FCC was to supply 19,000 tones of metallurgical coke. According to the appellant-FCC, initially the Coking Coal Washery Grade-II was used for the manufactures of metallurgical coke, which being a controlled item, was made available to the appellant-FCC through Coal Controller of India, that too, it was supplied at the instance of the respondent-HZL. This supply of Coking Coal Washery Grade II continued up to 14-7-1992.

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4.V:J

According to the appellant and admitted by the respondent, after 14-7-1992, there was a deterioration in the quality of Washery Grade-II Coal and to maintain the standards as per purchase orders agreed between the appellant and the respondent, Washery Grade-I was required to be used so that requisite quality of metallurgical coke could be supplied to the respondent-HZL. This was done for supply at both the units of HZL. The appellant further submitted that coal, being an essential commodity under the Essential Commodities Act, its acquisition, transport and transfer, etc. were controlled by the Coal Controller Order and the coal could be supplied only at the request for demand made by the actual user, i.e. M/s. HZL. When the appellant claimed higher price on account of use of coal Washery Grade-I, the respondent disputed tire claim and after several letters, ultimately the appellant issued legal notice claiming that the appellant is entitled to escalation of price as per the clauses given in the contract and also demanded interest. After considering this argument and after considering the case law, the arbitrators held that change of coal was in the knowledge and with the consent of the respondent and also held that the price of Metallurgical Coal in the Purchase Order was based on the price of Washery Grade II as on 8-11-1991 and, therefore, the claimants were held entitled to escalation price from Washery Grade II to Washery Grade and, therefore, the learned arbitrators decided the claim of amount and, thereafter, the award was passed. The trial court rejected the award in part. Deciding the appeal against the said decision, it was held:35 "Here in this case, the Court below committed same mistake of examining the terms of the contract and interpreting them for the purpose of deciding whether these claims were covered by the terms of the contract. Not only this but when the Court was not entitled to see the fact that whether the claim was covered by the terms, of the contract or not even went further, and examined the merits of the dispute and further more arrived at a different conclusion. Therefore, the order of the Court below is absolutely illegal." (2) The respondent contractor obtained the work of widening a portion of N. H.- 42 on the basis of the agreement No. 104-F2-198081 at an agreed cost of Rs. 56,86,233/ -. The contractor was to complete the work within 24 calendar months from the date of commencement of the work. The work commenced on March 25, 1981. The Contractor could not make progress with the work in accordance with the specified time schedule. He submitted revised programme for execution of the work, but he could not adhere even to the revised schedule. Ultimately contractor abandoned the work in an incomplete state after execution of work worth Rs. 13,30,741/-. Both sides had accused each other for being responsible for delay in execution of the work. As the respondent-contractor left the work incomplete, the contract was rescinded by the appellant after giving a show cause notice. Appellant State also levied compensation for inability to execute the assigned work in accordance with the agreed time schedule. The basic dispute between the parties was who was responsible for the delay in execution of the work. Upon a consideration of the materials placed before it, Tribunal came to a finding that the State Government was mainly responsible for the delay. Tribunal considered various claims under different heads and ultimately found that the Contractor was entitled to receive a sum of Rs. 3,09,689 / - from the State. The application challenging the award was rejected and the appeal against the said judgement was also dismissed.36 35 36

M/s. Friends Coal Carbonisation v. M/s. Hindustan Zinc Ltd., AIR. 2002 Raj. 116. State of Orissa v. Birat Chandra Dagara.AIR 1997 Ori 142.

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9.8.3 Award of Interest by Arbitral Tribunal Under the Interest Act, 1978, which came into force on August 19 1981, Court includes arbitrator. Under Section 5 of the Interest Act Section 34 of Code of Civil Procedure would, therefore, apply to the arbitrator as well. Arbitrator is thus entitled to award interest pendente lite and future interest at the rate not exceeding the current rate of interest, which has also been defined in clause (b) of Section 2 of the Interest Act. ILLUSTRATION A contract for earthwork, excavation, minor drainage crossing, overhead crossing, road bridges and cement concrete lining of Ravi Canal Project was partially terminated in the structural portion of the work on January 12, 1980. On June 6, 1980 the whole of the contract was terminated because of default committed by the contractor. The contractor filed a petition under Section 20 of the Arbitration Act as the contract stipulated arbitration agreement between the parties. The contractor has to be paid on the basis of measurement of the work done by lvim. Local Commissioner measured the work done by the contractor in presence of both the parties and thereafter he submitted his report. On the basis of measurements so recorded by the Local Commissioner the contractor prepared the final bill for Rs. 14,32,436/- and after taking out the amount already paid to him, made claim for the balance. Under clause 5 of the contract, the contractor was to be paid for the work executed by him under the contract at the rates specified therein. The Supreme Court upheld award of the arbitrator granting interest at 10% p.a.. It was observed:37 "There is nothing on the record to show that interest awarded by the arbitrator at the rate of 10% is in contravention of Section 34 of Code of Civil Procedure. That being so we do not think either the learned single Judge or Division Bench were correct in reducing the rate of interest as granted by the arbitrator. We would, therefore, restore the award of interest at the rate of 10% per annum as granted by the arbitrator from the date the arbitrator entered into reference till realisation of the amount under the award."

9.9 PAYMENT MADE UNDER MISTAKE If during the performance of a contract payment is made under mistake, can it be recovered? The Indian Law on this point is embodied in Section 72 of the Indian Contract Act. The Section reads: "SECTION 72: Liability of person to whom money is paid, or thing delivered, by mistake or under coercion "A person to whom tnoney has been paid, or anything delivered, by mistake or coercion, must repay or return it". In very plain language, the section declares that a person to whom money has been paid by mistake must repay it. However, for proper understanding of this seemingly simple statement, one must have a correct concept of the word "mistake". 3 7 State of J. and K . v. Dev Dult Pandit, AIR 1999 SC 3196; Also see M/s. Hydel Construction Ltd. v. H.P. State Electricity Board, AIR 2000 HP 19

Mistake Defined Mistake may be defined as an erroneous impression, amounting to conviction that some circumstances with regard lo Hie matter in hand are different from what il really is. Further, mistake may be either of fact or of law. When a person is induced lo perform an

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act by a misconception of facts, there is a mistake of fact. When there is knowledge of lhe facts and a wrong conclusion is drawn as to their legal effects, it is a mistake of law.

English Law Not Applicable It is now well-settled that the English law relating to this matter is different from the Indian Law as laid down in Section 72. According to the English principles of law, money paid under mistake of fact is recoverable. Whereas the Supreme Court of India has held that the term "mistake" used in Section 72 of the Contract Act has been used without qualification or limitation whatever and comprises within its scope a mistake of law as well as a mistake of fact. There is no warrant for ascribing a limited meaning to the word "mistake" as used therein. There is no conflict between the provisions of Section 72 on the one hand and Sections 21 and 22 of the Contract Act on the other. Section 21 declares, it may be noted, that a contract is not voidable because it was caused by a mistake as to any law in force in India. Section 22 lays down that a contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact. The principle is that if one party under mistake whether of fact or law pays to another pai ty money, which is not due by contract or otherwise, that money must be repaid. The mistake lies in thinking that the money paid was due when in fact it was not due and that mistake, if established, entitles the party paying money to recover it from the party, receiving the same. 38

It is not to be implied from the observations of their Lordships of the Supreme Court of India, cited above, that a sum paid under a mistake is recoverable, no matter what the circumstances may be. The rule laid down was qualified to the effect that the amount paid by mistake is recoverable, "subject however to the question of estoppel, waiver, limitation or the like". On the these grounds, the findings of the Calcutta High Court, in the case, below are noteworthy, it is submitted. In the said case39 the contractor paid sales tax believing that sales tax was payable even in respect of construction contracts. Under the terms of the contract if sales tax was payable, it was to be paid by the owner. Accordingly, the owner reimbursed the amount of sales tax paid. Obviously, both parties were labouring under a common mistake of law and fact that sales tax was payable. Immediately after the mistake became known demand was made by the owner for refund of the amount paid to the contractor towards reimbursement of the sales tax paid by him. It was observed by the Calcutta High Court: 38 39

Sales Tax Officer, Banaras v. Kanhaiya Lai Mukund Lai Saraf, AIR 1959, SC 135. Calcutta Corporation v. Hindustan Construction Co. Ltd, AIR 1972, Cal 420.

"There is no question of estoppel in this case because estoppel must be of the fact and not of law ... this is a case where both parties were labouring under the same mistake and again for this reason there is no case of estoppel. ..There is no question of waiver in this case, because, immediately, after the mistake became known to the plaintiff demand was made by the plaintiff for a refund of the sales tax. There is no question of limitation in this case, because the suit was instituted within three years from the date of payment by the plaintiff to the defendant." It was held that the owner was entitled to refund of the money paid or advanced by mistake

to the contractor.

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The Board of Trustees for the Cochin Port Trust, the plaintiff in a case decided by the Kerala High Court, invited tenders for the purchase of tractors and the defendant, Ashok Leyland Ltd. was one of the parties who submitted its quotation. The subsequent agreement included a provision as follows: "Excise duty, Central Sales Tax, Delivery charges, insurance charges and all other duties/ taxes as applicable will be paid extra at actuals by the Port Trust." The defendant supplied the tractors and payment was effected to the defendants as per bills with excise duty at 12.5% and 5% special excise duty on the basic excise duty. The plaintiff averred that the defendant had paid the excise duty on a concessional rate and actual amount paid was less by Rs. 11,034.51 than that paid by the plaintiff. The plaintiff sought the refund of the excess amount wrongfully and improperly levied in the bill. Reliance was placed on Section 72 of the Contract Act. The defence was based on certain statutory notification under which the defendants was entitled to retain an amount representing 25% of the excise duty payable in respect of the motor vehicles cleared in excess of the quantity in a particular year. The trial Court dismissed the suit holding that the plaintiff was not entitled to get refund of the excess amount paid. The Kerala High Court allowed the appeal and granted a decree to the plaintiff.40 The scope of S. 72 of the Contract Act came up for consideration before the Madras High Court.41 In that case, a person purchased a motor car at a price which was represented by the vendor to be the controlled priced under the Madras Civil Motor Cars Control Order 1947, but afterwards the vendee came to know that that he paid more than the controlled price upon the false representation of the vendor. The Court held that the excess payment is a payment made by mistake, attracting S. 72 of the Contract Act. The Allahabad High Court, after reviewing the decisions on the question of 'mistake' within the meaning of S. 72 of the Contract Act, observed as follows:42 40 41 42

Board of Trustees of the Cochin Port Trust v. Ashok Leyland Ltd AIR 1992 Ker. 1 (3-5). Lakshmanprasad and Sons v. S . V. Kamal Bai AIR 1960 Mad. 335. Modern Industries v. State of Uttar Pradesh Vol. 3 2 1973 STC 555.

"The question as to whether moneys have been paid under a mistake has got to be adjudged with reference to the litigant who claims the refund and not by the yardstick of a prudent and diligent assessee. Therefore, in case the assessee could establish that there was a mistake of law committed by it at the time when the payments were made, the mere fact that it might have been possible for the assessee by the exercise of due care and diligence to have known of the correct position in law would not disentitle it to the benefit of S. 72 of the Contract Act." A Division Bench decision of the Gujarat High Court in the course of judgment observed:43 "In our opinion, therefore, the person claiming repayment or return of money or thing U/S 72 must establish that justice of the case requires such repayment or return of money or thing. What is important is the substance of the right conferred under the Section. Therefore, the person basing his claim on that Section has to prove that it would be against one's conscience to allow the person to whom money is paid or thing delivered to retain it. He must establish

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that the person to whom money has been paid or thing delivered by mistake or under coercion is retaining it at his expense. In other words, it must be established that it would be unjust to allow the person to whom money is paid or thing delivered by mistake or under coercion to retain it and to allow him to do so would result in any loss or injury to him. If there is no loss or injury to the person claiming restitution, the claim for restitution cannot be sustained. As pointed out above, restitution postulates restoration to the rest or proper owner or reparation of injury or making good the loss. If the person claiming restitution is not the real owner of the money paid or thing delivered by mistake or under coercion, or if no loss or injury is caused to him, he could not be entitled to restitution. In our opinion, therefore, in order to succeed in an action for restitution under S. 72 of the Contract Act it is absolutely essential for the person claiming restitution to establish ownership, loss or injury." ILLUSTRATION Plaintiff-respondent had filed Money Suit in the Court of the Subordinate Judge, Rourkela against the Union of India and others for refund of Rs. 1,32,87,749/-, which, according to the plaintiff, had been illegally realised from it by the Railway Administration. The facts giving rise to this appeal were that the plaintiff required imported coal for the Rourkela Steel Plant. The coal was unloaded at Visakhapatnam Port wherefrom it was required to be transported to Rourkela Steel Plant Exchange Yard at Bondamunda where the wagons are placed for the purpose of unloading. It was the plaintiff's case that the shortest available route from Visakhapatnam to Rourkela is via Viajaynagaram-TitlagarhSambalpur-Jharsuguda-Rourkela covering a distance of 667 kilometres. The alternative, but longer and dearer route is via Vijaynagaram-Khurda Road-Kharagpur-Tatanagar-Chakradharpur-Rourkela covering a total distance of 1082 kilometres. However, in view of a notification issued under S. 27-A of the Indian Railways Act, 1890, the Central Government had notified certain routes called 'rationalised routes' over which particular traffic had to be booked and accordingly, in terms of a general order, the coal imported at Visakhapatnam 43

Union of India v. Ahmedabad Manufacturing and Calico Printing Co. Ltd (1984) (17) BLT. 246).

Port lor carriage to Rourkela Steel Plant was required lo be booked and carried by the longer route covering 1082 kilometers instead of by the shorter route of 667 kilometres. According to the plaintiff, in view of the rationalisation scheme and the general order, it had no choice but to pay freight for the longer route, as booking could not be for carriage over the shorter route. It was the further case of the plaintiff that in or about April, 1987, an officer came to know that some of the rakes booked were dispatched to Rourkela by the shorter route (covering a

distance of 667 kilometers) though weight charges were recovered for carriage by the longer rationalized route (covering a distance of 1082 kilometers). On coming to know about the aforesaid fact, alleged the plaintiff, it lodged a demand for refund of the differential amount of Rs. 1,32,87,749/- but the same was turned down. Deciding the appeal, it was held: 44 ".The claim for differential amount of freight what was payable and what was actually paid would, I feel, be a claim falling under S. 72 of the Contract Act, for it has been held in Union of India v. Steel Stock Holders Syndicate, Poona, AIR 1976 SC 879, that the Indian Railways Act does not supersede the provisions of the Contract Act."

9.10 OVERPAYMENTS AND UNDERPAYMENTS

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It is not uncommon to find in a construction contract with Government, provision worded as follows: "The Government reserves the right to carry out post-payment audit and technical examination of the final bill including all supporting vouchers, abstracts, etc. The Government further reserves the right to enforce recovery of any overpayment when detected, notwithstanding the fact that the amount of final bill may be included by one of the parties as an item of dispute before an arbitrator appointed under Condition 60 of this Contract and notwithstanding the fact that the amount of the final bill figures in the arbitration award. "If as a result of such audit and technical examination any overpayment is discovered in respect of any work done by the Contractor or alleged to have been done by him under the contract, it shall be recovered by the government from the Contractor by any or all of the methods prescribed above or if any underpayment is discovered the amount shall be duly paid to the Contractor by the Government. The clause provides for mutual adjustment of payments made, so that no party is put to loss or gain an unfair advantage on account of under-payment or overpayments made under the contract, respectively. The stipulation reserving the right of the Government to adjust overpayment against amounts due to the contractor under any other contract with the Government is valid and enforceable.

44

Union of India and others, v. Steel Authority of India Limited, AIR 1997 Ori. 77.

ILLUSTRATIONS (I) A clause in the contract was : "We agree for any adjustment as may be necessary on account of quality or quantity of supply to be made from our bills or subsequent bills." A suit was filed for recovery of amount due but which was adjusted. After framing of issues and adduction of evidence, the trial Court found that though there was such an agreement for adjustment, unless the appellants plead either set of or counter-claim and pay the Court-fee, they are not entitled to the relief, Consequently, the suit was decreed. On appeal, the High Court found that in the light of the agreement and adjustment from future bills the appellants were entitled to adjust the same from the future supplies since fraud was discovered for the first time under Ext. D in the year 1969. After it was pointed out by the Audit Department that the plaintiff had supplied Grade-II coal but collected the price of Grade-I coal, the appellants were entitled to adjust the same. But from the evidence on record about 12,038 tonnes of coal was supplied but what was the total quantity of the coal supplied between December 7, 1962 and June 1967 had not been brought on record and even the price which prevailed for GradeII and Grade-I coal during the relevant period was not produced. Consequently, the appellant could not succeed in avoiding the decree. Thus, the appeal was dismissed. The question to be decided by the Supreme Court was : whether the High Court was justified in dismissing the appeal and confirming the decree of the trial Court on the facts of this case? It was held: 43 "After the discovery of the fraud, the appellants started adjusting the amounts of over payments from the future bills payable to the plaintiff. Having found this fact, necessarily, the High Court either would have called for a finding from trial Court, after giving opportunity to the parties, and adjudged the rights of the parties or would have remitted the matter to the trial Court to give an opportunity to the appellants to place on record evidence in that behalf. We think that the latter course would be more feasible. Accordingly, we set aside that part of the

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judgment of the High Court and the decree of the trial Court and remit the suit to the trial Court. The trial Court is directed to give an opportunity to the appellants to adduce evidence of the total supplies made during the period from December 7, 1962 to end of December 1967 and also the prevailing price of Grade-I and Grade-II coal." ( 2) One of the terms in a Government Contract was Clause 20 B which read : "When no such amount (referred to in clause No.20 of the contract agreement) for the purpose of the recovery from the contractor against any claim of the Government is available such a recovery shall be made from the contractor as arrears of land revenue." It was the case of the State Government that since the price quoted of certain items were exceeding the prescribed price, overpayment of total Rs. 55,18,426-89 ps. was made so far as the petitioner of Special Civil Application No. 933/88 is concerned and overpayment of Rs.30,10,163.23 ps. was made so far as the petitioner of Special Civil Application No. 934/ 88 is concerned. Since the Government had no amount available for the purpose of set off or appropriation thereof, Clause 20B of the contract which was agreed by the original petitioners was invoked and notices were issued to the original petitioners calling upon them to make the payment as mentioned in the notice. Against those orders passed by the authorities, the 45

Steel Authority of India Ltd. and others, Appellants v. New Marine Coal Co. (Pvt.) Ltd., AIR 1996 SC 1250.

petitioners preferred the Special Civil Applications challenging the said notices. Contention before the learned single Judge in the aforesaid Special Civil Applications was that these notices are without jurisdiction since there is no adjudication of the issue and it was also contended by the petitioners that the principles of natural justice are not followed. However, the learned single Judge by interpreting the provisions of Clause 2 0 B observed that the same cannot be invoked as the said provisions are attracted where claim has been ascertained under the appropriate provisions of law and the same has become due. Reference was made earlier by the learned single Judge of the decision of the Apex Court in the case of Union of India v. Raman Iron Foundry reported in AIR 1974 SC 1265 and ultimately, it was observed by the learned single Judge that the impugned notices were without any authority of law and therefore, the notices were quashed. Against the said decision of the learned single Judge, the State of Gujarat has preferred the present Letters Patent Appeals.

It was observed: ".. it is not in dispute that the original petitioners had entered into such contract and Clause 20B was in existence at the time when the contract came to be given to the original petitioner. Therefore, when it is an admitted position that Clause 20B was there in the terms and conditions of the contract, the contention that for recovery of the claim of the Government, the same cannot be made as arrears of land revenue cannot be accepted because the original petitioners themselves are party to the said contractual agreement and die petitioners cannot be permitted to back out from the said contract which is admittedly entered into by them. " It was alternatively submitted on behalf of the original petitioners that even if it is assumed that the Government has power to recover as arrears of land revenue, then such powers can be exercised only when the claim is adjudicated by the competent Court and after such order of the competent Court, the amount can be recovered as the arrears of land revenue. Reliance was also placed upon the judgment of the Apex Court in the case of Union of India (supra) which is also referred by the learned single Judge in his judgment. If we examine the said contention of the original petitioner, the same is of no substance because the Apex Court in

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445

the aforesaid case was dealing with the case for claim of damages which resulted on account of breach of contract and therefore, while interpreting S. 73 and 74 of the Indian Contract Act, the Apex Court held that "a claim of damages for breach of contract is not a claim for a sum presently due and payable and the purchaser is not entitied in exercise of the right conferred upon it under clause 18, to recover the amount claimed by appropriating other sums due to the contractor". "It may be noted that the case before us is not that of recovery of damages from the contractor which has resulted on account of breach of contract. But the claim of the Government against a contractor is that of recovery of excess payment made than what was agreed by the Government. Therefore, the judgment of the Apex Court in our opinion, would not apply to the facts of the present case. In our view, when the matter pertains to excess or surplus payment made by either party, it would not be the case at par with the claim of damages to be recovered on account of breach of contract and therefore, the said contention of original petitioners deserves to be rejected." The last plea was that at least the petitioners ought to have been given opportunity to put forward their case to show that the payment made is not an excess payment. In reply it was the case of the Slate Government that umpteen number of times, notices were given to the original petitioners. However, neither the original petitioners have cared to reply to the same nor have they even demanded any opportunity in response to the said notices nor the original petitioners have requested the Government to provide particulars on the basis of which they were called upon to make the payment. It was held:

46

"Considering the facts and circumstances of the present case, we find that the ends of justice would be met by giving one more opportunity of hearing to the original petitioners to put forward their case before the final decision of recovering amount of excessive payment is taken by the competent authority. .. So far as the main Special Civil Applications are concerned, we hold that the State Government is entitled to recover the amount as per Clause 20B of the contract agreement as the arrears of land revenue. However, before exercising such powers, the competent authority will afford an opportunity of hearing to the original petitioners and the original petitioners will be heard and thereafter appropriate orders will be passed by the competent authority for recovery of amount as the arrears of land revenue."

9-10-1 Conditions under which a legal set-off may be allowed by a Court The conditions under which a Court may allow a legal set-off may be referred to for this purpose. These are mentioned in Order VIII, Rule 6 of the Civil Procedure Code, which reads: "Particulars of set-off to be given in written statement(1) Where in a suit for the recovery of money the defendant claims to set off against the plaintiff's demand any ascertained sum of money legally recoverable by him from the plaintiff, not exceeding the pecuniary limits of the jurisdiction of the Court, and both parties fill the same character as they fill in the plaintiff's suit, the defendant may, at the first hearing of the suit, but not afterwards unless permitted by the Court, present a written statement containing the particulars of the debt sought to be set-off. Effect of Set off- (2) The written statement shall have the same effect as a plaint in a cross-suit so as to enable the Court to pronounce a final judgment in respect of the of the original claim

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Building and Engineering Contracts

and of the set-off: but this shall not affect the lien, upon the amount decreed, of any pleader in respect of the costs payable to him under the decree. (3) The rules relating to a written statement by a defendant apply to a written statement in answer to a claim of set-off." The provisions can be analysed as thus: - In order to entitle a defendant to claim a set off under this rule, the following conditions, must be present:(i) (ii)

46

The suit must be one for the recovery of money. The amount claimed to be set-off must be: (a) ah ascertained sum of money (b) legally recoverable

State of Gujarat v. Pravinchandra C. Khatiwala, AIR 2002 Guj. 374.

(c) by the defendant (d) from the plaintiff (e) within the pecuniary limits of the jurisdiction of the Court in which the suit is brought; and (iii)

Both parlies must fill in the defendant's claim lo set-off the same character as they fill in the plaintiff's suit.

If a contractor aggrieved by the fact that a certain amount is deducted from the sum due to him under a contract, files a suit for recovery of the full contractor's price, the Government can, under the above procedure, claim a set-off for the amount due to it from the contractor under another contract. It may be noted that both parties fill the same character so long as the amounts relate to contracts let out by the Government to the contractor. Secondly, unlike equitable set-off, the cross-demands in a legal set-off need not arise out of the same transaction. It may, however, be noted that a claim for damages or for breach of contracts is "not a claim for a sum presently due and payable"47- The amount of such claim, therefore, cannot be recovered by appropriating other sums due to the contractor unless the claim for payment is admitted by the contractor, or in case of dispute, adjudicated upon by a Court or other adjudicating authority.

9.11

FINAL CERTIFICATES

The engineer/architect, on completion of the work, grants completion and final certificates to the contractor. These certificates indicate that the work has been completed in accordance with Hie terms and conditions of the contract and to the satisfaction of the engineer or the architect. Thus the engineer or architect, by way of issuing these certificates, assures the owner that the contractor is entitled to the payment of the balance of his account as finally adjusted. Clause 14.13 of FIDIC Conditions of contract, 1999 edition provides for issuing such certificate within 28 days after receiving Final Statement and written discharge by the contractor..

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447

As already mentioned, the engineer or architect acts in many cases in the capacity of an arbitrator, and as such it is essential that his decision as to the amount finally due must be honest and given without interference by either party. It may be noted that there is no contractual relationship between the contractor and the engineer or architect. Therefore, if the contractor has agreed to the condition, stipulating that the engineer's or architect's decision shall be final, binding and conclusive, no action will lie against the engineer of architect, except on grounds of collusion, fraud, deceit or breach of warranty of authority on his part.48 47 48

Union of India v. Raman Iron Foundry, AIR 1974 Sc 1265. Stevenson v. Watson (1879) 4. CRD 148.

If the engineer 's or architect's final certificate is made binding and conclusive on all parlies, even an action by the owner against the engineer or architect for negligence in the exercise of these functions will not be maintainable. As an agent of the owner, the engineer or architect would clearly be liable, but in such case he acts in the capacity of an arbitrator. 49 Withholding of a final certificate on account of certain parts of the work not having been done in "sound and workmanlike manner" does not amount to a fraud if the contract provides lhal the work is to be done to the entire satisfaction of the engineer or the architect. 5 "

9.12 HOW FINAL ARE FINAL CERTIFICATES The effect of a final certificate issued by an engineer or an architect depends upon the wording used in the contract. Most standard from contracts include arbitration clause for resolving disputes. Such arbitration clauses invariably provide: "The ... arbitrator/s shall have power to open up, review and revise any decision, opinion, instruction, determination, certificate or valuation of the engineer related to the dispute".51 In view of the arbitration clause worded so widely, it incorporates within its fold even the final certificate issued by an engineer/architect. In fact the modem forms, such as the FIDIC form, do not give any finality to the final statement or certificate issued by the engineer but provides in Clause 60.6 that the disputed part of the final statement be settled by reference to arbitration under Clause 67 after amicable settlement is attempted and proved unsuccessful. However, in cases where the final certificate clause and arbitration clause are so worded as to be apparently conflicting, the question of reconciliation between the two provisions may arise. ILLUSTRATIONS (1) A contract for the construction of a school building under RIBA terms provided as under: "Upon expiration of defects liability period - the architect shall - - issue a final certificate and such final certificate - - shall be conclusive evidence of sufficiency of the works and materials". The exception was made of latent defects. The arbitration provision gave power to the arbitrator to open up, review or revise any certificate in the manner as if no such certificate had been given. Two years after the issue of the final certificate, stone panels fixed to the exterior walls fell off owing to defective fixing by the contractor. The employer carried out the repairs and sought to recover the cost from the contractor. One of the questions to be decided was whether the arbitrator has the power to reopen the architect's final certificate. It was observed that to read the provision made in the arbitration clause literally would "rob the final certificate almost entirely of its conclusive effect". It was finally held52 "the specific

49 50 51 52

Chambers v. Gold Thorpe, Restell v. Nye (1901) K. B. 624. Cooper v. Uttoxler Burial Board (1865) 11 L. J . 565. See for example, FIDIC Clause 67.3 fourth edition 1987 Reprint 1992. East Ham Borough Council v. Bernard Sunley & Sons Ltd House of Lords (1965) 3 All ER619.

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Building and Engineering Contracts

provision of conclusiveness of the final certificate prevails over the generality of the words in the final sentence of Clause 27". (namely the arbitration clause). (2) A provision in an agreement

stipulated that unless a written request to concur in the

appointment ol" an arbitrator shall have been given by either party before the final certificate has been issued, the said certificate shall be conclusive evidence in any proceedings arising out of the contract to the effect that the works had been properly carried out and completed in accordance with the terms of the contract. The work was completed in April 1967. The architect issued interim certificates in April and July. The employers paid sums on account leaving a balance of 14,861 pounds unpaid on the ground that the floor was faulty. The contractor relaid it and still not having been paid, started proceedings. The employer did not seek to refer the dispute to arbitration but defended it on the ground that flooring was till then faulty and counterclaimed 13,500 pounds. The contractor alleged that he tried to repair it and about 12 months later sought the final certificate. The architect issued the final certificate

showing that the balance due to the contractor was 2,360 pounds. Three days after its issue the employer asked the contractor to concur in the appointment of an arbitrator. The contractor refused, alleging that it was then too late, and issued a second writ claiming the amount of the final certificate. On the above facts it was held that the final certificate prevented any further legal action, including the legal proceedings started long before the certificate was issued. As a result of this case the relevant part of the standard form provision was revised to limit the conclusiveness of the final certificate.513

(3) A contract incorporated a provision that the final certificate shall be conclusive evidence that any necessary effect has been given to all the terms of the contract, which require an adjustment to the contract sum. A completion certificate was issued on 13 May 1986 with an appended list of defects. Defects subsequently got executed through another agency under intimation to the contractor when he failed to rectify the same. Final certificates were issued after adjusting the amount spent in defects rectification. However, the deductions shown in respect of the amounts previously certified related to sums certified and not paid. The contractor issued a writ for the sum due. The employer sought stay of proceedings under the Arbitration Act, raising several cross-claims challenging for the first time, inter alia, the validity of the certificate of practical completion issued in May 1986. It was held: "The final certificate is based on the final measurement and valuation of all the works. It subsumes all interim certificates. If, and to the extent, therefore, that the qualification of the balance due under the final certificate is mistakenly based on sums certified rather than certified and paid, it follows - - that the sum due under an unpaid interim certificate must have the same immunity under Clause 35(3) as the balance due under the final .certificate, and the employer ought not be allowed to assert the contrary when the balance in the final certificate has been due to the fault of his agent". The Clause 35(3) was an arbitration clause and in effect it was held that the certificate is not reviewable by the arbitrator. 54 53 54

P. & M. Kaye Ltd v. Hosier & Dickinson Ltd., House of Lords (1972) 1 All ER 121. Rush & Tompkins Ltd. v. Deaner Q. B. Div (1987) 13 Con LR 106.

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449

The final bill as lhe name suggests, is lhe lasl claim lo be submitted by lhe contractor lo lhe owner for payment. The claim generally indicales the full amount due lo the contractor for the work done under a contract less payments already received by way of interim bills. The contract usually stipulates that no further claims shall be made by the contractor after lhe final bill except, of course, the refund of the security deposit. By the submission of lhe final bill, the contractor is deemed to have waived all further claims. A certificate to lhe effect is generally obtained from the contractor al lhe time of making the final payment. After scrupulously following this procedure can a contractor succeed in his claim? This question is dealt with below.

9.13 CLAIMS MADE AFTER PAYMENT OF FINAL BILL - IF AND WHEN MAINTAINABLE? It frequently happens that a contractor, with a view to getting paid with a substantial sum of money under the final bill or certificate, is coerced into signing a no claim certificate. After receipt of the money he initiates arbitration or court proceedings. Generally, by giving a no claim certificate the contractor could not be said to have become disentitled to refer any dispute arising out of the contract to arbitration. 55 The Calcutta High Court has observed:56" - It is so well known and notorious a fact that unless a no claim certificate is issued by the contractor the payment of the final bill will not be made. But that does not prevent the contractor from raising his claim before the arbitrator in terms of the arbitration clause for the value of his work or other claims within the scope of the agreement between the parties- -". In another case it was held by the Kerala High Court57: "when one party says that there was full and final settlement and the opposite party says that it was not voluntary but under compelling circumstances and he had got claims, that is also a matter that could be decided only by the arbitrator." This view finds support in the decision of the Supreme Court in Union of India v. L.K. Ahuja & Co.58

Accord and Satisfaction Accord and satisfaction is discussed in details under Chapter 10 under cansequences of breach of contract in Art 10-13. The Supreme Court considered the ambit of accord and satisfaction in a case and after considering the entire controversy held that:59 "Admittedly the full and final satisfaction was acknowledged by a receipt in writing and the amount was received unconditionally. Thus there is accord and satisfaction by final settlement of the claims. The subsequent allegation of coercion is an after-thought and a devise to get 55 56 57 58 59

See Damodar Valley Corporation v. K.K.Kar, AIR 1974 SC 158. Jiwani Engineering Works v. Union of India AIR 1981Cal. 101(102). Cochin Refineries Ltd v. S C S Co., EC Kottayam AIR 1989 Ker. 72. Union of India v. L, K. Ahuja & Co. AIR 1988 SC 1172. M/s P. K . Ramaiah & Co. v. Chairman and M.D. N.TP.C 1994 ( 1 ) SCAL 1 ) .

over the settlement of dispute, acceptance of the payment and receipt voluntarily given. - There is no existing arbitral dispute for reference Lo the arbitration." The full facts of this case deserved the finding given and this decision. Similarly subsequent decision in State of Maharashtra v. M/s Nav Bharat Builders60 was based on the facts peculiar to the case and do not change the well established law by the earlier decisions of several High Courts and the

450

Building and Engineering Contracts

Supreme Court of India, it is respectfully submitted. The recent decision of the Supreme Court supports this view, it is submitted. However, several facts of the said case need to be mentioned: (i)

Disputes as regard final bill arose prior to its acceptance thereof in view of the fact that the same was prepared by the respondent but was not agreed upon in its entirety by the appellant .

(ii)

The appellant had not pleaded that upon submission of the final bill by the respondent herein any negotiation or settlement took place as a result whereof the final bill, as prepared by the appellant, was accepted by the respondent unequivocally and without any reservation therefor.

(iii)

The respondent immediately after receiving the payment of the final bill, lodged its protest and reiterated its claims.

(iv)

Interpretation and/or application of Clause 52 of the agreement would constitute a dispute which would fall for consideration of the Arbitrator.

(v)

The effect of the correspondences between the parties would have to be determined by the Arbitrator, particularly as regard the claim of the respondent that the final bill was accepted by it without prejudice.

(vi)

The appellant never made out a case that any novation of the contract agreement took place or the contract agreement was substituted, by a new agreement. Only in the event of the cration of a new agreement is made out the question of challenging the same by the respondent would have arisen.

(vii)

The conduct of the appellant would show that on receipt of the notice of the respondent the same was not rejected outright but existence of disputes was accepted and the matter was sought to be referred to the Arbitration.

(viii)

Only when the letter of clarification was issued the plea of settlement of final bill was raised.

On the above facts the Supreme Court held:61

60 61

C.A.No. 853 of 1994, S.L.P. C. No. 5628 dated 4.2.1994. N.T.P.C. Ltd. V. Reshmi Constructions, 2004(1) Arb. LR 156 (SC).

"The finding of the High Court that a primafacie in the sense that there are triable issues before the Arbitrator so as lo invoke the provisions of Section 20 of the Arbitration Act, 1940 cannot be said to be perverse or unreasonable so as lo warranl interference in exercise of extraordinary jurisdiction under Article 136 ol the Constitution of India.

" The cases cited by the learned counsel for the appellant P.K. Ramaiah and Company (supra) and Nathani Steels (supra), would show that Ihe decisions Iherein were rendered having regard lo the finding of fact that the contract agreement containing the Arbitralion clause was

Chapter-9

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Measurement, Valuation and Payment

substituted by another agreement. Such a question has to be considered and determined in each individual case having regard to the fact situation obtaining therein." In yet another decision the Supreme Court held:62 "Only because the respondent has accepted the final bill, the same would not mean that it was not entitled to raise any claim. It is not the case of the appellant that while accepting the final bill, the respondent had unequivocally stated that he would not raise any further claim In absence of such a declaration, the respondent cannot be held to be estopped or precluded from raising any claim" ILLUSTRATION On behalf of the owner it was contended in a case that the contractor was not entitled to get any damages in view of the fact that they had accepted the final bill in full payment of all claims and further given the certificates in the following terms: "We M/s .... Certify that we have no claim on any count towards this work and contract." It was further pleaded that, in view of these certificates, it should be held that the contractor has waived his claim to damages. No plea of waiver was taken in the written statement and no issue was framed on this matter during the course of trial. An application was submitted to the High Court to allow them to carry out suitable amendment in the written statement. It was held that the application was not bona fide. Their lordships of the Gujarat High Court observed: "We find that this application for amendment is not bona fide. So far as the final bills are concerned, the plaintiff's partner .... has explained in his deposition appearing in Ex. 128 under what circumstances he signed the receipt under the final bills. What he states is as follows: "I signed the receipt of full payment below the final billvbecau>: at that time Rs. 50,000/ was payable to me according to the bills and the Executive Engineer ... told me that I will not get this payment unless I signed the full payment receipt. He also assured me Uiat it could not affect me, If I have any claim in excess of this bill". As against this specific allegation made by the witness to explain under what circumstances he signed the certificates appearing under the final payments, we find that not a single question is put to him in cross-examination lo challenge the statement made by him." It was further observed thai at the relevant time the said 62 63

Bharat Coking Coal Ltd. V. Annapuma Construction, 2003(3) Arb. LR 119 (SC). R.C.Thakkar v. Gujarat Housing Board, A.R. 1973 Guj. 34(56).

Executive Engineer was present in the Court but he was not examined to contradict the above referred allegations of the witness. It was held:-

"It is, therefore, found that effort of the defendant at this stage lo advance a plea of waiver on the ground

thai

totally lacks concerned

the final bills have been signed by in

bona fides. So far as the

not a single question is

deposition to

show that

implications thereof and in token

certificates

put to the

these certificates

of

the

plaintiff in

found

at

full

satisfaction

of its claim,

the foot of Exs. 138 and 139 are

plaintiff's partner . . . during the course o f his

have been

signed by

him after

understanding the full

the waiving o f his further claims arising out of the suit

contracts."

The above case is one example of circumstances under which lhe final certificate will not be final, binding and conclusive.

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Building and Engineering Contracts

It can, therefore, be concluded that the final certificate would be conclusive on the parties except where a claim is based on grounds of collusion, fraud, misrepresentation, dispute or breach of warranty of authority on the part of the engineer. Also where a contract includes an arbitration clause the dispute in respect of the final certificate in such a case obviously lacks the finality ordinarily attached to it.

♦♦♦

Breach of Contract __________________________________________ A 10.0 INTRODUCTION A breach of a contract is failure to perform an obligation arising out of the contract. Where there is failure to perform an obligation, in whole, it is a total breach. When an agreement is broken only in part it is a partial breach. Jfjyjarjy^j^ is due, his definite unwillingness or inability to fulfil the contract, he thereby admits he is guilty of a breach. The breach in such a case is called anticipatory breach. Occasionally a party may deliberately incapacitate himself or render impossible the performance of his contract duties; or may so interfere to render performance by the other party impossible. Such tactics also constitute a breach of contract. Every breach of a contractual obligation confers upon an injured party a right of action. However, there are a number of valid excuses for non-performance of contractual obligations. An actionable breach of contract, therefore, occurs when a promisor, without sufficient excuse or justification, fails to perform in accordance with the dictates of his agreement. Further, there is a distinction between breach of a contract and termination of a contract. When a contract comes to an end it is said to be terminated. Breach of contract may constitute a means of contract termination. However, there are a number of ways other than a breach by which a contract can be terminated. Full and satisfactory performance by both sides is the usual mode. The other modes include: 1. Release under seal. 2 Rescission by consent of parties. 3. Accord and satisfaction. 4. Exercise of option given to a party in a contract to terminate under certain circumstances or events. 5. Rescission by a party on account of repudiation or non-performance by the other party. 6. Frustration or impossibility of performance. It may be noted that many common forms of breach of important contract conditions are dealt with, in their appropriate places in different chapters in this book. The law applicable to some forms of breach of contracts not dealt with elsewhere in the book is considered in this Chapter. The doctrine of frustration, consequences of breach of contract such as waiver, accord and satisfaction, termination, compensation, applicability of the doctrine of specific performance, the doctrine of substantial performance; and effect of termination, as also of accord and satisfaction on Ihe arbitration clause are the important topics discussed in this chapter. Common breathes of contracts are dealt with in Chapter 11.

10.1 PROVISIONS OF THE LAW AND STANDARD FORM CONTRACTS

The following Sections of the Indian contract act are dealt with in this chapter:

Section 52 to 54 & 67

Art No. JQ.5,1

62

10.6 10.7 10-2

56 65

Provisions of the Standard form contracts referred include : FIDIC 1992 Amended Reprint FIDIC 1999 Ed. MoS&PI, GOI2001 M.E.S Clauses 63 and 69.

Clauses 15 and 16; Clause 59; P.W.D. 3 and 4; Clause 52 and Railways Clause 61.

10.2 REFUSAL TO PERFORM CONTRACT In a building or construction contract, the earliest possible situation out of which a breach of the contract may arise would be the refusal of a party to go ahead with the contract. The refusal may be either by the owner or by the contractor. Section 39 of the Indian Contract Act deals with the consequences of refusal of the party to perform a promise wholly. It reads : SECTION 39: "Effect of refusal of party to perform promises wholly- When a party to a contract

has refused to perform, or disabled himself from performing his promise in its entirety, the promisee may put an end to the contract, unless he has signified by words or conduct, his acquiescence in its continuance". Illustrations (a) A, a singer, enters into a contract with B, the manager of a theatre, to sing at his theatre two nights in every week during the next two months, and B engages to pay her 100 rupees for each night's performance. On the sixth night A wilfully absents herself from the theatre. B is at liberty to put an end to the contract. (b) A, a singer, enters into a contract with B, the manager of a theatre, to sing at his theatre two nights in every week during the next two months, and B engages to pay her at the rate of 100 rupees for each night. On the sixth night A wilfully absents herself. With the assent of B, A sings on the seventh night. B has signified his acquiescence in the continuance of the contract, and cannot now put an end to it, but is entitled to compensation for the damage sustained by him through A's failure to sing on the sixth night. Section 39 falls under Chapter IV of the Contract Act dealing with the contracts which musl be performed but deals with the situation where it need nol be performed; the topic covered by Sections 62 to 67 : Consequences of breach of contract. Al the outset it needs lo be noted that S.39 is applicable lo executory contracts where the time of performance has not yet arrived. However, that does nol necessarily mean that it covers anticipatory breaches alone. In other words it presupposes the contract under which some substantial part of the contract is yet to be performed. The words "in its entirety" indicate that the kind of refusal contemplated by this Section is one, which affects a vital part of the contract, and prevents the promisee from getting in substance what he bargained for.

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455

The law embodied in this Section is that where a party to a contract refuses altogether to perform or is disabled from performing his part of it; the other side has a right to rescind the contract unless the other party has signified his acquiescence in the continuance of the contract. This Section covers three sets of circumstances: 1. Renunciation of a party of his liabilities under the contract; 2. Impossibility of performance created by his own act; and 3. Total or partial failure of performance. Renunciation means repudiation of liability before the time of performance has arrived. Any intimation, either by words or by conduct, that a party declines to continue with the contract is repudiation. It may occur or impossibility be created either before or at the time of performance. The third situation contemplates total failure during performance and if failure is partial, to be of the nature which goes to the root of the contract. A party injured by refusal of the other party to perform the contract must satisfy itself, before rescission of the contract, that the refusal is absolute and that the other party has made its intention not to perform the contract quite plain. Mere failure by the party to perform the promise without evincing an intention to end the contract would not be repudiation covered by S. 39 but covered by S. 54 and 55 of the Indian Contract Act. Further, it may be noted that the election to rescind, once made, is conclusive. Also a contract cannot be terminated in part but must be repudiated altogether. These concepts though prima facie appear simple are often difficult to apply in practice. Every intimation of refusal may not amount to renunciation. A party is likely to think wrongly that it is entitled to terminate the contract and cornrnit a repudiatory breach entitling the other party to terminate the contract. ILLUSTRATION The architect in a case wrongly advised the employer to deduct liquidated damages from interim certificates. The contractor thereupon wrote terminating the contract for the alleged breach and ordered the sub-contractors to cease the work. The employer thereupon served notice for determination on the ground that the contractor was in default by wholly suspending execution of the works without reasonable cause. The contractor alleged that the employer was in default by failing to make payment under interim certificates and then issued a writ. It was held : By issuing an invalid termination notice, ceasing the progress of the works and thereafter issuing a writ, the contractor had indicated art intention not to be bound by the contract, and since the owner had no alternative but to accept the repudiation, the contract was brought to an end. The contractor was held lo be in breach, even though the employers were wrong in deducting liquidated damages at that stage.1

10.2.1 Disability to Perform A party can be said to have disabled itself from performing the contract if: i) when he deliberately puts it out of his power to perform the contract; or ii) when by his own act or default, circumstances arise which render him unable to perform his side of the contract or some essential part of it.

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When it comes to establish, renunciation is easier to establish than impossibility. In the case of the former a party has to establish that the conduct of the defaulting party has been such as to lead a reasonable man to believe that he did not intend to perform his promise., whereas in the case of the latter, he must show that the contract is in fact impossible to perform due to fault of the other party.

10.2.2

Doctrine of Anticipatory Breach

This Section also embodies the doctrine of anticipatory breach. The rule indicated by this doctrine is that on the repudiation of the contract by one party, even before the time for performance has arrived, the other party may at his option treat the repudiation as an immediate breach, putting an end to the contract for the future and at once bring his action for recovery of damages. However, on the other hand, if the aggrieved party prefers to await the time when the contract is to be performed, and then hold the other party responsible for all the consequences of non-performance, he keeps the contract alive for the benefit of the other party as well as his own. In other words he remains subject to all his own obligations and liabilities under the contract and enables the defaulting party not only to complete the contract, if so advised, notwithstanding his previous refusal to perform it, but also to take benefit of any supervening circumstance which would justify him in declining to perform it.2 From the above considerations it is clear that refusal of one party to fulfil his part of the contract renders the contract voidable at the option of the other party. When the other party makes use of that option the contract becomes void. As to what are the consequences of rescission of a voidable contract, Section 64 and 65 of the Contract Act need to be considered. 1 2

Lubenham Fidelities & Investments Co. Ltd. v. South Pembrokeshire District Council & Wigley Foz Partnership; Court of Appeal (1986). Ratanlal v. Brijmohan (1931) 33 Bom L.R. 703, 122 IC 861 (31) A.B. 386.

SECTION 64 : "Consequences of rescission of voidable contract- When a person al whose option a contract is voidable rescinds it, the other parly thereto need not perform any promise therein contained in which he is lhe promisor. The party rescinding a voidable contract shall, if he has received any benefit thereunder from another party to such a contract, restore such benefit, so far as may be, to the person from who it was received." The provisions made in the above Section require a person who has elected to put an end to the contract, to restore the benefits received under the contract to the defaulting party. The other

party thereafter need not perform his part of the contract. He is, however, liable to pay damages for the defaulting party's breach under Section 75 which reads as follows: SECTION 75: "Party rightfully rescinding contract entitled to compensation - A person who rightly rescinds a contract is entitled to compensation for any damage which he has sustained through the non-fulfillment of the contract". Illustration "A, a singer, enters into a contract with B, the manager of a theatre, to sing at his theatre two nights in every week during the next two months, and B engages to pay her at the rate of 100 rupees for each night. On the sixth night A wilfully absents herself. With the assent of B, A sings on the seventh night. B has signified his acquiescence in the continuance of the contract, and cannot now put an end to it, but is entitled to compensation for the damage sustained by him through A's failure to sing on the sixth night.

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Section 75 is to be read as supplementary to Sections 39,55, 64 and 65. The other Section 55 has been dealt with in Chapter 6 and Section 65 is considered hereinafter in Art. 10.8. Application of all these principles to some common forms of breach in cases of building and engineering contracts are considered below.

10.3 BREACH BY THE CONTRACTOR The provisions of the Standard form contracts are so numerous that it may not be desirable to attempt to give an exhaustive list of possible breaches of contract by the contractor. For example, failure to submit the programme, failure to appoint qualified engineers, failure to insure, failure to submit labour returns, etc. can be cited as breaches of a less common kind, which may or may not result in damage to the owner. However, it is possible to group the commonest breaches of contract conditions causing substantial damage and often being the subject of litigations, into the following three categories: a) b) c)

Abandonment, or total failure to complete the work, either to start with or midway in execution. Delay in completion of the works, and Defective work.

The consequences of the first category are considered in this chapter and also in chapter 11. The second category is considered in Chapter Nos. 6, 7, and 11. The third category is dealt with in Chapter Nos. 8 and 11. 10.3.1 When Successful Tenderer Refuses to Perform Contract - Earnest Money Cannot Automatically be Forfeited Upon acceptances of a lender, a conlracl is concluded. A conlracl is a conlracl from ihe lime il is made and nol from ihe lime that performance is due. If a tenderer wanls lo back out after his tender is accepted he commits breach of the contract. The owner can terminate the contract under the provisions of Section 39. Section 64 of the Contract Act, however, requires that he should restore any benefits received under the contract. Usually a tender is accompanied by earnest money deposit. This clearly is the benefit received by the owner. The contractor would, thus, be entitled to get back the earnest money. However, the owner is entitled under Section 75 to recover damages, which he sustained by reason of the contractor's refusal. If by reason of wrongful repudiation of a contract by the contractor, the owner lawfully puts an end to the contract and in the process suffers loss, the contractor must make good that loss. If the loss is more than the earnest money received along with the tender, the owner can recover the difference from the contractor, by taking adequate legal steps, if necessary. If, however, the loss suffered by the owner is less than the amount received by way of the earnest money, the law is that he should, after deducting the sum necessary to make good his loss, return the balance of the earnest money to the contractor. This is true even where the tenderer has agreed to the express stipulation that "the earnest money will be forfeited to the owner in full", if he fails to adhere to the terms and conditions of the contract. ILLUSTRATION The defendant had invited tenders for the removal of zinc dross and zinc ash at Mettur Dam. The plaintiff submitted a tender along with Rs. 5.000/- by way of earnest money in accordance with the tender notice. Later the parties broke up and the plaintiff called upon the defendant to return the deposit. The defendant, however, contended that the defendant was entitled to

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forfeit the amount under clause 9 of the tender notice. Thereupon the plaintiff filed the suit. Clause 9 of the Instructions to Tenderers provided as under; "If the tenderer fails to adhere to the terms and conditions prescribed in the tender or backs out when his tender is accepted, his deposit mentioned above will be forfeited to the Corporation in full. If the tenderer fails to take delivery of the materials within the time limit prescribed, the earnest money deposit will be forfeited to the Corporation in full as a penalty. Besides, the materials will then be disposed of, otherwise and loss if any in total value between the accepted tender rates and the value realised on such disposal will be made good from defaulting tenderers." Considering the above facts, it was held:3 "The conclusion, that with the acceptance of the tender ... a contract resulted, carries with it the consequence that the plaintiff committed a breach of the contract, because it was not prepared to share the business with another. The defendant would, no doubt, be enlilleci lo 3

M.M.& M. Refinery, Bangalore v. M.S.S.I. Corp., AIR 1874 Mad. 39.(42). recover damages which il sustained by reason ol' the plaintiffs default,

but even so, il must, return the sum of Rs.5,000/- which it got from the plaintiff. This is because of Section 64 of the Contract Act,

The learned Judge referred to the provisions of Sections 64 and 75 and interpretation of these sections by their Lordships of the Privy Council in a well-known case4. In that case the plaintiff had committed the breach, but it was contended on his behalf that, even so, he was entitled to the refund of the sum paid by him. This contention was rejected by the Courts below, but was upheld by their Lordships of the Privy Council, on the wording of Section 64 of the Contract Act. Their Lordships pointed out that, though the defendant might have sustained damages, they would have to prove the same and could only setoff those damages against the plaintiffs' claim. They observed : "On general principles they may set-off such damages as they have sustained, but the Act requires that they give back whatever they received under the contract". The contention of the defendant in the Madras case under discussion, that even without proving any damage sustained by it, it would be entitled to forfeit the sum of Rs. 5,000/ under clause 9 of the tender notice was not accepted by the High Court. This decision of the High Court, it is submitted, is in conformity with the law laid down by the Supreme Court of India. The right to retain security money in full without proof of actual damage can only be entertained under Section 74 of the Contract Act. The scope and applicability of Section 74 was considered by the Supreme Court in a couple of cases5. The Principle laid down by their Lordships of the Supreme Court amply makes it clear that "when it comes to the question of forfeiture of the security money because of the breach the sum forfeited does not, ipso facto, become reasonable compensation if actual loss can be proved." It may not, however, be necessary for the owner to file a suit to recover the damages to the extent of the earnest money deposit. The owner if satisfied with the forfeiture of the earnest money may retain the earnest money. However, if the contractor files a suit for recovery of the earnest money, the owner should set up a plea of equitable set-off in his written statement, if it is not time-barred on the date of the plaintiff's suit. It would be appropriate to explain the juristic principle further. Equitable set off is allowed where it arises out of the same transaction, which is the basis of the plaintiff's claim and where it would be inequitable to drive the defendant to a separate suit.

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Where, however, the loss to the owner is more than the earnest money, the owner must take the initiative in filing a suit if he desires to recover damages. Such a suit must be filed within the period of limitation. The loss sustained by the owner may include a sum of money by which the tender sum of another contractor, whose tender the owner had to accept, exceeds the sum tendered by the defaulting contractor. The fact that the defaulting contractor's liability is not limited to the extent of earnest money/security deposit but extends to make good the full loss is illustrated by the following cases. 4 5

Murlidhar Chatterji v. International Film co., AIR 1943 P.C.43. S. A. Bhat v. V. N. Inamdar, AIR 1959, Bon. 452; Fateh Chand v. Balkishan Dass, AIR 1963 SC 1405; and Maula Bux v. Union of India, AIR 1970 SC 1955.

ILLUSTRATIONS

( 1 ) The government advertised bids in surplus materials. The important terms of the invitations were as under : (1) Each bidder to deposit a specified amount with the government agency; which would stand

forfeited by withdrawal of a bid, (2) If the person to whom the contract was awarded refused to go ahead with the purchase, the government could : (a) terminate the contract, (b) sell the material to another party, (c) charge the party who refused to enter into the contract of purchase with any damages the government might sustain. On the above facts, it was held that the contractor's liability was not only limited to the security deposit which he would forfeit but also extended to making good the full loss the government sustained by selling the materials to some one else at a lower price.6 (2) Where in respect of works contract for transportation of coal by road transport.the tenderer refused to accept the work order unless a condition for revision of rates was incorporated in the contract, it was held by the Patna High Court that no contract was concluded between the parties and as such earnest money in the form of National Savings Certificates could not be forfeited under Section 74 of the Act. 7

10.4 BREACH BY THE OWNER Similar to breaches of contract by the contractor, the owner too is likely to cornrnit various defaults amounting to breaches of the standard form contract conditions, either express or implied.

10.4.1 When Owner Cancels a Contract Before Work Begins If the owner, after having accepted a tender, abandons the work or otherwise annuls the contract before the work is started by the contractor, the contractor is entitled to receive damages from the owner, subject of course to the terms and conditions of their agreement. In the absence of a stipulation to the contrary in the agreement, the contractor may in such a case, be entitled to the actual damages sustained. The actual damages may include, in addition to preliminary expense, which the contractor may have incurred for starting the work, the amount of profit which he would have received had he performed the contract to its completion.

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The amount of profit that would be lost by the contractor is 'the difference between the contract price and what it would have cost to perform the contract'. But in estimating the cost of performing the contract, a contractor may not use the prices submitted by his subcontractors. The 6 7

United States v. P. J. O'Donnel and Sons, 228 f. 2d, 162 U.S. Court of Appeals, 1956. Arvind Coal & Construction Co. v. Damodar Valley Corpn, AIR 1991 Pat 14; Also see AIR 1970 SC 1986.

'■

advantages and benefits of sub-contracts are loo uncertain and contingent to lie considered in estimating the profits, a general contractor might have made under his contract."

ILLUSTRATION A contract was entered into between the owner and the contractor, the contractor undertaking lo carry out repairs to a building for $ 2000. The contract provided that, if the owner breached the contract, the contractor was entitled to receive 30% of the contract price as liquidated

damages or to sue for the actual damages sustained. The owner cancelled the contract before the work began. The contractor brought in an action to recover $ 600. i.e.30% of the contract price. The Court dismissed the suit on the grounds that the amount of liquidated damages was disproportionate to the actual damages and further actual losses could readily be determined. The suit was, however, dismissed without prejudice, enabling the contractor to start new action and prove the actual damages sustained.9

10.5

DEFAULTS BY OWNER AND/OR CONTRACTOR

The breaches, which lead to failure to perform an obligation in whole, are considered in Art. 10.3 to 10.4 above. These are rare cases. In a great majority of cases there is no total breach but there are defaults in the performance of the contract by either side which result in loss or delay in completion. Building and engineering contracts invariably contain reciprocal promises either express or implied. The legal aspects of breaches of reciprocal promises are considered below and the most common breaches are considered in Chapter 11. The remedies for breaches are dealt with in Chapter 12.

10.5.1

Reciprocal Promises

Section 52 of the Indian Contract Act which deals with reciprocal promises reads as follows: "52. Order of performance of reciprocal promises: - Where the order in which reciprocal promises are to be performed is expressly fixed by the contract, they shall be performed in that order; and where the order is not expressly fixed by the contract, they shall be performed in that order which the nature of the transaction requires."

Order, which the nature of the transaction requires Whereby a statute, property is not transferable without the permission of the authority, an agreement to transfer the property must be deemed subject to the implied condition that the transferor will obtain the sanction of the authority concerned.10 Under Section 47 there can be 8 9 10

Delvin v. Mayor of the City of New York 63 NY 8 P25. Weatherproof Improvement Contracting Corpn. V. Kramer, 172 N.Y.S. 2d 688, Municipal Court of the City of New York, Borough of Bronx. 1958. Natthu Lai v. Phool Chand, AIR 1970 SC 546.

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no bar to the maintainability of a suit for specific performance of an agreement to direct the defendant (seller) to apply for permission under Section 47 and after he obtains it to execute a sale-deed. This result would follow whether or not there was a specific term in the agreement that permission would be obtained under Section 47 and that thereafter 11

a sale-deed will be executed ....... Applying these rules to ascertain the order of performance 12 in a case, it was held: 'The permission of the District Officer/Collector was the essential precondition to the competency of the appellant lo transfer. Therefore, unless he obtained thai permission there was no question and no need of paying the moneys under the terms of the agreement. Therefore, in the very nature of things the permission ought to have been obtained

first as it was the first step in the series of acts to be performed by the respective parties and thereafter the question of payment of moneys would arise. However, to deny a claim for specific performance of an agreement to sell an immovable property in existence or to be brought into existence according to the specification agreed to merely because the vendor had to make applications or move the concerned and competent authorities to obtain permission/sanction or consent of such authorities to make the sale agreed to be made an effective and full-fledged one may not be correct. That unless the competent authorities have been moved and the application for consent/permission/sanction have been rejected once and for all and such rejection made finally became irresolutely binding and rendered impossible the performance of the contract resulting in frustration as envisaged under Section 56 of the Contract Act, the relief cannot be refused for the mere pointing out of some obstacles. 13 The next relevant Section 53 reads: SECTION 53: Liability of party preventing event on which the contract is to take effect. "When a contract contains reciprocal promises, and one party to the contract prevents the other from performing his promise, the contract becomes voidable at the option of the party so prevented; and he is entitled to compensation from the other party for any loss which he may sustain in consequence of the non-performance of the contract". Illustration "A and B contract that B shall execute certain work for A for a thousand rupees. B is ready and willing to execute the work accordingly, but A prevents him from doing so. The contract is voidable at the option of B; and. if he elects to rescind it, he is entitled to recover from A compensation for any loss which he has incurred by its non-performance." No man can complain of another's failure to do something which he has himself made impossible is the rule of all civilized law. It is embodied in Section 53 of the Indian Contract Act. The owner of a construction work is well-advised to fulfill his part of the contract and to give no ground to the contractor, which may be used as an excuse for his non performance and 11 12 13

Syed Jalal v. Targopal Ram Reddy, AIR 1970 AP 19. Bishambhar Nath Agarwal v. Kishan Chand; AIR 1998 All. 195. Nirmala Anand v. Advent Corporation Pvt. Ltd.AIR 2002 SC 2290.

further make the owner liable lo pay compensation. A Privy Council decision illustrates the circumstances in which a contractor's claim lo compensation may be sustainable under this Section. ILLUSTRATION

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A contractor undertook to remove waste rock lying at a dump at the owner's mine within two

years, provided there were not more than fifty thousands tons, the owner agreeing to supply a crusher. The crusher supplied by the owner, was so inadequate, caishing only three tons per hour that the work had to be stopped. It was held that the contractor was entitled to recover the damages for the expense to which he had been subjected to in preparing for the work, and for the loss of profit he would otherwise have made by supplying crushed stone to a third party.14 Where the owner of a project undertakes to provide site of work free from hindrance, good for construction drawings, certain materials like cement, steel, etc. to the contractor for use in the work, the effect of the owner's failure to do what was agreed, is governed by Section 54 of the Indian Contract Act: The said Section reads : SECTION 54 : Effect of default as to that promise which should be first performed, in contract consisting of reciprocal promises - "When a contract consists of reciprocal promises, such that one of them cannot be performed or that its performance cannot be claimed till the other has been performed, and the promisor of the promise last mentioned fails to perform it, such promisor cannot claim the performance of the reciprocal promise, and must make compensation to the other party to the contract for any loss which such other party may sustain by the non-performance of the contract". Illustration (b) "A contracts with B to execute a certain builder's work for a fixed price, B supplying the

scaffolding and timber necessary for the work. B refuses to furnish any scaffolding or timber, and the work cannot be executed. A need not execute the work, and B is bound to make compensation to A for any loss caused to him by the non-performance of the contract". The owner of a building or construction project is duty-bound under the contract to afford the contractor reasonable facilities for the performance of the contract. For example, the owner should permit the contractor to enter on or, to take possession of the site of work without which he cannot perform his work. Also the engineer should supply drawings, designs and other information to enable the contractor to perform the contract. Section 67 of the Indian Contract Act deals with such situations. The Section is reproduced below along with its illustration. SECTION 67 : "Effect of neglect of promisee to afford promisor reasonable facilities for performance: "If any promisee neglects or refuses to afford the promisor reasonable facilities for the performance of his promise, ihe promisor is excused by sucli neglect or refusal as lo any non14 Kleinert v. Abosso Gold Winning Co. (1913) 58 Sol. J. 45.

performance caused thereby."

Illustration "A contracts with B to repair B's house. B neglects or refuses to point out to A the places in which his house requires repair. A is excused for the non-performance of the contract, if it is caused by such neglect or refusal".

The order of performance of reciprocal promises is important. Where the contract stipulates mutual obligations to be performed by the parties, the defendant is not entitled to complain of non-performance of a later obligation by the plaintiff without performing his earlier obligations under the contract (Sections 52 and 54 of the Indian Contract Act).

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ILLUSTRATION In a contract for sale of ore from a mine the defence was raised by the seller that the buyer had not performed its obligations like appointing sampling agent, providing weigh bridge, etc. for not supplying the ore. Rejecting the contention, the Calcutta High Court held that the contract itself indicated the order in which reciprocal obligations were to be performed. It was for the seller to raise the material from the mines and inform the buyer. The obligation of the buyer would arise only thereafter.15 10.6 EXCUSES FOR NON-PERFORMANCE It has been mentioned earlier that every failure to perform an obligation arising out of a contract may not amount to an actionable breach. There are a number of valid excuses for non-performance including the following ones embodied in S. 62 of the Indian Contract Act

"S.62. Effect of novation, rescission and alteration of contract If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed." Illustrations (a)

(b)

A owes money to B under a contract. It is agreed between A, B and C that B shall thenceforth accept C as his debtor instead of A. The old debt of A to B is at an end, a new debt from C to B has been contracted. A owes B Rs. 10,000. A enters into an agreement with B and gives B a mortgage of his (A s) estate for Rs. 5,000 in place of the debt of Rs. 10,000. This is new contract and extinguishes the old.

15 Vyaya Minerals Pvt. Ltd., Plaintiff v. Bikash Chandra Deb,AIR1996, Cal.67 (79)

(c) A owes .B Rs. 1,000 under a contract. B owes C Rs. 1,000. B orders A to credit C with Rs. 1,000 in his books, but C does nol assent to the arrangement. B still owes C Rs. 1,000, and no new contract has been entered into. Section . 62 provides for discharge of contractual obligations where lhe contract is substituted by a new contract or rescinded or altered by all the parlies to it.

10.6.1. Novation The meaning of novation has been thus defined by the House of Lords 16: "that, there being a contract in existence, some new contract is substituted for it either between the same parties or between different parties, the considerations mutually being the discharge of the old contract". Thus, where the parties substitute a new contract in place of the old one, they mutually discharge each other from performing obligations arising out of the old contract; which then neither party need perform. Novation contemplated in Section 62 of the Act therefore involves an annulment of one debt and the creation of another. In every case of this nature one has to consider not only whether the new debtor has consented to assume liability but also whether the creditor has agreed to accept the liability of the new debtor in substitution of the original debtor. In other words,

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novation is not consistent with the original debtor remaining liable in any form, since the essential element of novation is that the rights against the original contractor shall be relinquished and the liability of the new contracting party accepted in its place. Under law therefore one of the requisites of novation is the agreement of the parties to the new contract. Obviously there must be consent of all parties involved.17 An assignment of a contract might result by transfer either of the rights or of the obligations thereunder. There is a well-recognized distinction between these two classes of assignments. The Supreme Court held that obligations under a contract cannot be assigned except with the consent of the promisee and when such consent is given it is really a novation resulting in substitution of liabilities. But rights under a contract are assignable unless the contract is personal in its nature or the rights are incapable of assignment either under the law or under the agreement between the parties.18 Where the contract itself contains the provision for payment of enhanced rates dependent upon a contingency; for example, liability of the tenant to pay a proportionate increase in the municipal taxes, there is no novation.19 One of the essential requirements of 'Novation'; as contemplated by Section 62, is that there should be complete substitution of a new contract in place of the old. It is in that situation that the original contract need not be performed. Substitution of a new contract in place of the 16 17 18 19

Scraf v. Jardine (1882) 7, App. Ca. 345, 351. State Bank of India, Appellant v. Mrs.T. R. Seethavanna ; AIR 1995 KERALA 31 ; Appukutm Panicker v. Anantha Chettiar, 1966 KLJ 708: (AIR 1966 Ker 303); T. M. and Co. v. H.I. Trust, AIR 1969 Calcutta 238. Khardah Co. Ltd. v. Raymon and Co. AIR 1962 SC 1810. Savita Dey v. Nageshwar Majumdar (1995) 6 SCC 274.

old contract which would have the effect of rescinding or completely altering the terms of the original contract, has to be by agreement between the parties. A substituted contract should rescind or alter or extinguish the previous contract. But if the terms of the two contracts are inconsistent and they cannot stand together, the subsequent contract cannot be said to be in substitution of the earlier contract. In one case, the rights under the original contract were not given up as it was specifically provided in the subsequent contract that the rights under the old contract should stand extinguished only on payment of the entire amount of Rupees 9,51,000/-. 20

10.6.2. Rescission Where parties mutually agree to terminate their contract, no party need perform the obligations arising out of such a cancelled contract. If the Supplemental Agreement is valid, it will follow that the same puts an end to the original agreement. Nothing will survive.21

A contract, however, cannot be cancelled or terminated unilaterally unless the contract empowers one party alone to terminate it. It needs to be noted that the right to one party to terminate the contract does not render the contract void. The Supreme Court of India held: "Under general law of contracts any clause giving absolute power to one party to cancel the contract does not amount to interfering with the integrity of the contract. The acceptance of the argument regarding invalidity of contract on the ground that it gives absolute power to the parties to terminate the agreement would also amount to interfering with the rights of the parties to freely enter into the contracts. A contract cannot be held to be void only on this ground. Such a broad proposition of law that a term in a contract giving absolute right to the parties to cancel the contract is itself enough to void it cannot be accepted."22 A Division Bench of Bombay High Court held in a case that the provision empowering a party to put an

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end to the contract after one year by giving 30 days notice is not unconscionable or opposed to public policy.23

Effect on Arbitration Clause An arbitration clause is a collateral term of a contract as distinguished from its substantive terms; but none-the-less it is an integral part of it. However comprehensive the terms of an arbitration clause may be, the existence of the contract is a necessary condition for its operation, it perishes with the contract. The contract may be non est in the sense that it never came legally into existence or it was void ab initio or the contract was validly executed, the parties may put an end to it as if it had never existed and substitute a new contract for it solely governing their rights and liabilities thereunder; in the former case, if the original contract has no legal existence, the arbitration clause also cannot operate, for along with the original contract, it is also void; in the latter case, as the original contract is extinguished by 20 21 22 23

Lata Construction v. Dr. Rameshchandra Ramniklal Shah; AIR 2000 SC 380; 1999 AIR SCW 4518. Unikol Bottlers Ltd., M/s v. M/s. Dhillon Kool Drinks, AIR 1995 Del. 25. H. H. M. Shantidevi P. Gaikwad v. Savjibhai Haribhai Patel; AIR 2001 SC 1462;= 2001 AIR SCW 1240. O.N.G.C. Ltd. V. Streamline Shipping Co. Pvt. Ltd., 2002 (Suppl.) Arb. LR 145 Bombay (DB).

the substituted one, the arbitration clause of the original contract perishes with it. In between the two falls many categories of disputes in connection with a contract, such as the question of repudiation, frustration, breach etc. In those cases it is the performance of the contract that has come to an end, but the contract is still in existence for certain purposes in respect of disputes arising under it or in connection with it. As the contract subsists for certain purposes, the arbitration clause operates in respect of these purposes. 24

10.6.3. Alteration Alteration in the contract, mutually agreed to, frees the parties from performing the old contract. It needs to be noted that the original terms of the contract continue to be the part of the contract and are rescinded or superseded except in so far as they are inconsistent with the modifications.25 The consideration for the variation lies in the mutual abandonment of existing rights or conferring new benefits by each party on the other or in the assumption of additional obligations or incurring additional liabilities or increased detriment. While assuming 'increased detriment' a party may gain a 'practical advantage', which can be considered as sufficient consideration. A unilateral declaration by one party alone cannot constitute a variation unless the contract empowers a party to do so and will amount to breach of contract entitling the other party to damages or right to repudiate the contract, as the case may be. Where the Government department agrees to supply certain machineries to the contractor at fixed rates, it cannot enhance the rates unilaterally unless there is a provision to that effect in the contract.26

10.6.4 Non-Performance not Excused Because of Unexpected Expense, Difficulties, Strikes or the Like Abnormal Increase In Prices

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The Contract Act does not enable a party to a contract to ignore the express covenants thereof, and to claim payment of consideration for performance of the contract at rates different from the stipulated rates, on some vague plea of equity. If, on the other hand, a consideration of the terms of the contract in the light of the circumstances existing when it was made, shows that they never agreed to be bound in a fundamentally different situation which has now unexpectedly emerged, the contract ceases to bind at that point not because the Court in its discretion thinks it just and reasonable to qualify the terms of the contract, but because on its true construction it does not apply in that situation.27

24 25 26 27

Union of India v. Kishorilal Gupta and Bros. AIR 1959 SC 1362. Juggilal Kamalpat v. NV Internaional Credit-En-Handels Vereeniging 'Rotterdam'.AIR 1955 Cal.65. State of A.R v. Pioneer Construction Co., AIR 1978 AP 281; Also see: Magnum Films v. Golcha Properties Pvt. Ltd., AIR 1984 Del. 162. . Alopi Parshad v. Union of India, AIR 1960 SC 588.

ILLUSTRATION briefly stated the facts involved in the case were as

under 28::

The defendant, by its purchase order dated 5.2.1973, entered into a contract with the plaintiff for the supply of and installation of eighteen power transformers, etc. The contract between the parties was a firm price contract without provision for any escalation on any account. The delivery of equipment was to commence after ten months from the dale of lhe purchase order and was to be completed in the fourteenth month. Admittedly, six out of eighteen power

transformers were dispatched on various dales after the delivery period was over. The value of the equipment dispatched and delivered was about two-thirds of the value of the entire transformers and the rest of the twelve transformers were not supplied, though four were tested. Extension of time was granted up to 31.3.1975. The defendant terminated the contract on 3.9.1975 and 18.9.1975.The Plaintiff contended that they were prevented from supplying, due to force majeure conditions namely, strikes, power cuts, and phenomenal increase in the cost of transformer oil (400%) due to war conditions, etc. It was contended that the termination was unilateral and illegal. The disputes were referred to an umpire by the order of the Madras High Court. The umpire allowed the claims of the plaintiff for the price variation applicable to the six transformers supplied as also for oil transformers so supplied, etc. The defendants contended in the High Court, holding that the contract was a firm price contract With no provision for escalation on any account and at the same time by allowing escalation, the umpire committed an error apparent on the face of the record. After referring to the Supreme Court decisions mentioned above, it was held a: "...in the present case, it can be safely held that the above mentioned increase in price due to war condition, is an untoward event or change of circumstances which "totally upsets the very foundation upon which parties rested their bargain." Therefore, EASUN (the plaintiff) can be said to be finding itself impossible to supply the transformers which it promised to do. ...In the circumstances, I do not think there is any error apparent on the face of the record, in the award passed by the Umpire..." The facts of this case and this decision only confirm entitlement of price rise to a party in spite of the contract to the contrary if the factual matrix under which the contract was entered into totally changes to upset the calculations, it is submitted.29

Unexpected difficulties

Chapter-10

467

Breach o f Contract

There is a fairly established principle that a contract is not discharged by frustration merely because the promisor suffers loss or meets with difficulties in the execution of the contract. It is a settled rule that where a person by his contract or agreement charges himself with an obligation possible to be performed, he must perform it, and he will not be excused therefrom because of unforeseen difficulties, unusual unexpected expense, or because it is unprofitable or impracticable.30 28 29 30

Easun Engineering Co. Ltd. v. Fertilisers and Chemicals, Travancore Ltd.., AIR 1991 Mad. 158. Tarapore & Co.v. Cochin Ship Yard Ltd.(1984) 2 SCC 680 (715). Clinchfield Stone Co. v. Stone 254. S.W. 2d Court of Appeals of Tennessee, 1952.

A parly lo a conlracl can always safeguard his inleresl against unforeseen contingencies by express provisions made in the contract. If he voluntarily undertakes an absolute and unconditional obligation he cannot complain merely because events turned oui to his disadvantage. Mere difficulty, or the need lo pay abnormal prices cannol excuse a party from fulfilling his part of the contract unless the factual matrix on which ihe contract was based has changed as already stated."

ILLUSTRATION The contractors in a case undertook to build 78 houses for a fixed sum of £ 94,424. Owing to an unexpected shortage of skilled labour and certain materials the contract took 22 months to complete and cost some £115,000. The House of Lords did not accept the contention of the contractors that under the circumstances, the contract had been frustrated and they were entitled to claim on a quantum meruit for the cost actually incurred. It was held by their Lordships, that the mere fact that unforeseen circumstances had delayed the performance of the contract, and rendered it more onerous to the contractors, did not discharge the agreement. The ultimate situation was still within the scope of the contract. "The thing undertaken was not, when performed, different from that contracted for32.

10.7 DOCTRINE OF FRUSTRATION Most legal systems make provision for the discharge of a contract where, subsequent to its formation, a change of circumstances renders the contract, legally or physically impossible of performance. In India it is embodied in Section 56 of the Contract Act. That Section embodies the doctrine of frustration. "SECTION 56: Agreement to do impossible act.- An agreement to do an act impossible in itself

is void : "Contracts to do acts afterwards becoming impossible or unlawful. - A contract to do an act

which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful. "Compensation for loss through non-performance of act known to be impossible or unlawful-

Where one person has promised to do something, which he knew, or with reasonable diligence, might have known, and which the promisee did not know to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise". Illustrations (a) "A agrees with B to discover treasure by magic. The agreement is void. (b) A and B contract to marry each other. Before the time fixed for the marriage, A goes mad. The contract becomes void. 31 32

Mahadeo Prasad v. Calcutta D & C Co. AIR 1961 Cal 70; Satyabrata v. Mungerneeram Bangur and Co. AIR 1954 SC 49. Davis Contractors LTd. v. Fareham U.D.C (1956), A.C. 696.

468

Building and Engineering ('onlracts

( c ) A contracts to marry B, being already married to C, and being forbidden by the law lo

which he is subject lo practice polygamy. A must make compensation to B for the loss caused to her by the non-performance of his promise. (d) A contracts to lake in cargo for B al a foreign port. A's Government afterwards declares war against the country in which the port is situated. The contract becomes void when war is declared. (e) A contracts lo acl al a theatre for six months in consideration of a sum paid in advance by B. On several occasions A is too ill to act. The contract to act on those occasions becomes void." According to the first paragraph, where parties purport to agree to do something obviously impossible, they must be deemed not to be serious or not to understand what they are doing. Also a promise to do something obviously impossible is no consideration. According to the second paragraph, if due to some event the performance becomes impossible or illegal, the contract becomes void when such an event takes place. It is clear from the third paragraph of the Section that a contractor must take care, before entering into an agreement, to see that what he is agreeing to is possible to perform. If he fails to use reasonable diligence to deterrnine whether the performance would be possible and legal he would be liable to the owner, if at a later stage the performance becomes impossible or illegal. Where the owner had obtained a license to execute certain repair works to his house and engaged the contractor to do the work who, having innocently exceeded the amount of the license, claimed the excess amount spent was denied the recovery. It was held that the prohibition on doing unlicensed work was absolute and did not depend on the contractor's state of mind. The owner, thus had the benefit of the work without having to pay for it.33 Similarly, it may be noted here that performance is not rendered impossible for the purpose of Section 56 of the Indian Contract Act merely on account of a strike of the workmen employed 'in executing the work under a contract 34 The doctrine of frustration of contract cannot apply where the event which is alleged to have frustrated the contract arises from the act or election of a party.35

10.7.1 Essential Conditions for Applicability of Section 56 In order that the principle of impossibility of performance may apply, the following conditions must be satisfied: (a) (b) (c) (d)

33 34 35

There must be a valid and subsisting contract between the parties Some part of the contract must yet be unfulfilled The contract after it is made becomes impossible That the impossibility is not on account of some event which the promisor could not prevent or anticipate, and

Bostel Brothers Ltd v. Hurlock, Court of Appeal (1949) 1 KB 74. Hari Laxman v. Secretary of State, (1927), 52 Bom 142, 30, Bom L.R. 49. 108,1.C. 19(28) A.B. 61. Boothalinga Agencies, Appellant v. V. T. C. Poriaswami Nadar, Respondent. AIR 1969 SC 110.

When Ihe above conditions are satisfied, Ihe conlracl becomes void when Ihe act becomes impossible.

10.7.2

Meaning of Impossible

469

Building and Engineering Contracts (e) Thai Ihe impossibility is not self-induced by ihe promisor or due to his negligence.

The word impossible has not been used, in the sense of physical or literal impossibility. The performance of an act may not be literally impossible but it may be impracticable and useless from the point of view of the object and purpose which the parties had in view; and if an untoward event or change of circumstances totally upsets the very foundation upon which the parties rested their bargain, it can very well be said that the promisor finds it impossible to do the act which he promised to do. In a case their Lordships of the Supreme Court observed:.36 "Section 56 of the Contract Act lays down a rule of positive law and does not leave the matter to be determined according to the intention of the parties. The impossibility contemplated by Section 56 of the Contract Act is not confined to something, which is not humanly possible. If the performance of a contract becomes impracticable or useless having regard to the object and purpose the parties had in view then it must be held that the performance has become impossible. But the supervening events should take away the basis of the contract and it should be of such a character that it strikes at the root of the contract." An example, where it may not strike to the root, the case decided by the Supreme Court, may be useful. In the said case textile undertaking was nationalized and thereby assets got vested in Government, the plea by surety that vesting of assets in Government has frustrated contract of guarantee was held as not tenable. Contract of guarantee has no co-relation with the Nationalization Act. It is an independent contract and in all fairness has to be honoured to fulfill the contractual obligation between the surety and the creditor - Recourse to S. 141 is also not available to surety.37 There can be no doubt that a man may by an absolute contract bind himself to perform which subsequently however becomes impossible, or to pay damages for the nonperformance and this interpretation is to be placed upon an unqualified undertaking, where the event which causes the impossibility was or might have been anticipated and guarded against in the contract, or where the impossibility arises from the act or default of the promissor. But where the event is of such a character that it cannot reasonably be supposed to have been in the contemplation of the contracting parties when the contract was made, they will not be held bound by general words which, though large enough to include, were not used with reference to the possibility of the particular contingency which afterwards happened. It is on this principle that the act of God is in some cases said to excuse the breach of a contract. The Latin maxim referred to in the English judgment "lex nun cogil ad impossibilia" also expressed 36 37

Satyabrata Ghose, v. Mugneeram Bangur and Co. and another,.AIR 1954 SC 44. I. F. C. I. Ltd. v. Cannanore Spg. and Wvg. Mills Ltd.; AIR 2002 SC 1841= 2002 AIR SCW 1822.

as "impolentia excusat legem" in common English acceptance means, the law does nol compel a man lo do lhal which he cannot possibly perform. There ought always thus lo lie an invincible disability lo perform lhe obligation and lhe same is akin lo lhe Roman maxim "nemo lenelur ad impossibilia". In Broom's Legal Maxims the slate of lie situation has been described as below: It is, then, a general rule which admits of ample practical illustration, thai impotentia excusat legem; where the law creales a duty or charge; and the party is disabled to perform il without any default in him, and has no remedy over, there lhe law will in general excuse him and though impossibility of performance is in general no excuse for not performing an obligation which a party has expressly undertaken by contract, yet when the obligation is one implied by law, impossibility of performance is a good excuse. Thus in a case in which consignees of a cargo were prevented from unloading a ship promptly by reason of a dock strike, the Court, after holding lhat in the absence of an express

470

Building and Engineering Contracts (e) Thai Ihe impossibility is not self-induced by ihe promisor or due to his negligence.

agreement to unload in a specified lime there was implied obligation to unload within a reasonable time, held that the maxim lex non cogit ad impossibilia applied, and Lindley, L.J., said : "We have to do with implied obligations, and I am not aware of any case in which an obligation to pay damages is ever cast by implication upon a person for not doing that which is rendered impossible by causes beyond his control." A few illustrations, wherein the contracts were held to be frustrated, and not frustrated will make this point clear. ILLUSTRATIONS (I) In a case decided by the Supreme Court of India an agreement to lease certain lands was concluded in January 1947. The contract between the parties provided that the lease deed of the lands should be registered within 15 days from the date of acceptance of the tender. For one reason or the other, the contemplated lease deed was neither executed nor registered. The land in question became part of Pakistan as a result of the partition of India. Even before the partition both parties to the agreement had migrated to India because of communal disturbances. Considerable evidence was led in the case to establish that even before the partition of India took place, because of serious communal trouble it was not possible for the tenderer to go to the place either to cultivate the lands or even to collect the rent from those who were cultivating it. Under these circumstances the tenderer called upon the owner of the land to refund the amount deposited as security for payment of rent and a sum of Rs.200G7- as damages. The owner declined to comply with the demand. Thereafter the tenderer filed a suit claiming a decree of Rs.36,000/-. It was held by the Supreme Court:38 "From the facts found in this case it is clear that ... the agreement between the parties relating to taking possession of the properties also became impossible to perform. There ere we agree with the Trial Court as well as the Appellate Court that the contract had become impossible to perform". (2) 38

In another case the contract was regarding the sale of right to collect pig dung in Sushila Devi v. Hari Singh, AIR 1971 SC 1756.

a Municipal area. The plaintiff was the Municipal Council. The suit was Hied for recovery of the balance amount and penalty from the defendant who was the contractor for collecting pig dung. The suit was contested on the ground that the owners of the pigs removed the dung as of right and prevented the defendant from collecting it. As such the contract became impossible to perform and the defendant was discharged of his obligation under the contract to pay the balance. On these facts it was held by the A. P. High Court19 : "The contract between the parties rested upon the fundamental condition that the dung becomes available to the purchaser and when the said event did not happen due to no

fault of either party to the bargain, there is a clear case of frustration of the contract". (3) Where, in a contract for the supply of milk containers to the government of India, the containers were to be coated with 'hot dip tin coating', the tin ingots were not available in the open market and the Government did not release the ingots, it was held that the contract was void for impossibility of performance40. (4) The plaintiff, in one case agreed to supply certain quantity of eucalyptus firewood from plantations which were leased to the plaintiff by the TN Forest Plantation Corporation. The plaintiff did not supply the total quantity of specified quality of firewood. He alleged that he was not aware of the shortage of that type of firewood at the time of entering into the contract. It was held 41:

471

Building and Engineering Contracts (e) Thai Ihe impossibility is not self-induced by ihe promisor or due to his negligence.

"The doctrine of frustration is based not only on the physical or literal impossibility of the performance of the agreement but also on circumstances which make it impossible or illegal for a contracting party to perform the contract. ..It is clear from S. 56 that where a person has promised to do something which he knew, or with reasonable diligence might have known and which die promisee did not know to be impossible or unlawful, such a promisor must take compensation to such promisee for any loss sustained by him. The Court has to necessarily examine the contract, the circumstances under which it was made and whether the promisor could have been reasonably aware of the impossibilities of die performance. Courts cannot absolve a party from the liability to perform a contract merely on the ground that it has become more onerous. Express covenants in a contract cannot be lightly brushed aside when it was well within the knowledge of the promisor at the time of die contract itself that it would not be possible for him to perform.the agreement. ..As the plaintiff, in the instant case, could have ascertained what quantity of firewood there was in the plantations before entering into the contract with the defendant, he could not contend that he was not aware of its details. "The plea of frustration was not accepted. (5) The agreement recorded that the owner decided to have the construction of five godowns to be given on rent to the Food Corporation of India as agreed by the said Corporation. The conditions that were enumerated in the said agreement relate to the modes of construction and particulars regarding payments. As far as the agreement is concerned, it is necessary to reproduce Clause 4 thereof in the context of the question under consideration. Clause 4 was in the following terms : "The said contractor shall build 39 40 41

Markapur Municipality v. Doda Ramireddy, AIR 1972 AP 299. Punj. Sons Pvt. Ltd v. Union of India, AIR 1986 Del. 158. M/s Gwalior Rayon Silk Mfg Co. Ltd. v. Andavar & Co. AIR 1991 Ker. 134.

and. completely finish the said godowns on or before 31st May, 1978. unless prevented by any labour strike, accident or any other major disturbances." It was contended that due to delay in construction the agreement was frustrated. Evidence showed that there were other parties to take the godown on hire. It was held that the Clause 4 would at once make it clear that the condition of completion of the construction on or before May 31, 1978 had no relation of any kind to the situation of impossibility or frustration. The condition itself makes il clear lhal if the plaintiffs are prevented by any labour strike, accident or any major disturbances, relaxation of the condition to complete the construction on or before May 31, 1978, would not be fatal to the performance of the contract as is available from the said condition. Thus the agreement itself cannot be said to be containing any element of frustration or impossibility.42 (6) An agreement clearly provided that the dispute between die parties should be settled by arbitration in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce. Article 8 of the ICC Rules provides that where die parties had agreed to submit to arbitration by the International Chamber of Commerce they shall be deemed thereby to have submitted ipso facto to the present Rules. It was urged by the petitioner that the cost of arbitration was prohibitive and hence the agreement stood frustrated. It was held: " Having specifically agreed to the application of the ICC Rules it cannot now turn around and say that lhe cost of the arbitration being formidable, the agreement stands frustrated as the same is incapable of being performed. ..No event has taken place which was not in the contemplation of the parties to the contract. ..The parties knew what they had bargained for. Therefore, there is no event which has intervened to frustrate the agreement. In these circumstances, it is not a case in which the doctrine of frustration of the arbitration agreement can be invoked.43

472

Building and Engineering Contracts (e) Thai Ihe impossibility is not self-induced by ihe promisor or due to his negligence.

10.8 EFFECT OF FRUSTRATION It is settled that when there is frustration of contract the dissolution of the contract occurs automatically and it does not depend on the ground of repudiation or breach or on the choice or election of either party but it depends on the effect of what had actually happened on the possibility of performing the contract.44 For example, a contract for construction of a reservoir to be completed within six years was awarded in 1914. The contract contained the usual provision empowering the engineer to grant extension of time. In February 1916 the work was ordered to be stopped under wartime powers by the concerned Ministry. Considering the fact that if the power to extend time was exercised it was not impossible to perform, but the House of Lords held that a contract, if resumed after the war, would amount to a new contract.45 Section 65 of the Indian Contract Act deals with the consequences of void contract under Sections 32 and 56 of the Act. It reads: 42 43 44 45

C. T. Xavier v. P. V. Joseph; AIR 1995 Ker. 140. Eacom's Controls (India) Ltd., Petitioner v. Bailey Controls Co. AIR 1998 Del. 365. Ahmed Khan v. Jahan Begum, AIR 1973 All. 529. Metropolitan Water Board v. Dick Kerr & Co. Ltd. House of Lords, (1918) AC 119.

'SfXTION 65 : "Obligation of person who has received advantage under void agreement or contract that becomes void. When an agreement is discovered to be void or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound lo restore it, or to make compensation for it, to the person from whom he received it".

Illustrations (a) A pays B 1,000 rupees in consideration of B's promising to marry C, A's daughter. C is dead at the time of the promise. The agreement is void, but B must repay A the 1,000 rupees. (b) A contracts with B to deliver to him 250 maunds of rice before the 1st of May. A delivers 130 maunds only before that day and none after. B retains the 130 maunds after the 1st of May. He is bound to pay A for them.

(c) A, a singer, contracts with B, the manager of a theatre to sing at his theatre for two nights in every week during the next two months, and B engages to pay her a hundred rupees for each night's performance. On the sixth night A willfully absents herself from the theatre, and B, in consequence, rescinds the contract. B must pay A for the five nights on which she had sung. (d) A contracts to sing for B at a concert for 1,000 rupees, which are paid in advance. A is too ill to sing. A is not bound to make compensation to B for the loss of the profits which B would have made if A had been able to sing, but must refund to B the 1,000 rupees paid in advance. The Section makes a distinction between an agreement and a contract. According to Section 2 of the Contract Act an agreement which is enforceable by law is a contract and an agreement which is not enforceable by law is said to be void. Therefore, when the earlier part of the Section speaks of an agreement being discovered to be void it means that the agreement is not enforceable and is, therefore, not a contract. It means that it was void. It may be that the parties or one of the parties to the agreement may not have, when they entered into the

46 Kuju Collieries Ltd. v. Jharkhand Mines Ltd.; AIR 1974 SC 1892.

473

Building and Engineering Contracts (e) Thai Ihe impossibility is not self-induced by ihe promisor or due to his negligence.

agreement, known that the agreement was in law not enforceable. They might have come to know later that the agreement was not enforceable. The second part of the Section refers to a contract becoming void. That refers to a case where an agreement which was originally enforceable and was, therefore, a contract, becomes void due to subsequent happenings. In both these cases any person who has received any advantage under such agreement or contract is bound to restore such advantage, or to make compensation for it to the person from whom he received it. But where even at the time when the agreement is entered into, both the parties knew that it was not lawful and, therefore, void, there was no contract but only an agreement and it is not a case where it is discovered to be void subsequently. Nor is it a case of the contract becoming void due to subsequent happenings. Therefore, Section 65 of the Contract Act will not apply.46

10.8.1 Frustration and Terms of Contracts The question of the effect of express terms in the agreement may have to be decided before concluding that a particular event is a frustrating event. A couple of illustrations may help in answering this question.

ILLUSTRATIONS (1) By contracts entered into between March and November 1971, the Respondents who were building two blocks of Hats in Hong Kong agreed to the sale flats under construction. The construction work began in December. 1971. The date stipulated in the contract for completion of the work was 17th May 1973. The agreement, which made time to be of the essence of the contract, also incorporated provisions in certain circumstances for extension of time for not more than one year. hi June 1972, part of the hillside above the building site slipped taking with it a thirty-storey block of flats. The entire debris landed on the site of work obliterating the building works already completed. Work was stopped and because it could not be recommenced within three months, the building permit of the vendors came to an end. A new permit was not issued until November 1975, by which time; the maximum extension contemplated by the parties had elapsed. The agreement contained an express stipulation " - that notwithstanding anything herein contained— should any unforeseen circumstances beyond the vendor's control arise whereby the vendor is unable to sell the undivided share and apartment to the purchaser - -the vendor shall be at liberty to rescind the agreement forthwith and to refund the purchaser all installments of the purchase price paid- - without interest or compensation" It was held that the above express stipulation should not be read as applying to the kind of "frustrating event". The contract was frustrated.47 (2) A contract for the construction of an underground railway to be completed within a fixed period was entered into on the basis that the work was to be carried out on a sevenday, three-shift basis. The work was accordingly started but it was noisy and third parties affected by the work obtained injunctions restraining the activities at the site on evenings and on Sundays. The contracting company commenced arbitration proceedings claiming an addition to the contract price. Two contentions were raised. Firstly, it was contended that an implied term deserves to be read in the contract that if the contractor was restrained by injunction from working as planned, the railway authority would indemnify the contractor against the additional costs. Secondly, in the alternative, it was contended that the

474

Building and Engineering Contracts (e) Thai Ihe impossibility is not self-induced by ihe promisor or due to his negligence.

contract had been frustrated by the grant of the injunction. It was held by the High Court of Australia that no term was to be implied but the contract had been frustrated by the grant of injunction. It was held that the performance of the contract with the new stipulation was fundamentally different from the performance in the situation contemplated in the contract48. 47 48

10.8.2

Wong LaiYing v. Chinachem Investment Co. Ltd. P.C. (1979) 13 BLR 81. Codelfa Construction Propriatary Ltd. v. Steel Rail Authority of New South Wales, High Court of Australia (1982) 149 CLR 337.

Death or illness of Party

Impossibility contemplated by Section 56 of the Conlracl Acl is both subjective and objective. When impossibility is due to the incapacity of the parly who has undertaken Ihe work, it is known as subjective impossibility. Such incapacity may be due to death or serious illness of the parly. It becomes a valid excuse for non-performance of contractual obligations in respeel of contracts for strictly personal services. For example, death or serious illness of a Consulting Engineer would relieve him of his contractual obligations of providing professional services. Subjective impossibility may not ipso facto become an excuse in the case of a typical building or construction contract. Most contracts therefore, include a clause, which empowers the owner, upon death of the contractor, to terminate the contract without liability to pay damages, if the legal representatives of the contractor are not capable of carrying out and completing the contract.

10.8.3

Bankruptcy of contractor

On the bankruptcy of a contractor, or liquidation of a company where the contractor is a company, the burden and benefit of his contract pass to the trustee in bankruptcy or to the liquidator respectively. Most construction contracts, however, provide for such contingencies by including a "forfeiture" clause in the contract which can be enforced in such cases.

10.8.4

Bankruptcy of Owner

Apart from the special provisions of any formal contract, on the bankruptcy of the owner, the contractor is entitled to determine the contract and claim in the bankruptcy proceedings as an ordinary creditor.

10.9 CONSEQUENCES OF BREACH

OF CONTRACT

When breach of a contract takes place the injured party has several alternatives. The injured party may waive the breach or release the other party, or terminate the contract or accept the performance subject to recovery of damages. These alternatives are briefly considered below:

10.9.1 Waiver of Breach Waiver is an intentional relinquishment of a known right, claim or legitimate plea. Breach of contract as already seen, is a failure to perform an obligation under a contract. A breach of the contract by one party may empower the other party to terminate the contract. If the injured party, instead of terminating the contract, continues to treat the contract as a subsisting

4X0

Bidding and Engineering Contracts

obligation, by insisting upon further performance by the wrongdoer or by accepting it, notwithstanding the breach, it will be deemed to have waived the breach, in other words, abandoned its right to terminate the contract. Where a contract provided for compensation for a partial breach of the contract, waiver of breach would not preclude the injured party from recovering any damages suffered on account of the partial breach. For example, failure of a contractor to complete the work within the stipulated period amounts to breach of the contract conditions. When the owner waives the breach by granting an extension of time he thereby may not abandon his right to recover damages for the breach of the contract. He can be well within his rights to accept further performance subject to recovery of damages. However, a few points need to be noted. In die first place, it is elementary that waiver is a question of fact and it must be properly pleaded and proved. No plea of waiver can be allowed to be raised unless it is pleaded and the factual foundation for it is laid in the pleadings. Secondly, waiver means abandonment of a right and it may be either express or implied from conduct, but its basic requirement is that it must be "an intentional act with knowledge.49 There can be no waiver, unless the person who is said to have waived is fully informed as to his right and with full knowledge of such right, he intentionally abandons it.50 Thirdly, to sustain a defence of waiver of breach there must be something in the nature of consideration or an element of estoppel. 51

10.9.2 Accord and Satisfaction An accord and satisfaction emerges from an arrangement under which, the party in defaultpromises to render, and the party who holds the right of action, agrees to accept, some performance differing from that which was originally contracted for and which might legally have been enforced. The accord is the agreement by which the obligation is discharged. The satisfaction is the consideration, which makes the agreement operative. The 'accord' being an agreement and 'satisfaction' (being) its execution or performance, the arrangement appears parallel to novation. However, the accord (i.e. the new agreement) itself does not ordinarily discharge the rights and duties arising out of the original contract but simply holds these in abeyance pending satisfaction (i.e. performance) of such accord. Parties may discharge any kind of contract by this recognized legal method. Formerly it was necessary that the consideration should be executed. Later it was conceded that the consideration might be executory. The consideration on each side might be an executory promise, the two mutual promises making an agreement enforceable in law, a contract. An accord, with mutual promises to perform, is good, though the thing be not performed at the time of action; for the party, has a remedy to compel the performance', that is to say, a cross-action on the contract of accord. If, however, it can be shown that what a creditor accepts in satisfaction is merely his debtor's promise and not the performance of that promise, the original cause of action is discharged from the date when the promise is made.52 ILLUSTRATIONS 49 50 51 52

per Lord Chelmsford, L. C. in Earl of Damley v. London, Chatham and Dover Rly. Co., (1867) 2 HL 43 at p. 57. Halsbury's Laws of England (4th ed) Vol. 16 in papa. 1472 at p. 994; Craine v. Colonial Mutual Fire Insurance Co. Ltd. (1920) 28 CLR 305. M. P. Sugar Mills v. State of. U.P., AIR 1979 SC 621. Cheshire and Fifoot in their Law of Contract. 3rd Ed., on p. 453.

There were three agreements each of which were settled by the parties on acceptable terms, the relevant part of each settlement was as under : (1) "The contractor expressly agrees to pay ............

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Bidding and Engineering Contracts

(2)

The contract on

payment of the amount mentioned in Clause (1) shall stand finally determined."

The relevant part of the settlement of the second contract was :

"The contractor expressly agrees to pay... "The contract stands finally determined and no party will have any further claim against the other". The relevant part of the settlement in respect of the third contract read : "The firm will pay a sum of Rs .......................... In order to provide cover for money payable ........... the firm undertakes to hypothecate their movable and immovable property .............. The firm further undertakes to execute the necessary stamped documents .................. The contracts stand finally concluded in terms of the settlement and no party will have further or other claim against the other." Upon failure of the firm to adhere to the terms of the settlements, the Government wrote a letter to the firm demanding the payment of Rs. 1,51,723 payable under the original three contracts, ignoring the three setdements. The Government referred the matter to arbitration in which the firm participated after challenging the jurisdiction and also the correctness of the claims made. The arbitrator made the award in favour of the Government for a total sum of Rs. 1,16,446 odd in respect of the first and the third contracts and gave liberty to the Government to recover the amount due under the second contract in a suit. The award was fled in the Calcutta High Court. On receiving the notice the firm filed an application for setting aside the award and in the alternative for a declaration that arbitration clause in three contracts ceased to have any effect and stood finally determined by the settlement of the disputes between the parties. The findings of the High Court were as under: The first contract was to be finally determined only on payment in terms of the settlement, and, as such payment was not made, the original contract and its arbitration clause continued to exist. As regards the third contract it was held that by the third settlement, there was accord and satisfaction of the original contract and the substituted agreement discharged the existing cause of action and therefore the arbitrator had no jurisdiction to entertain any claim with regard to that contract. As the award was a lump sum award, not severable, the whole award was held bad. The Government by special leave filed an appeal against the said order of the High Court in the Supreme Court.The relevant part of the majority judgement of the Supreme Court reads5-' : "..lhe only two outstanding questions are: (i) what is the legal effect of the contract dated February 22, 1949, on the earlier contracts? and (ii) does the arbitration clause in the earlier contracts survive after the settlement contract? "The law on the first point is well-settled. One of the modes by which a contract can be discharged is by the same process which created it i.e. by mutual agreement, the parties to the original contract may enter into a new contract in substitution of the old one." Dismissing the appeal, it was held : (as per majority opinion) ; "We have, therefore, no doubt that the contract dated February 22, 1949, was for valid consideration and the common intention of the parties was that it should be in substitution of

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the earlier ones and the parties thereto should thereafter look to it alone for enforcement of their claims. As the document does not disclose any ambiguity, no scrutiny of the subsequent conduct of the parties is called for to ascertain their intention The second question as to whether the arbitration clause in the earlier contracts survived after the settlement contract was answered in the words as follows: "A contract is the creature of an agreement between the parties and where the parties under the terms of the contract agree to incorporate an arbitration clause, that clause stands apart from the rights and obligations under that contract, as it has been incorporated with the object of providing a machinery for the settlement of disputes arising in relation to or in connection with that contract. The questions of unilateral repudiation of the rights and obligations under the contract or of a full and final settlement of the contract relate to the performance or discharge of the contract. Far from putting an end to the arbitration clause, they fall within the purview of it. A repudiation by one party alone does not terminate the contract. It takes two to end it. and hence it follows that as the contract subsists for the determination of the rights and obligations of the parties, the arbitration clause also survives. (2) On default by the debtor to repay the loan, the creditor bank filed a suit to recover the amount with interest. During pendency of the suit, the parties arrived at a compromise according to which the Bank agreed to withdraw the suit, provided the debtor paid the amount within the stipulated time. The debtor requested for extension of time, which was granted. The debtor paid the full amount in installments and requested the Bank to record the full and final settlement of the suit claim. The Bank, however, claimed overdue interest for delayed payments. On these facts it was observed by the Madras High Court: 54 "I may observe that where there has been a true accord under which the creditor agrees to accept a lesser sum, in satisfaction of the debtor and acting upon that accord by paying the lesser sum and the creditor accepts it, then, it is inequitable for the creditor to insist afterwards for the balance or so. ..having received the said compromise amount, it is not open for the plaintiff to claim the overdue interest to the extent of Rs.69,571.20 for which there was no agreement and that under the circumstances, the claim, if any, made by the plaintiff has been directly hit by S.63 of the Indian Contract Act". 53 54

Union of India vs. Kishorilal, AIR 1959 SC 1362. Central Bank of India v. V. G. Naidu & Sons (Leather) Pvt. Ltd. AIR 1992 Mad. 139 (147).

10.9.3

Termination of Contract Through Breach

ll needs lo be noled lhal lo justify termination of a contract, by the injured parly, the breach of

it must be so material as to defeat or render unattainable the very object of the contract. A termination of a contract by the innocent party on account of a breach, which can be characterized as casual, technical or insignificant, might be premature and may render the innocent party liable to pay compensation to the other party. Repudiation by one party does not terminate the contract. It takes two to end.it, and hence it follows that the contract subsists for determination of the rights and obligations of the parties." It is indeed very difficult to lay down general rules to decide whether a particular default is substantial or insignificant, inasmuch as much will depend upon the nature and terms of the agreements. The following case may be considered only as an illustration. ILLUSTRATION

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Upon the sub-contractor's failure to deliver certain materials on the agreed date, the prime contractor granted a I5-days extension. The sub-contractor was specifically told by the prime contractor, while granting the extension, that the extended date was essential to permit him (the prime contractor) to complete the job within the time specified in his contract. When the sub-contractor failed to deliver materials within the extended date the prime contractor cancelled the contract. While dismissing the action brought by the subcontractor to recover damages for breach of contract, the Court held that the failure of the sub-contractor to deliver the parts within the specified time was a material breach of contract, which justified the cancellation of the contract, by the prime contractor.56 As mentioned earlier, consequences of a breach of contract may depend upon the express provisions included in the contract by the parties. Even so the matter may not be easy because the provisions may be scattered in a lengthy document. Further intention of the parties is to be gathered from the document as a whole. As an example, consider an Item Rate Tender and Contract Form B-2 used for public works in various States. Clause 3 of the form, which deals with this aspect, is reproduced here. Provisions in other public works contracts are more or less similar, CLAUSE 3 OF B-2 FORM "In any case in which under any clause or clauses of this contract the contractor shall have rendered himself liable to pay compensation amounting to the whole of his security deposit (whether paid in one sum or deducted by installments) or in the case of abandonment of the work owing to serious illness or death of the contractor or any other cause, the Executive Engineer, on behalf of the Governor of ... shall have power to adopt any of the following courses, as he may deem best suited to the interests of the Government:"(a) To rescind the contract (of which rescission notice in writing to the contractor under the hand 55 56

Damodar Valley Corporation v. K. K. Kar, AIR 1974 SC 159. Vette v. McBride, 118 A, 2D 640, Court of Appeals of Maryland, 1955.

of the Executive Engineer shall be conclusive evidence) and in that case the security deposit of the contractor shall stand forfeited and be absolutely at the disposal of lhe Government. "(b) To employ labour paid by the Public Works Department and to supply materials to carry out the work, or any part of the works, debiting the contractor with the cost of the labour and the price of the materials (as to the correctness of which cost and price the certificate of the Executive Engineer shall be final and conclusive) and crediting him with

the value of the work done, in all respects in the same manner and at the same rates as if it had been carried out by the contractor under the terms of his contract; and in that case the certificate of the Executive Engineer as to the value of the work done shall be final and conclusive.

"(c) To order that the work of the contractor be measured and to take out of his hands such part thereof as shall remain unexecuted and to give it to another contractor to complete, in which case any expenses which may be incurred in excess of the sum which would have been paid to the original contractor, if the whole work had been executed by him (as to the amount of which excess expenses a certificate in writing by the Executive Engineer shall be final and conclusive) shall be borne and paid by the original contractor and shall be

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deducted from any money due to him by the Government under the contract or otherwise or from his security deposit or the proceeds of sale thereof, or a sufficient part thereof. "In the event of any of the above courses, being adopted by the Executive Engineer, the contractor shall have no claim to compensation for any loss sustained by him by reason of his having purchased, or procured any materials, or entered into any engagements, or made any advances on account of, or with a view to the execution of the work or the performance of the contract. And in case the contract shall be rescinded under the provision aforesaid, the contractor shall not be entitled to recover or be paid any sum for any work thereto actually performed by him under this contract unless and until the Executive Engineer shall have certified in writing the performance of such work and the amount payable to him in respect thereof, and he shall only be entitled to be paid the amount so certified." The provisions of the above Clause are applicable under the following circumstances : C) The contractor shall have rendered himself liable for payment of compensation amounting to whole of his security deposit. (ii) In the case of abandonment of the work by the contractor owing to : serious illness, death, or any other cause. (iii) According to the stipulation in Clause 4, of the same form. Clause 3(b) will be applicable if progress of part of the work is not satisfactory in accordance with Clause 2. (iv) According lo Clause 26 of the same form, If the contractor shall assign or sublet, or attempt to assign or sublet, or become insolvent, or commence insolvency proceedings, or make any composition with his creditors, or attempt to do so; any bribe, gratuity, gift, loan, perquisite, advantage, pecuniary or otherwise shall either directly or indirectly be given, promised or offered by the contractor or any of his servants or agents to any public officer or person in the employment of the Government in anyway relating to his office or employment; any such officer or person shall be come in any way directly or indirectly interested in the contract. More often than not, the circumstances contemplated in (i) above, provide the ground for an action to be taken against the contractor. It contemplates the situation when the contractor is liable to pay damages to the extent of 10 per cent of the estimated cost of the work as shown in the tender. There are several clauses which empower the engineer-in-charge to levy penalty for defaults, but the most important among them is Clause 2. That clause provides for compensation for delay in commencing the work, or failure lo maintain the progress, or delay in completion. The clause empowers the Superintending Engineer to decide the amount of penalty to be recovered and further makes his decision final and binding. The Superintending Engineer while deciding the penalty cannot ignore the true interpretation of Clause 27 of the B-2 Form That clause states that all sums payable by a contractor by way of compensation under any of the conditions shall be considered as a reasonable compensation without reference to the actual loss or damage sustained, and whether any damage has or has not been sustained. This clause is so worded as to stamp 'reasonable' any quantum of compensation fixed by the Superintending Engineer. Properly constructed, it means the compensation recoverable should be reasonable under the facts and circumstances of each case. The clause should be so interpreted because it can only provide what the law is on the matter. It is lawful to recover only reasonable compensation and no more. Where there is in fact no loss sustained, the reasonable compensation may be nil or nominal. Further the compensation should be decided by the Superintending Engineer and soon after the happening of the case.

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Before levying penalty the Superintending Engineer must satisfy himself that there is no valid ground for granting an extension of time. (See Chapter 6). If due care is exercised in deciding reasonable compensation and notice thereof is given to the contractor, steps under Clause 3 can be taken soon after the amount of compensation equals the maximum allowed. Clause 3 presents three alternatives: (i) To rescind the contract, (ii) To carry out the remaining work departmentally at the risk and cost of the contractor; iii) To employ another contractor to complete the remaining portion. The clause gives full power to the Executive Engineer to decide the course of action, once the decision to apply Clause 3 is taken. He will, therefore, be required to weigh advantages in making a choice of the three alternatives open to him The choice would depend upon the facts and circumstances of each case, of which the concerned Executive Engineer is undoubtedly the best judge.

Choice Of Alternatives (I) Termination Of Contract: Clause 3(a) provides an advantageous course of action if the contractor has refused to sign the agreement and pay security deposit. It may he a good choice even if he has started or partly done the work, and then abandoned the contract leaving a substantia] portion unfinished. One factor which must weigh in favour of deciding to treat the contract as discharged under clause 3(a) is the probable loss the Government is likely to incur. If the loss is within the limit of the security deposit and can be made good from the amount in the hands of the department, it is in the best interest of the parties to annul the contract.

In this respect it may be noted that the stipulation made in Clause 3(a) that the security deposit shall stand forfeited is qualified by the provisions made in the Indian Contract Act. As already seen. Section 64 requires the security deposit to be returned if the contract is terminated. However, compensation can be deducted from it under Section 75 of the Contract Act. Thus, if reasonable compensation is less than the security deposit the balance may have to be returned to the contractor. Further, if he files a suit for its recovery the actual damage will have to be proved. (II) Execution Of Work Departmentally: The very fact that it was decided, in the first instance, to let out the work to a contractor rather than execute it departmentally might lead one to the conclusion that it was found to be the best course of action in the interest of the department. It would not, therefore, be illogical to consider that the department would, in the event of abandonment of the contract by the contractor, like to get the remaining work completed by some other contractor, However, where the first contractor has substantially completed the work, it would be difficult to get a new contractor to complete the work within a reasonable time and cost. Under the circumstances, the best course would be to keep the contract subsisting and carry out and complete the work departmentally at the risk and cost of the contractor under the provisions of Clause 3(b). Clause 4 rightly recommends the choice of adopting Clause 3(b) when only part of the work is to be taken out of the hands of the contractor. Because a contract cannot be partly terminated, Clause 3(a) and (c) are not applicable. Also no other contractor can be employed with advantage because there would possibly be a lack of co-ordination between the two contractors causing hindrance to each other, responsibility of which would naturally be on the department. (III)To Employ Another Contractor: Having discussed the circumstances under which action under Clause 3(b) can be taken, the choice of adopting Clause 3(c) becomes obvious. The only care that needs to be exercised is that prior to measuring up the work

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done by the contractor, the contractor should be notified in writing to remain present either personally or through an authorized representative at the appointed time for taking joint measures; This would avoid future disputes, which would be difficult to resolve. If in spite of the notice, the contractor remains absent he would have to bear the consequences.

Provisions in other Standard forms Clause 54 of M.E.S. Standard form Contract The said clause empowers the appellant to cancel the contract, only if the contractor "fails 56 See Art. 10.3.1. pp 464.

to complete the works, work order and items of work, with individual dates for completion, and clear the site on or before the date of completion." The said clause further stipulates: "The Government shall also be at liberty to use the materials, tackle, machinery and other stores on site of the Contractor as they think proper in completing the work and the

Contractor will be allowed the necessary credit. The value of the materials and stores and the amount of credit to be allowed for tackle and machinery belonging to the Contractor and used by the Government in completing the work shall be assessed by the G. E. and the amount so assessed shall be final and binding.

"In case the Government completes or decides to complete the works or any part thereof under the provision of this condition, the cost of such completion to be taken into account in determining the excess cost to be charged to the contractor under the condition shall consist of the cost or estimated cost (as certified by G.E.) of materials purchased or required to be purchased and/or the labour provided or required to be provided by the Government as also the cost of the Contractor's materials used with an addition of such percentage to cover superintendence and establishment charges as may be decided by the C.W.E., whose decision shall be final and binding." For taking action under the said clause, the 'failure' must be on the part of the contractor and not by reason of acts of omissions and commissions of the department. The said clause could, thus be invoked only on default on the part of the contractor and not otherwise.57

FIDIC Form 1999 includes under clause 15 most of the circumstances listed in P.W.D. Clause 3 above, empowering the employer to terminate the contract. It also includes clause 16, which empowers the contractor to suspend or terminate the contract. The consequences of termination by either party are also included in the respective provisions, which are selfexplanatory.

FIDIC Form 1992 includes the similar provisions in clause 63 and 69 respectively. MoS & PI, GOI Form includes clauses 59 and 60 dealing with termination by either the employer or the contractor. The said provisions are also self-explanatory.

10.9.4 Doctrine of Specific Performance not Applicable /Under certain well-defined circumstances, an injured party to a contract may institute a suit for and obtain a decree of specific performance whereby the defaulting party is required to live up to the bargain he had made. A party cannot claim specific performance of a contract after repudiating the same and electing to sue for damages. In a suit for specific

57 58

Union of India v. M/s V. Pundarikakshudu, AIR 2003 SC 3209. Ayissabi v. Gopala Konar, AIR 1989 Ker. 134, follows AIR 1928 PC 208 & (1904) ILR 31.

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performance the plaintiff has to be ready and willing to perform his part of the contract and has to treat the contract as subsisting at all times.58 Such a remedy is by no means available in all breach situations and certainly not in respect of construction contracts. The main reasons are : (i) payment of damages by the defaulting party to the injured party affords adequate remedy (ii) superintending performance of a construction contract by a Court would be extremely

difficult, if not impossible.

10.9.5

The Doctrine of Substantial Performance

While according to the rule exacting strict performance, a person who has failed to fully perform his contract is not entitled to any recovery; construction contracts form an exception to this rule. The doctrine of substantial performance is applicable to such contracts. This doctrine usually allows a builder upon substantial performance, to recover the contract price, notwithstanding the work may have been defective or incomplete. The remedy of the owner is the recovery of damages on account of incomplete or defective work.

Meaning of Substantial Performance What amounts to substantial performance depends upon the nature of the contract and is a question of fact and degree in each case and decided cases may be of little use. It is a doctrine judicially evolved to overcome the difficulties of the rule of strict performance of "entire contracts" before being entitled to payment. It can, therefore, mean that on the facts in a case, a court or tribunal can come to the conclusion that there has been sufficient performance of an entire contract notwithstanding defects and omission of non-important parts of the obligations, that is covering cases of both nonfeasance as well as misfeasance but of unimportant matters. This rule may not be available to a party which is guilty of a fundamental breach of having abandoned the contract. This rule can also be excluded by an express provision in the contract. 59

The only guiding principle of some use that can be cited is: "In considering whether there was substantial performance ... it is relevant to take into account both the nature of the defects and the proportion between the cost of rectifying them and the contract price."60

ILLUSTRATION In an action brought by a contractor to recover a balance due under a contract, the owner interposed the defence that the contractor had not completely performed the contract and therefore there could be no recovery. The Court found as a fact that the contractor had substantially performed the contract. The Court, therefore, held that the contractor was entitled to recover the balance due under the contract less the cost of providing remedy to the alleged defects in the work. This judgment was affirmed by the appellate court61 59 60

Hoenig v. Isaccs (1982) T.L.R. 1360 (1952) 2 All ER 176. Botton v. Mahadeva (1972) 1 W.L.R. 1009 (1972)2 All ER 1322. See. Chitty on Contracts, 24th Edn, page 613.

61

Meador v. Robinson, 263, S.W. 2d, 118, Court of Appeals of Kentucky, 1953.

In India, the consequences ol' rescission of a voidable contract are spelled out in Section 64- Under that section as already seen, the owner is obliged to pay for the work done by the contractor. The sum payable may, however, be reduced by an amount necessary to remedy the defective performance.

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10.9.6

Consequences of Common forms of breach of contract by the owner and the contractor and Remedies for breach of contract

Chapter 11 deals with the common breaches of construction contracts and Chapter 12 covers the remedies available to an innocent party

10.9.7

Effect on Arbitration Clause

The case law to answer the question as to what happens to the arbitration clause contained in a contract in which a party pleads full and final settlement or accord and satisfaction was summed up by the Bombay High Court in the Union of India v. M/s. Ajii Mehta & Associates 62 . The following cases were considered: ( i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (IX)

(x) (xi) (xii) It was held:

In AIR 1963 SC 250 (Kapurchand Sodha v. Himayatalikhan Aza-mjah). In AIR 1974 SC 158 (Damodar Valley Corporation v.K.K. Kar). In AIR 1988 SC H72(Union of India v. L.K. Ahuja & Co.). The Bombay High Court in Arbitration Petition No. 123 of 1980. A decision of the same learned Judge in Arbitration Petition No. 81 of 1985 in Award No. 19 of 1985 delivered on March 17, 1986. In AIR 1981 Cal 95 (Union of India v.D.Bose). AIR 1981 Cal on page 101) (Jiwani Engineering Works (P) Ltd. v. Union of India). The decision of the Supreme Court in AIR 1974 SC 158. The decision of the Division Bench of the Calcutta High Court in AIR 1981 Cal 95. In AIR 1984 Guj 41 (Vipinbhai R. Parckh v. General Manager, Western Railway, Bombay). In AIR 1989 Kerala 72 (Cochin Refineries Ltd. v. C. S. Company, Engineering Contractors, Kottayam), and Division Bench decision of the same Court reported in (1987) 1 Ker. LT 241.

"Thus the authorities discussed above can be said to lay down the law that in spite of full and final settlement of the claim, the arbitration clause in the contract may subsist where the party invoking it alleges that in fact there was no accord and satisfaction for some reasons such as the final bill was submitted or receipt was given under coercion, mistake or misrepresentation, without prejudice, under protest etc. For then, that itself becomes a dispute arbitrable under the clause. However when there is no such allegation made when invoking the arbitration clause, and it is 62 AIR 1990 Bom 45.

invoked simpliciler, it will have to be held that the contract itself had come to an end and with il the arbitration clause which is a part and parcel of il. We have come across no decision which has taken a contrary view. On the other hand lhe decisions discussed above support our

conclusion."

The Andhra Pradesh High Court rejected the request for appointment of an Arbitrator, where il was found that a full and final settlement was amicably and voluntarily reached by the parties,

in such a case the matter ceases to be an arbitrable dispute. However, the division Bench of the said High Court held that though the full and final payment was received and "no demand

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certificate" was issued by the respondent, unless it is clearly shown that the parties have given a clear go by to the earlier agreement, the party will have a right to recourse thereto.63 It is submitted with respect that the view taken by the Bombay High Court and the Division Bench of the Andhra Pradesh High Court above is the correct position in law. Under the Arbitration and Conciliation Act, 1996, an arbitral Tribunal is empowered to decide the existence and validity of the arbitration agreement.

10.9.8 Termination of Contract - Reference of Claims to arbitration This aspect has been dealt with in Chapter 16.

+++

NTPC v. V. Subbarao & CO., 2001(3) Arb. LR 320 (AP) (DB)

Chapter 1 1

Common Breaches of Contract 11.0 INTRODUCTION Under the complicated provisions of many building and engineering contracts the possible breaches of contract by the owner and the contractor are numerous. Typical breaches of the common kind are considered in this Chapter. This Chapter is, in fact, a continuation of the previous chapter No. 10. the provisions of the law applicable to the discussion in this Chapter are considered in the earlier Chapters as also in Chapter 12, to which reference may be made, if need be.

11.1 PROVISIONS OF THE STANDARD FORM CONTRACTS (1) P.W.D/C.P.W.D. (2) M.E.S. Department (3) Railways Department (4) FIDIC form 1992 Amended

(5) FIDIC form 1999 Edition (6) MoS&PI, GOI, 2001 Clause No. 2 (a), 2 (b), 10, 11, 12, 13, 14, 15,

15(A), 17, 18(A), 21, 33, 42. Clause Nos. 1, 3, 7. 9, 10, 18, 24, 61 to 68. Clause Nos. l(k), (n). 6, 7. 8. Clause Nos. 1.1 (b) (ii), (hi) (vii), 3.1,4.1, 6.1, to6.5,7.1 to 7.3, 12.2, 13.1, 14.1 to 14.4,39.1, 39.2,40. to 43.3,42.1 to 42.3, 51.1 lo 53.5, 69.1 to 69.5 All the conditions relevant to the earlier edition including 15 and 16. Clause Nos. 7,13,16,17 to 23, 27 to 32, 33 to 36, 37 to 62.

11.2 BREACHES BY THE OWNER/EMPLOYER From experience it is observed that the most common forms of defaults likely to be committed by the owner include: 1. 2. 3. 4. 5. 6.

Failure to hand over possession of the site to the contractor. Delay in supply of working drawings, details, designs and decisions. Delay in supply of materials listed in Schedule A that is the materials agreed to be supplied by the owner to the contractor. Ordering suspension or stoppage of work or interfering with the progress of work in any manner. Failure/delay in making payments of mobilization advance/machinery advances, R.A. Bills, extra items, excess quantities, including settlement of final bill. Failure/delay in nominating specialist sub-contractors and suppliers.

Delay caused by oilier agencies employed at the site of the work by the owner in addition to the contractor. 8. Wrongful deduction of liquidated damages/penalty. 9. Termination of conlracl wrongfully and illegally. 10. Failure/delay in appointing an Architect or an Engineer or in filling the vacancy. 7.

11.3 BREACHES BY CONTRACTOR The breaches of construction contract by the contractor which cause substantial damage and give

rise to litigation include : 1. Abandonment or total failure to complete. 2. Delay in completion. 3. Defective design, materials and/or workmanship. Typical breaches of a less common kind include : 1. Failure to submit planned programme; 2. Unauthorised sub-contracting; 3. Failure to insure as required;

Failure to employ qualified engineers; 5. Failure to maintain and submit labour reports; 6. Payment of unauthorised wages; 7. Failure to take safety precautions; 8. Causing damage to property or work of other agencies; 9. Misappropriation/extra consumption of schedule A materials like cement, steel, etc. and 4.

10. Failure to account for or return schedule A materials. Some of the above breaches are discussed below.

11.4 BREACHES BY EMPLOYER Out of the possible breaches of contract conditions by the employer listed in Art. 11.2, some are very common and of great significance and as such are discussed in detail below.

11.4.1 Failure to hand over Possession of Site Building and construction contracts usually define the "site" to mean "the lands and other places on, under, in, or through which the works are to be executed or carried out and any other land together with such other places as may be specifically designed in the contract as forming part of the site." That other places normally designated in the contract include quarries for obtaining materials: like rubble, sand, etc. as also land for camp sites, material storage, plant and equipment. Though the term "handing over of possession of the site" to the contractor is commonly used in engineering practice, legally the owner is always in possession of the site and the lerm only means lhal lhe conlraclor is allowed enlry upon lhe site obligations.

for

lhe purpose

ol'

performing his contractual

When tenders are invited from lhe contractors for execution of work, the invitation by implication represents thai the owner would be in a position to hand over the whole sile to the contractor immediately upon the making of the contract, unless the tender invitation stipulates to the contrary. For example, the C.P.W.D. Form No.6 of Notice Inviting Tenders in Clause 2A provides: "The site for the work is available/or the sile for lhe works shall be made available in

parts as specified below" The modem forms nowadays impose an express duty on the owner to give possession of the site to the contractor. For example Clause 42.1 of the FIDIC form 1992 amended edition expressly provides in Clause 42.2 for grant of extension of time and payment of "such costs which shall be added to the contract price" by the engineer after due consultation with the employer and the contractor, in the event the handing over the possession of the site is delayed. Similar provision is made in FIDIC form 1999 edition in clauses 2.1 read with 3.5. Clause 21 of the Government of India form stipulates that the failure by the employer to hand over site free from encumbrances will be deemed to have delayed the start and will be a compensationtary event.

Many contracts are silent in respect of availability of the site for the obvious reason that it is a precondition to be fulfilled by the owner, so essential for performance of the contract according to other terms such as the time limit for completion, that if a third person were to suggest to both the parties to include this stipulation, they would testily suppress him with a common "Oh! of course". It, therefore, follows that in a construction contract stipulating time limit for completion, there is an implied obligation on the part of the owner to hand over the site to enable the contractor to commence the work immediately upon making the contract or within a period such as a week or two specified in the agreement for commencement of the work by the contractor. Failure of the owner to hand over the possession of the entire site to the contractor will amount to breach of contract by the owner, in the absence of express stipulation to the contrary. This must particularly be so when a date for completion is specified in the contract. "If in the contract one finds the time limited within which the builder is to do the work, that means, not only that he is to do within that time, but it means also that he is to have that time within which to do it." 1 This breach invariably results in delay in completion of the works and claim of compensation by the contractor on that count is admissible.2 ILLUSTRATIONS (1) Where indisputably there was delay of six months in handing over of the site due to

finalization of the location and materials agreed to be supplied by the employer were not supplied due to non-availability in the market, it was held that the delay would enure for the benefit of the contractor. 1 2

Wells v. Army & Navy Co.-op Society (1902) 86 L.T. 764. D.D.Sharma v. Union of India; 2004(2) Are. LR 119 (SC)

Further no case was made out against the contractor who was allowed extension o!' time Cor completion without any reservations or conditions. The contract did not contain any prohibitory clause denying the contractor any enhanced compensation. Award by an arbitrator allowing escalation charges in favour of the contractor was upheld by the High Court/' (2) A contract for demolishing old houses and erecting new ones provided a time limit of six months for completion of the work. It further provided that all brickwork for the new houses was to be simultaneously raised, no part being raised more than five feet higher

than the remainder, a provision normally found in specifications to prevent unequal settlement. At the request of the owner, the contractor agreed to a fortnight's delay from the date of signing the agreement. The owner could give possession of part of the site some weeks after the expiry of the extended time of fifteen days for commencing the work. It took nearly five mondis before the contractor got possession of the whole site. The contractor claimed damages for the breach of contract. It was held: 4 "The contract clearly involves that the building owner shall be in a position to hand over the whole site to the builder immediately upon making of the contract. There was an implied undertaking on the part of the building owner that he would hand over the land for the purpose of allowing the contractor to do that which he has bound himself to do". (3) In a case, the contract expressly stipulated : "No implied obligation of any kind by or

on behalf of Her Majesty shall arise from anything in the contract. —". The contract with the Crown in the said case was one of six contracts for the project as a whole. The work required under two of the later contracts interfered with the contractor's work because they encroached on the site. The contractor claimed damages for breach of implied terms

relating to possession. It was held that the condition that 'no implied obligation of any kind shall arise' "has no application in the case as bar because it is fundamental to a building contract that work space be provided unimpeded by others.5 In a case, where no time limit for completion is specified, the site would be required to be made available to the contractor within a reasonable time. As to what is a reasonable time is a question of fact and will vary from case to case in view of the facts and circumstances involved in each case. In the case of a new project, the main contractor will normally be entitled to exclusive possession of the entire site in the absence of an express stipulation to the contrary. Few common express exceptions to be found in the contracts include: (i) Permitting the presence on the site of other contractors employed by the owner. (ii) Permitting the owner and his representatives such as architects, engineers to enter the site for supervision. (iii) Permitting the owner to get the work or any part of it done through other agencies, in case the contractor refuses to comply with any relevant instructions of the engineer/architect. 3 4

The Superintending Engineer, T.N.H.B. v. M. Pramasivam; 2003(2) Arb. LR 546 (Madras) (DB) Freeman & Son v. Hensler C.A. (1900) 64 JP 260

5

The Queen in Right of Canada v. Walter Cabbott Construction Ltd Canadian Federal Court of Appeal (1975) 21 BLR 42.

However, whether in any given case the contractor was given possession of adequate site, is a question of fact to be determined in the light of all the circumstances. 6

Common instances of the projects getting delayed on account of the site being not available are indicated below: 1. A building contract contemplating demolition of old structures and constructing new ones in its place; old structures continue to be in use and not vacated. Construction of a bridge, road or remodelling of existing road being contracted for on the presumption that the land acquisition proceedings would be completed before the commencement of the work but the presumption proving to be erroneous.

2.

3. Acquisition of land for quarries, waste weir, canal, setting up of workers camp and site offices of the contractor, etc. in case of irrigation projects often gets delayed more than contemplated. 4. Obstructions like trees, telephone or electricity supply poles, towers, water supply pipeline, under ground cables and conduits, requiring relocation, etc. coming in the alignment. 5. Last minute changes in the location or alignment of structures encroaching on the adjoining land not acquired. 6. The quarries indicated in the agreement do not meet the expected requirements of materials in respect of quality or quantity or both and the alternative sites are not made available promptly. Where the agreement contemplates the contractor to procure materials from other sources, "approval" to the new quarries, their opening, extra lead, royalty or compensation, etc. pose special problems.

All the above and similar instances will amount to breach of contract by the owner and he is well advised to take precautions to avoid the same as these factors invariably result in delayed completion, claims of compensation put forth by the contractor and sometimes litigations as already stated.

11.4.1.1 Obstructions by Third Person In many cases the Government departments claim to have handed over the possession of the site to the contractors but there are obstructions by the third persons, invariably persons claiming to be the original owners of the land to whom compensation was either not paid or considered inadequate by them. There have been instances where work order was given when crops were standing and no work could in effect be commenced until after the crops were removed. The cases of the contractor being excluded from the site by a third person need to be divided into two categories: i) Obstruction by a third person for whom the owner is not responsible in law and over whom he has no control; 6.

London Borough of Hounslow v. Twickenham Garden Developments Ltd., Chancery Division (1970) 7 BLR 81.

ii) II is in the power of the owner lo have Ihe situation rectified, if necessary by legal action. The contractor's claim for compensation is likely to fail in the case falling under the first category; and the owner of the site to be handed over to the contractor, is likely to be held guilty of breach of either express or implied conditions, in the cases falling under the second category.

ILLUSTRATIONS (1) A contract for construction of a school building for the Council on the land belonging to the Council provided that the contractor should be entitled to enter on the site immediately and that he should complete the work by the agreed date. The only access to the site, was from a road. The soil between the road and the site of the proposed work was soft. The agreement had, 'therefore, incorporated a provision diat the contractor lay a temporary sleeper roadway from the road to the site for access, and subsequently provide a permanent pathway. The contractor commenced the work but was forced to suspend it because of a direalcned injunction from an adjoining owner, who claimed that the road was his property. Subsequently, after the third party's claims were held to be unfounded, the contractor resumed and completed the works. The contractor claimed damages from the Council for the loss suffered due to delay caused by the third party's action. It was held that there was no implied warranty by the Council against wrongful interference by third parties with free access to the site.7 (2) A contract to construct five blocks consisting of over 100 dwellings contained express provision (Clause 21 of JCT 63) that possession of the site should be given to the contractor on 23 June 1980. The defendant (owner) could not give possession because squatters occupied one corner of the site. The owner took eviction proceedings and it took about 19 days before the site was cleared of squatters so as to enable the plaintiff contractor to occupy die whole of the site. Referring to Clause 21, it was held that there was a clear breach of that term by the failure of the defendants, for whatever reason, to remove these squatters until an appreciable time after they had promised to give the plaintiffs possession of the site -" (Emphasis supplied).8

11.4.1.2 Information About Site

In major projects, the basic information in the site information document is generally the result of high technical efforts on the part of the owner. It is such information, which the contractors have neither the time nor the opportunity to obtain for themselves. It is doubtful if the contractors could be expected to obtain it by their own efforts as a potential or actual tenderer. But the information is indispensable, if the judgement is to be formed as to the extent of the work to be done. When such information is supplied to the tenderers with a proviso which invariably some standard form conditions provide that 'the contractor is to satisfy himself to all things so far as they may have any connection with Lhe works in the contract, and to obtain his own information on all matters which can in any way influence his 7 8

Porter v. Tottenham Urban District Council, Court of Appeal (1915) 1 KB 1041. The Rapid Building Group Ltd v. Ealing Family Housing Association Ltd., Court of Appeal (1985) 1 Con LR 1.

lender', lhe contractor has lb seek redress on lhe [ilea of misrepresentation or fraud as lhe case may be.'' The engineers and officers responsible for lhe execution of public works often neglect taking prompt steps either to eliminate the hindrances or to order suspension of lhe contract under appropriate provision (where agreement incorporales such a provision) which entitles the contractor to exercise his option to treat the contract as at an end, or to call the contractor for negotiations and mutually terminate the contract. It is suggested that prompt action at the right stage would keep the liability of the owner due to breach of this important condition of contract to the minimum.

Unfortunately, certain provisions in the agreement, which stipulate that the delay in handing over the possession of the site to the contractors would entitle him to an extension of time only, and no compensation would be given to him, result in litigation or arbitration. If the delay is reasonable, the condition may be treated as valid depriving the contractor of claims of compensation. If, however, the delay is abnormal, amounting to fundamental breach, these stipulations will amount to 'exemption clauses' and the contractor may succeed in spite of the negative stipulation. These aspects are fully discussed in Chapter 12. The best course of action available for the owner, is of course, not to enter into an agreement till after the site is available for execution of the work by the contractor. On the other hand, a contractor is well advised to protect himself by inserting a suitable condition in his tender to take care of such an eventuality. In practice occasionally, one comes across with a situation wherein the extent and time of possession of the site of work as discussed above does not figure but the "state of the site" becomes a point of dispute. This aspect has been duly considered under the heading "extras caused by misrepresentation" in Chapter 5 which may also be referred to in addition to what follows:

11.4.1.3 Condition of Site The development of the law over more than one hundred years in England is worth noting as it is similar to the developmet of the law and the contract conditions in India. The earlier decisions attempted to throw the risk more on to the contractor than the owner. As a result, of course, over the years, the contract conditions had to be modified to keep the cost of construction within reasonable expectation. It is clear that if the contractor is asked to bear

9 10

Pearson & Son Ltd. v. Dublin Corporation; House of Lords, (1907) AC 351; Howard Marine and Dredging Co. Ltd; Court of Appeal (1977) 9 BLR 34. Thorn v. London Corporation . (1876) 1 App Cas. 120.

unexpected risk the cost is bound to be quoted high. One of the earliest decision by the House of Lords which deserves taking notice of in this connection is Thorn v. London Corporation.10 In the case Thorn contracted with the London Corporation to demolish an existing bridge and to construct a new one, in accordance with plans and specifications prepared by the corporation's engineers. The plans and specifications proved defective in important respects, so much so, that (.he bridge had be buill in a different way. The conlraclor, in an aclion claiming reimbursement for his loss of lime and labour, could make no recovery. The contractor's contention thai there was an implied warranty thai Ihe bridge could be buill inexpensively in accordance with the plans and specifications was also rejected, ll was held thai the obligation of the conlraclor lo complete the works covered substantial deviations from what had been planned. In an even earlier case " the conlracl was for execution of sewerage works. The conlraclor intended to use poling boards for the excavation. Neither parly had taken boreholes to ascertain

the nature of the substrata. However, before signing of the contract lite owner had been advised that the contractor's price was such that he was bound to lose money because of the type of soil conditions expected. During the execution of the work the soil turned out to be unsuitable and necessitated extra work. The contractor, after the engineer refused to authorise extra, as a variation, abandoned the work and sued for the value of the work. It was held that the contractor was not entitled to abandon the contract on discovering the nature of the soil or because the engineer refused to certify, and his claim must fail. The conditions of the contract were bound to change in order that the law as laid down in the above cases gave way to a just approach which must take into account a simple fact that the contractor's price is built up dependent upon the data supplied to him or assumed by both the parties prior to or at the time of signing of their agreement. If the sub-soil conditions are materially different from those described in or implied by the contract, it is unreasonable to expect the contractor to bear the cost of variation. The following illustrations lay down the guiding principles, it is submitted. ILLUSTRATIONS A contract for the construction of a convalescent home expressly provided that 'the quality and quantity of the work included in the contract sum shall be deemed to be that which is set out in the bills of quantities; these bills, unless otherwise stated shall be deemed to have been prepared in accordance with the Standard Method of Measurement'. The Standard Method, as is usual, included, where practicable, the nature of the soil to be described, with reference to existing trial holes and rock excavation to be paid separately. The bills required the contractor to satisfy himself as to the local conditions, etc. but did not include a separate item for rock excavation. The possibility of rock excavation, though within the knowledge of the architect, was also not shown on any drawings. On these facts it was held that the contractor was entitled to extra payment for excavation in rock plus a fair profit.12

(1)

(2) A contract for construction of blocks of dwellings contained sub-structure designs and priced bills of quantities prepared by the contractor in selected foundation conditions. The foundation designs were based on the borehole data supplied to the contractor by the 11 12

Bottoms v. Lord Mayor of York, Court of Exchequer (1812) 2 HBC (4th Ed.) 208. C. Bryant & Sons Ltd. v. Birmingham Hospital Saturday Fund-, KB (1938) 1 All ER 503.

owner. During construction, the nature of the soil (represented to be a mixture of Northamptonshire sand and clay) was found lo be different from thai assumed inasmuch as luia was discovered in several areas of lhe sile. The changed soil slrala conditions necessitated redesign of lhe foundations and execution of additional work in the areas where soil strata was different from that originally assumed. The Court of Appeal look notice of the following basic engineering factors:

Firstly, before designing lhe foundations for any building it is essential to know the nature of the soil conditions. Secondly, where the contract is for a comprehensive development of the kind in question, the contractor must know the site conditions at the site of each projected block in order to be able to plan his timetable and to estimate his requirement of materials. Thirdly, the above stated matters relate directly to the contract price. Fourthly, if the work is interrupted or delayed by unforeseen complications, the contractor is unlikely to be able to complete his contract in time, making the contractor liable to pay liquidated damages. It was held that on the basis of the above stated strong commercial reasons, and on proper interpretation of the contract, there was an implied term or warranty that the ground conditions should be in accord with the hypotheses upon which the contractor had been instructed to design the foundations. The contractors were held entitled to damages for breach of the implied term.13 It is submitted that the above decisions lay down a good law, which will apply to all contracts, except where the agreement makes express provisions to the contrary by excluding the implied term.

11.5 DELAY IN SUPPLYING WORKING DRAWINGS, DESIGNS, DETAILS AND DECISIONS In engineering practice minimum of three sets of drawings are contemplated, viz. 1. Tender drawings; 2. Working drawings; and 3. Record drawings. These are briefly discussed below. 11.5.1

Tender Drawings This set of drawings is primarily prepared for obtaining technical sanction to the project and invitation of tenders. They are meant for giving the intending tenderers a fair and reasonable idea regarding the scope and nature of the work, various materials, and workmanship to be incorporated in the work so as to enable him to estimate a realistic cost of the work before submitting his tender. Certain public works departments do take care to stamp or write a bold note on these drawings such as "not for execution". 13

Bascal Construction (Midlands) Ltd. v. Northhampton Development Corporation, Court of Appeal (1975) 8 BLR 88.

11.5.2

Working Drawings

These drawings, compared to the lender drawings are more detailed and accurate, give Ihe exact location, size, shape and directions of the work and are in fact the drawings strictly in accordance with which" work is to be executed by Ihe contractor and are by far the most

important drawings. In a majority of the contracts and especially large civil engineering projects involving millions of rupees, these drawings are prepared by Ihe owner and supplied to the contractor only after an agreement is signed. Occasionally in some specialized projects, now-a-days, the a tendency is to ask the contractors to quote on the basis of "design, drawings and execution" wherein, it is the responsibility of the contractor to prepare the working drawings, get them approved by the owner /engineer or his representative, if the contract so stipulates.

11.5.3

Record Drawings

As the name suggests these drawings are prepared to show exactly how the work was carried out at the site for the purpose of record and future use. Changes made from time to time during the execution of the work in the working drawings, necessitate preparation of these drawings.

11.6 NORMAL PROVISIONS IN CONSTRUCTION CONTRACTS Under the definition and interpretation clause normally incorporated in the construction contracts "drawings" mean "the drawings referred to in the specifications and any modifications of such drawings as may from time to time be furnished or approved by the Engineer-in-charge." The general conditions of contract provide : "The contractor shall carry out whole and every part of the work ... in accordance with the specifications. The contractor shall also conform exactly and fully to the designs, drawings and instructions in writing, in respect of the work, signed by the Engineer-in-charge. The Engineer-in-charge shall have the power to make any alterations in, omissions from, additions to or substitutions for, the original specifications, drawings/designs and instructions that may appear to him to be necessary during the progress of the work, and the contractor shall carry out the work in accordance with any instructions which may be given to him in writing signed by the Engineer-in-charge, and such alterations, omissions, additions, or substitutions shall not invalidate the contract". The necessity of these stipulations has already been emphasized in Chapter 5. These provisions when read with other stipulations mean: (i) That the contractor is to execute the work strictly as per specifications, designs, drawings and instructions issued to him from time to time. (ii) That the contractor is to commence the work on or before the date stipulated in the contract; and (iii) Tbat the whole of the work is to be completed on or before the specified date. In view of these provisions, although the contract may be silent about the time of supply of the designs and drawings, it is an implied term of the agreement that detailed drawings have to be issued at the proper time. It is expected that the full set of working drawing will be kepi ready by lhe owner lo be supplied lo lhe contractor within a reasonable time alter making the contract and in any case before the date of commencement of the work by the contractor. ' Al the lime of signing of an agreement the tender drawings alone are available. If there is no major change expected the contractor should ask, and the engineer should clarify il" the

contractor can commence the work on the basis of the tender drawings. When the tender drawings clearly carry a note 'not for construction', the contractor, even prior to moving on to the site of the work should ask for a full set of working drawings. This is advisable because an engineer may require adequate notice for supply of these drawings. The same procedure

should be followed whenever asking for any design or other details, instructions and clarifications during the progress of the work. This is for the reason that it is possible, in the absence of express provisions, to be held that details should be supplied on request only. It must be understood that the necessity for a full set of working drawings arises even prior to execution of the work as these drawings enable the contractor to make advance arrangements for procuring men, materials and machinery. Failure to supply working drawings before or at the time of commencement of the work would amount to a breach of contract for which the owner will be liable in damages to the contractor.14 Similarly change or variation order, if any, ought to be given sufficiently in advance so as not to hamper the planned progress of the work. Any delay in issuing such instructions would also amount to a breach of contract for which the owner will be liable in damages to the contractor. There is an implied contract by each party that he will not do anything to prevent the other party from performing a contract or to delay him in performing it. Generally such a term is by law imported into every contract. It is well settled that the Courts will imply a duty to do whatever is necessary in order to enable a contract to be carried out. The implementation of a building contract does require close co-operation between the contractor and the architect. The provision in the agreement imposes on the architect an obligation to furnish the contractor with drawings and details as and when necessary. As such it must have been in the contemplation of the parties that the architect/engineer would act with reasonable diligence and would use reasonable care and skill in providing the information. ILLUSTRATION In a contract for construction of 287 dwellings, the completion of the work got delayed. The parties were in dispute regarding the causes for the delay. The contractor contended that the delay was almost entirely due to lack of diligence and care, and also lack of cooperation by the owner's architect. The contractor alleged that the owner was in breach of implied terms of the contract as follows: (i) The owner would not hinder or prevent the contractor from carrying out his obligations in accordance with the terms of the contract and from executing the works in a regular and orderly manner. 14 Neodox Ltd v. Borough of Swinton & Pendlebury Q.B. Div. (1985) 5 BLR 34; Roberts v. Bury Commissioners (1870) L.R. 5.

(iij The owner would take all steps reasonably necessary to enable the contractor lo discharge his obligations and to execute the works in a regular and orderly manner. Dispute when referred to arbitration, the arbitrator held that the above two terms ought to be implied. The findings of the arbitrator were confirmed.15

11.6.1

Delay in Ordering Variations

It is also safe to. presume that under the terms of construction contracts, variations cannot be ordered after practical completion, in the absence of an express provision, unless of course if the contractor is willing to carry them out. If it were otherwise, the employer can use the power to vary or change the contract into a two-visit project.16 When the work is not completed within the stipulated time, the fact that changes were ordered in drawings and designs even after the lapse of the stipulated period is likely to be relied upon

by the contractor either as a defence justifying the delay or as an evidence to breach of contract by the owner.

11.6.2

Earlier Completion, if planned by the Contractor - Duty of the Employer, if any

It happens, though not frequently, that contractor submits a programme showing completion earlier than the date stipulated in the contract for completion. The question arises as to whether a term has to be implied in the contract that the owner by himself, servants or agents should so perform the contract to carry out the works in accordance with the programme as submitted by the contractor. Under the terms of most standard form contracts, the contractor is obliged to complete the work on or before the contractual date of completion. As such the contractor is entitled to submit such a programme and complete the work accordingly, However, the above implied term cannot be read in the contract.17 Where, however, the contract provides for bonus for early completion, the contractor is entitled to submit such programme and the employer will be bonud by by the programme so submitted.

11.7 DELAY IN CARRYING OUT WORK OR SUPPLYING MATERIALS Where under the terms of a contract the employer undertakes, either by himself or through other contractors, to carry out work or supply materials in connection with the contract works, and fails to do so at the proper time, it amounts to a breach of contract by the employer. As a result he will make himself usually though not invariably, liable for damage suffered by the contractor as a result of his failure to do so. ILLUSTRATIONS (1) In a case the contractor's tender for execution of five items of work for flood control was accepted by the State. The contract was signed on 4.7.1972, for a total sum of 15 16 17

London Borough of Merton v. Stanley Hugh Leach Ltd. Chancery Division (1985) 32 BLR 51; Also see : M/s. Multimetals Ltd. v. K. L. Jolly, AIR 2003 Raj. 8. Russel v. Sa Da Bandeira (1862) 13 CD (N.S. 149); Hudson's B.C. 10Th Ed. 326, 552. Glenlion Construction Ltd v. The Guinness Trust Q. B. Div. (1987) 11 Con. L.R. 126.

Rs. 1,64,300/-. The lime fixed for completion of lhe work was before 3.9.1972. The contractor by a letter dated 31.7. 1972, requested the Executive Engineer to release the required quantity of cement. He repealed his demand in another letter dated 16.8.1972. The, Executive Engineer, though insisting upon the contractor to commence the work did not release the cement. After the exchange of a few letters, the Executive Engineer cancelled the contract by a letter dated 9-5-1973. The contractor filed a suit. It was held by the trial court thai lhe Stale committed breach of contract and allowed damages at 10% of the total amount of the contract to be paid by the State lo the contractor. The State filed an appeal in the Kerala High Court. The High Court confirmed the judgment of the

Trial Court, and dismissed the appeal.18 (2) A contract was executed between the parties to the suit on 7-12-1977 for construction of a new shed in the premises of the defendant. As per the averments of the plaint, the duration of contract was up to 6-10-1978. The plaintiff had to execute the construction work on the instructions of the architect and as per the drawings and the designs, so provided by them. The plaintiffs alleged collusion eness between the architect and the defendant since the drawings and designs were not provided to them within time as a result of which, the delay had occurred in execution of the work. It was alleged that the Architect changed the designs repeatedly and further that the architect had instructed the plaintiff to dismantle the

constructed work and to reconstruct the same. As a result, the plaintiff sought extension of time for completion of the work, which was not granted to him by the architect. He further alleged that his machineries were detained in the factory premises of the defendant on the instructions of the Architect. The plaintiff also impugned the deductions made by the architect in his final bill. He also impugned the genuineness of the recovery of Rs.91,500/- on account of damages for delay in construction of the shed. In the written statement filed by the defendant, he had specifically denied the contention of the plaintiff by contending inter alia that :- ■ (a) the suit was not maintainable on account of S. 69 of the Indian Partnership Act; (b) the plaintiff had deliberately delayed the execution of the work due to which, the operation schedule of the defendant was unnecessarily delayed resulting in huge loss; (c) the construction work was defective and contrary to the instructions of the architect and further the defects were not removed which were brought to his notice; (d) the architect was empowered by the agreement of the contract to make the amendments in the drawings as and when required and the work could be deemed to have been completed only after issuance of the certificate by the Architect. Since the work had not been completed, it makes clear that the plaintiff had not completed the work after the date of filing of the written statement, and; (e) the suit was not maintainable on account of limitation being time-barred. It was held: "From the perusal of the evidence, it is fully established that if there was any delay in execution of the work or completion thereof, it was primarily on account of the attitude of the defendant and for which the plaintiff cannot be blamed."19

Exemption Clauses The exemption clauses providing that no compensation would be payable to the contractor due to delay in supplying materials, apart from extension of time, would be 18 19

State of Kerela v. K. Bhaskaran, 1984 AX.R. 289. M/s. Multimetals Ltd. v. K. L. Jolly, AIR 2003 Raj. 8.

strictly construed against Ihe owner. There have been cases wherein in spile of such exemption clauses, huge damages were required lo be paid by the public works departments. These aspects have been fully discussed in Chapter 4.

11.8

DELAY BY OTHER AGENCIES

Where the contract contemplates getting a part of the work done by other agencies, the owner may be required to make good the losses suffered by the contractor due lo delay in gelting the work done by other agencies. Lack of proper planning results in such situations. For example, when

civil works are either not started or not progressing well, contracts with other agencies like plumbing or electrification works are finalized, with the result that these specialized agencies are rendered idle at the site of work. There have been on the other hand, instances of the main contractor's work suffering due to non-finalization of the other agencies or due to slow progress by the other agencies. ILLUSTRATION The contractor, in a case, complained about late supply and inferior quatily of certain components to be used in the construction of houses, which were to be supplied by the suppliers appointed by the owner. The contractor had no contract with the supplier. The contract over-ran by 25 weeks and the contractor claimed damages. The agreement had provided that the components were to be delivered to the site in accordance with a programme to be agreed between the architect, the contractor and the

supplier. It was held that as the owner had undertaken to supply the components they were liable to the contractor on the basis of an implied term, that the components would be supplied in time to avoid disruption and delay. It was observed that the owner could pass that obligation over to the supplier. 20

These eventualities, it is felt, can be avoided by proper planning and scheduling of the contract works and by strict control and supervision. 11.9

STOPPAGE OR SUSPENSION OF WORK

It must be remembered that the contractor is not a servant and the employer is not the master. As such, unless the contract expressly provides to the contrary, the owner has no right to suspend-the work or to stop the work or to direct the contractor to carry out the work in a particular order, and if he does so he commits a breach of contract.21 There is a general principle applicable to building and engineering contracts that in the absence of any indication to the contrary, a contractor is entitled to plan and perform the work as he pleases, provided always that he finishes it by the time fixed in the contract.22 The distinction between a servant and an independent contractor can be considered. The Supreme Court of India cited with approval, it is submitted, the distinction between a servant 20 21 22

Thomas Bates & Son Ltd v. Thurrock Borough Council, Court of Appeal dated 22 Oct 1975. See Hudson's B. C. 10th Ed. Pp. 326, 327 Greater London Council v. Cleveland Bridge & Eng Co. Ltd. Court of Appeal, (1986) 8 Con. LR.30.

and an independent contractor brought out in Pollock's Law on Torts page 62 & 63 Edn., 15 as follows: ZK

"A master is one who nol only prescribes to the workman the end of his work but directs or al any moment may direct the means also, or, as il has been put, retains 'the power of controlling the work', a servant is a person subject lo the command of his master as to the manner in which he shall do his work.... "An independent contractor is one who undertakes to produce a given result so that in the actual execution of the work he is not under the order or control of the person for whom he does it, and may use his own discretion in things not specified beforehand .. "An independent contractor is a person engaged to do certain work, but to exercise his own discretion as to the mode; time of doing it .... he is bound by his contract, but not by his employer's orders".

11.9.1 Provisions in Standard Form Contracts Certain standard form contracts in use in some State Public Works Departments/ M.E.S. etc. do provide for suspension of work or power reserved to the owner or his engineer to direct "at what point or points and in what manner the works are to be commenced, and from time to time carried on". However, in practice it is seen that many a time the engineer-in-charge fails to give written order for suspension or written direction for doing a work out of turn. Failure to exercise these powers and allowing the contract to remain in force during the suspension

period would amount to a hindrance to the smooth progress of the work and a breach of contract for which the owner be liable to pay damages to the contractor.

11.10 FAILURE TO PAY AS PER AGREEMENT Where the contract expressly provides for interim payments to be made to the contractor by the owner upon certificates of an architect or scrutiny of the bill by the engineer, nonpayment by the owner of the sum so certified or billed will amount to a breach of contract. J. M. Hill and Sons Ltd. v. London Borough of Camden,24 is an example of what is likely to happen, in many cases. There was a delay in the payment of the amount certified by the architect. The contractors shifted some of their equipment and men but not the subcontractor's men from the site. The owner apprehended repudiation by the contractor and refused to pay. The question arose: who was right ? It was held : "- - the very essence of the provisions of the contract about payment on the architect's certificate was to maintain the cashflow of the contractor and when the cashflow is cut off without good reason - it does not lie in the mouth of the employers to say that plaintiffs (contractors) were acting unreasonably or vexatiously." 23 24

Shivanandan v. Punjab National Bank, AIR 1955 SC 404. J. M. Hill and Sons Ltd. v. London Borough of Cmden, Court of Appeal (1980) 18 BLR 31.

Whether this breach will permit ihe conlraclor lo rescind Ihe conlracl and sue lor damages is a difficult question but if Ihe conlraclor contends thai due lo non-payment by Ihe owner, his working capital got eroded and progress of Ihe work suffered adversely, il may entitle him lo an extension of

consequential compensation if he is able to prove the losses incurred on ibis count. However, there remains the vexed question as to what course of action the contractor should take upon the owner's failure to make payments in terms of the agreement. In the absence of knowledge of a definite course of action, the course generally adopted is to slow down the rate of progress and wait for the owner lo take the initiative in terminating the contract arid there after attempt to establish the termination as unjustified, wrongful and illegal and recover due payment in an arbitration or a civil suit. The most harmful effect of this course of action, especially in public works, is that the engineer-in-charge, allows considerable time to pass before laking the final action, and many times, the action taken also does not meet all the requirements of the contract and the law so much so that it is ultimately held to be illegal. The public exchequer is made to bear considerable extra expenditure due to price rise in the intervening period, besides losing all the benefits of early completion of the project. lime and

If the contractor, under the circumstances, is to repudiate the contract and take recourse to arbitration or law suit for recovery within a reasonable time of this breach, he is in grave danger of facing the consequences of wrongful repudiation by him. This is so because there has been a tendency to hold that mere non-payment of due installment does not constitute repudiation by the owner. If he borrows money and continues to carry out the work, as indeed he is duty bound to do so with a view to mitigate the losses, he is afraid that if the owner persists in his breach, he would create further liability by way of loans or overdrafts. Sooner or later, however, he will usually be obliged in his own interest to rescind the contract. He can certainly do so, but is well-advised to take the following precautions: (1) In normal times, it is observed, that both the parties give a go by to the term of the contract requiring the contractor to submit his bill each month or at an agreed interval to

25 26

Hyderabad Municipal Corporation v. M. Krishnaswamy, AIR 1985 SC 607. M/s Jhabby Mai Jang Bahadur v. Nanak Chand, AIR 1982, Del. 55.

the engineer-in-charge. However, when there is a failure to pay, the contractor must, in fulfillment of the term of the contract prepare and submit the bill. He should continue to do so at the intervals specified in the contract. (2) If he gives notice, claiming interest on outstanding sums from the date it is due for payment, he may succeed in getting the interest unless the contract stipulates to the contrary. Besides, the contract stipulation of non-liability to pay interest may not hold good if the breach is during the extended period.25 (3) If the agreement includes an arbitration clause, the owner's failure to make payment even after notice, amounts to a difference and he can have the matter referred to arbitration.26 (4) Generally lhe contractor's contribution for working capital is 12 lo 20% of the cosl of the work, depending upon lhe lotal cosl, pari of which is received by him by way of mobilization advance. The amount withheld should be "substantial" in relation to lhe working capital.

(5)

The contractor must be able to prove that the outstanding payments have not been paid over a long period in relation to the period of installment payment and total time-limit stipulated for completion of the work. For example, 15% to 25% of the time-limit stipulated for the completion of the work is likely to be considered a long period.

(6) That he can prove that the amount was withheld without any reasonable cause. In this connection it is to be noted that whether the owner has a bona fide and arguable counter-claim entitling him to set-off against payment due to the contractor is always to be determined on the interpretation of the actual wording of the contract.27 However, if the owner raises a bona fide arguable contention that a payment certificate issued by the engineer may have been over valued, he is entitled to have that issue referred to arbitration or judicial determination and the contractor may not be able to claim summary judgment on the certificate.28 (7) If small sums are paid from time to time and not the whole of the bill amount, the amount should be accepted under protest so as not to have waived the right to get payment as per the bill. (8) In general the contractor will have to show that "the owner made quite plain the intention not to be bound by the term of the contract." If the conditions above mentioned are fulfilled the contractor can repudiate the contract on account of persistent failure of the owner to pay due installments. The author feels fortified in the above proposition by the decision of the Supreme Court of India in Mahabir Prasad Rungta v. Durga Dutta29. Under RIBA standard forms, the builder has a right to determine the contract if the employer does not pay any sums actually certified by the architect, after receipt of written notice to do so. Clause No. 69.1 of the FIDIC form 1992 amended edition, ( Clause 16.1 and 16.2 of the

1999 edition) makes a similar provision. In addition Clause 69.4 of the said form permits a contractor to suspend the work or slow down the progress besides entitlement of interest under CI. 60.10. A somewhat similar provision needs to be incorporated in the Government of India form 2001to eliminate the undesirable consequences discussed above in respect of public works. 27 28 29

Tuberworkers Ltd v. Tilbury Const. Ltd. Court of Appeal, (1986) 4 con LR 1. C. M. Phillings & Co. Ltd. v. Kents Investment Ltd Court of Appeal (1986) 4 Con LR 1. AIR 1961 SC 990.

11.11 BREACH OF CONTRACT BY CONTRACTOR Failure lo adhere to a term of the contract by the contractor would be a breach of the said provision by the contractor. Some major breaches of contract by the conlraclor are considered here.30

11.11.1 Abandonment or Total Failure to Perform The essence of a construction contract is a promise by the contractor to carry out and complete the work in consideration of a promise by the building owner to pay for it. Failure to complete the work in accordance with the terms of the contract without reasonable cause or excuse is therefore a breach of contract, which would entitle the owner to damages. In the case of a lump sum or entire contract, if the contractor does not complete the work substantially he will not be entitled to payment even for the work done.31 In practice, however, certain difficulties are likely to be faced in establishing the fact of the contractor having abandoned the work. The contractors, knowing fully the contractual and legal provisions and their implications rarely admit of having stopped the work or abandoned it. Invariably a skeleton of men and machinery would always be at the site to bring the case under "slow progress". As such before the owner acts presuming that the contractor has stopped the work or abandoned it, certain precautions may be taken including the following: 1. Issue of notice to the contractor pointing out the fact that the work had been stopped or abandoned from a particular date and directing him to start the work or improve the progress and to show cause as to why action as provided for in the agreement should not be taken against the contractor. A reasonable time should be given for improving the progress, if it appears that the work has not been totally stopped.

2. Upon receipt of the reply of the show cause notice, an impartial assessment of the reasons should be undertaken. If indeed there are certain causes or hindrances for stoppage or slow progress including those discussed under the heading breaches by the owner, the same should be eliminated and the contractor should be given a chance to restart the work or improve his performance. 3. If there is no reply to the show cause notice, provisions of the agreement should be carefully studied or if need be legal opinion sought before an action is taken against the contractor. For example, in private works where standard form contract prepared by the Indian Institute of Architects is used, there is a provision for obtaining a certificate from the Architect that the circumstances exist under which the owner is entitled to rescind the contract. Whether any notice prior to termination is contemplated or not, the same should be served upon the contractor and the full notice period should be allowed to elapse.

30 31

Also see Ch. 10. Ibmac Ltd v. Marshal (Homes) Ltd. Court of Appeal (1968) 208 Est Gaz. 852.

C ha p te r- 11

Common Breaches of Contract

501

I f iIn-.- coiuracLor has virtually abandoned the work but does not admit it and the progress ol' work is negligible and the contract provides for recovery of liquidated damages lor slow progress, the same provision should fie invoked and penally/liquidated damages imposed and recovered from any money due, and payable lo the contractor.

4.

liquidated damages (for example, in many contracts ihere is a limit of 10% of lhe contract sum up lo which liquidated damages can be recovered) is recovered; or if the full notice period elapses mid there is neither resumption of lhe work by lhe contraclor nor improvement or progress and the intention of the contraclor not to do

5. Only after lhe full amount due under lhe

the work is clear, suitable action can be taken. Invariably construction contracts make express stipulations as to the right of the owner lo terminate the contract or to get the work done through another agency or department at the risk and cost of the contractor.32

6.

11.11.2 Delay in Completion Where the contract stipulates lhe dates for commencement of the work and for completion of a certain part or whole of the work and if there is delay in commencement or completion of the work by the contractor, he commits a breach of contract and the owner is entitled 10 recover compensation for the damage caused due to such delay. Meaning of "Regularly and Diligently"

Certain contracts include provisions to the effect that "the contractor shall proceed with the works regularly and diligently" failing which, action can be taken against him. The FIDIC form uses the words "—the contractor shall proceed with works with due expedition and without delay". These or similar words are elusive words on which the dictionaries help little. True, the words convey a sense of activity, progress and so on, but such language provides little help on the question of how much activity, progress and so on is expected.33 The meaning given to 'due diligence' in the Greater London Council v. CB-& E. Co. Ltd.34 by the Court of Appeal, is the best one can do, it is submitted. 11was observed: "If there had been a term as due diligence, I consider that it would have been, when spelt out in full, an obligation on the contractors to execute the works with such diligence and expedition as were reasonably required in order to meet the key dates and completion date in the contract". Most standard form construction contracts contain provisions for levy of penalty or liquidated damages. Where the delay is caused due to the acts of omission and commission of the contractor, he renders himself liable for action under this provision. For detailed discussion see Chapters 6 and 7. The precautions to be observed would be the same as those discussed in Art. 11.11.1 above. 32 33 34

or full discussion see Chapter 10. See Hounslow Borough Council v. Twickenham Garden Development Ltd., Chancery Division, (1970) 7 BLR 81. (1986) 8 Con. LR 30.

11.11.3

Defective Design, Materials and/or Workmanship

This aspect has to be considered in relation to defects under three heads : design, materials and/or workmanship (i) noticed during the performance of the contract and (ii) after completion of the work done by the conlraclor. However il should be appreciated that the

(liapter-11

Common Breaches o f Contract

SI 1

term "design" itself is wide enough lo include not merely structural calculations, anddimensions, but the choice of materials, specifications and drawings as well. The cases on suitability of designs are, in a majority of instances though not all, likely lo arise where an architect or engineer is not engaged by the owner for designing the structure. "Package deal" contracts, and contracts for sale of houses to be erected or in the course of erection by the private developers, are instances wherein a liability for design on ihe part of the contractor may arise. The following statement of Lord Denning may be taken as authoritative and of general application. "Il is clear from Lawrence v. Cassell and Miller v. Carman Hill Estates that where a purchaser buys a house from a builder who contracts to build it, there is a threefold implication thai the builder will do the work in a good and workmanlike manner, that he will supply good and proper materials and that the house will be reasonably fit for human habitation.35 In general the principle to be applied in construction contracts can be summarized thus: That a person contracting to do the work and supply materials implicitly undertakes : (i) lo do the work in workmanlike manner, that is, with care and skill; (ii) lo use materials of good quality, and where specifications of quality are agreed this will mean good of their expressed kind; and (iii) that both the work and materials will be reasonably fit for the purpose for which they are required, unless there are circumstances to exclude any such obligation, under the contract. Defective design, materials or workmanship observed during the construction ought to be brought to the notice of the contractor and he should be directed to remove the defects and make good the work. Most standard form contracts provide for the removal of defective work/materials by the owner through another agency or otherwise at the risk and cost of the contractor, if the contractor, after a notice served on him, fails to take the necessary steps to do so within the reasonable time granted to him in the said notice. The liability of the contractor for defects after completion would be limited to defects pointed out to him within the defects liability period, and further, only in respect of defects arising out of his breach of contract. For further discussion see Chapter 8.

11.11.4 Indemnities and Insurance The contractor's general obligations, under most modern standard form contracts, include: i) To insure lhe works together with materials and plant for incoqxiration therein to lhe 35 Hancock v. Brazier (Merely) Ltd. (1966) 1 W.L.R. 1317.

lull replacement cosl including profit, plus agreed additional sum lo cover additional costs of arid incidental to the rectification of loss or damage including professional fees and the cost of demolishing and removing any part of the work or debris, etc.

ii) To insure the contractor's equipment and other things brought on to the site by the contractor, for a sum sufficient lo provide for their replacement at the site. iii) The insurance is to be in the joint names of the contractor and the owner and to

remain in force till the liability under the defects maintenance clause is over. The contract conditions generally incorporate excepted risks (for which the contractor is not

(liapter-11

Common Breaches o f Contract

SI 1

obliged to insure) such as war, hostilities, and invasion, act of foreign enemies, civil war and sometimes cyclones, storms of unprecedented nature. iv) To indemnify the owner against all losses and claims in respect of dealh or injury to any person, or loss or damage to any property resulting from any act or neglect of the owner, his agents, servants or other contractors not employed by the contractor. Failure by the contractor to insure or indemnify as per the terms of the contract will be a breach of contract but may not entitle the owner to repudiate the contract on that ground. Some contracts include provisions, in the evenl of the contractor failing to take insurance, empowering the owner to take insurance and deduct the costs thereof from the sum due and payable to the contractor. These provisions sometimes present serious difficulties of interpretation. ILLUSTRATION A contract contained two provisions relevant for the discussion. The first provision required the contractors to indemnify the owner in respect of injury to persons and property (subject to certain exceptions). The second required the contractor to "effect — such insurances — as may be specifically required by the bills of quantities". The bills of quantities required 'insurance of adjoining properties against subsidence or collapse'. The contractor took insurance policy, which covered the contractor's liability for subsidence but not that of the plaintiff- owner. A neighbouring owner brought a claim against the plaintiff in respect of subsidence caused by the building operations. The owner brought an action cldming that the contractor was in breach of his obligation under the second of the two above mentioned conditions. It was held : All the items in the list for "the contractor shall insure", would appear to be cases where the contractors must insure themselves and therefore there is insufficient reason for thinking that the last item "insurance of adjoining properties against subsidence or collapse" gives an obligation to insure not the contractors themselves but also the building owner.36 The problem of interpreting complex contract provisions becomes difficult if the owner is to take possession of part of the premises and start using it and the contract stipulates that to the extent possession is taken the obligation of the contractor to insure ceases, as illustrated in the case below : 36 Gold v. Patman & Fotheringham Ltd., Court of Appeal, (1958) 2 All ER 497.

ILLUSTRATION Tenders were invited for carrying out extensive extension to the existing factory (making it three times as large as before) without disrupting the production. The contractors submitted a tender in RIBA form, including bills of quantities for £ 687,860 which tender was accepted and a formal contract signed. The work was started in 1969 and completed lo a great extent by January 1970. New machines were installed and stock of reels of paper in the new reel warehouse was stored, though the contractors had not completed the works in full. On 18th January 1970, there was a big fire and much of the new factory was gutted with the estimated loss at £ 250,000. The question was who was to bear this loss. The answer depended upon proper interpretation of Clause 20A (1) and 16 of the RIBA form. Clause 20A (1) provided that the contractor should insure against loss and damage by fire all work executed and all unfixed materials and goods and should keep them insured under practical completion of die works or until the employer should authorize in writing the cancellation of such insurance. Clause 16 provided for empowering the owner to take possession of any part or parts of the work, with the consent of the contractors, before practical completion of the

Chapter-11

Common Breaches of Contract

504

work; the architect to issue a certificate stating the estimate of approximate total value of the part so taken over within seven days of the employer taking possession; and entiding the contractor to reduce the value insured under 20 (A) by the full value of the relevant part and the said relevant part shall, as from that date when possession was taken, to be at the sole risk of the employer. The great question was, did the employer take possession of the part as claimed by the contractors. The contention of the contract was 'taking possession' is a question of fact which is answered by the fact that the employers were using and occupying the factory at the time of the fire. The employers, on the other hand, contended that "taking possession" could only take place when the relevant part was handed over to them and accepted by them; and that never took place. The architect had issued a certificate of completion to his satisfaction only in respect of the car park. It was observed that the agreement contemplated definite machinery to determine handing over. The practice was for the contractor to inform the architect that a part was ready, the architect was to inspect it and if ready accept it and issue a certificate to that effect. It was held the contractors at the time of the fire had not handed over some parts to the employer; it was the responsibility of the contractors to insure them; the risk had not passed to the employers. The contractors, or their insurers, therefore must bear the loss.37 It is to be noted that even where a party to the contract agrees to indemnify the other party, such a provision cannot be read to impose on the party indemnifying the other against the other's own negligence unless clear words to that effect are used.38 In the case of building or engineering contracts, where numerous different sub-contractors may be engaged, there can be no doubt about the convenience from everybody's point of view, including perhaps insurers, of allowing the main contractor to take out a single policy 37 English Industrial Estates Corporation v. George Wimpay & Co. Ltd., Court of Appeal (1972) 7 BLR 122. 3 8 Walters v. Whesssoe Ltd and Shell Refining Co. Ltd., Court of Appeal, (1960) 6 BLR 23.

covering the whole risk, that is to say covering all contractors and sub-contractors in respect of loss or damage to the entire contracts work. However, a sub-contractor who is engaged in contract works may insure the entire contract works as well as his own property.39

11.12,

FORMS

OF

DISCHARGE

BY BREACH

If one of the two parties to a contract breaks the obligation which the contract imposes, a new obligation in every case will arise - a right of action conferred upon the party injured by the breach. In addition to the right of action there are circumstances under which lhe injured party will also stand discharged from such performance as may still be due from him In order to have the effect of discharge by breach, the breach must be such as to constitute repudiation by the party in default of his obligations under the contract. A breach of contract does not automatically terminate the contract but renders it voidable at the option of the injured party; he has the option either to treat the contract as still in existence or to regard himself as discharged by reason of repudiation of the contract by the other party.40 Repudiation by one party alone does not terminate the contract. It takes two to end it. 41 However, the option can be said to be available to the injured party if the injured party can carry out the contract to completion without the co-operation of the party in default and sue for the price. Where performance of the contract cannot be carried out when cooperation is refused, the injured party must accept the repudiation and sue for damages. The construction

Chapter-11

505

Common Breaches of Contract

contracts would invariably fall under the latter category. Repudiation is an act or omission of a party, which can fairly be regarded as evincing an intention by that party no longer to be bound by the terms of the contract. Repudiation of a construction contract by the owner will give the contractor a right'to bring an action for the recovery of money due for the value of the work done together with damages. Similarly repudiation of the contract by the contractor would entitle the owner to bring 'an action for damages forthwith. In practice, however, quite often the cases are of partial failure of performance giving rise to the difficult question as to whether such failure by one party entitles the other to regard him as discharged. Differing terminology are in use to describe the nature of the failure of performance to discharge the innocent party from the performance of his own obligations under the contract. The breach it has been said, must be fundamental, 'it must go to the root or essence of the contract', or 'to the foundation of the whole' or 'is such that it deprives the innocent party of substantially the whole benefit which it was intended that he should obtain from the contract'. 42

11.12.1 Fundamental Breach The 39

Petrofina (VK) Ltd. v. Magnagold Ltd. Q.B. Div. (1983) All ER 35.

40 41 42

Heyman v. Darwins (1942) AC 356. Damodar Valley Corporation, v. K.K. Kar, AIR 1974 SC 159. For full discussion see Chapter 10.

"fundamental

expression breach

of

contract" or "breach of a fundamental term" is used

in two quite different senses. In one sense these denote a breach by one party, which is sufficiently serious to entitle the other party, not merely to claim damages, but to elect to treat himself as discharged from further performance under the contract. In another sense, these terms are used as a supposed principle of law that there are certain breaches of contract which are so totally destructive of the obligations of the party in default that liability for such a breach cannot be limited or excluded by means of an exemption clause. In this sense it is a rule of construction and is dealt with in Chapter 4.

11.12.2 Anticipatory Breach The renunciation of a contract by one of the parties before the time for performance has come is known as "anticipatory breach" of contract. It also discharges the innocent party if the party so chooses, and entitles it to sue for damages. If, however, the innocent party refuses to accept the renunciation and continues to insist to exercise his right on the performance of the contract, he loses his right to rely on the anticipatory breach and the contract remains in existence for the benefit and at the risk of both the parties. For example, if the circumstances subsequently give rise to frustration of contract, the injured party would lose the right of action under anticipatory breach.43 ***

43

For full discussion, see Chapter 10.

unapter i z

Remedies for Breach of Contract

I

12.0 INTRODUCTION The discharge of a contract by breach has already been considered in chapter 11. In this chapter it is proposed to consider the various remedies which are available to the person injured by the breach, whether the breach is of such a kind as to justify the injured party in treating the contract as discharged or not. These remedies fall under the following heads : (1) Every breach of contract entities the injured party to damages for the loss he has incurred. (2) The injured party must be entitled to claim the value of the work done in which case he is said to sue upon a quantum meruit. (3) In certain circumstances the injured party may obtain an order for specific performance of the contract or an injunction to restrain its breach. (4) Standard form contracts include provisions of forfeiture which take effect upon a breach of contract. The above mentioned remedies are discussed in this Chapter.

12.1 PROVISIONS OF THE LAW/CONTRACTS Indian Contract Act S. 73 S.74 S. 148, 170 & 171

Art No. 12.3 12.19 12.17

12.1.1 Provisions of the Standard Form Contracts Form

12.2

(1) P.W.D. / C.P.W.D. (2) M.E.S. Department (3) Railways (4) FIDIC 1992 (Amended) (5) FIDIC 1999 Edition DAMAGES

Provisions CI. 3, 4,13, 29 53,54,57 32, 52,61 & 62 54.1 to 54.8 4.2; 15.1 to 15.5 and 16.1 to 16.4.

The Indian Contract Act, besides Section 55 which deals with delay in performance,1 contains three provisions in Chapter VI under the heading : "Of the consequences of breach of contract" as under : (1) Section 73 deals with "unliquidated damages".

(2) Section 74 deals with liquidated damages, and (3) Section 75 deals with compensation for any damage which a person who rightfully rescinds the contract is entitled to.

Section 74 dealing with liquidated damages has been considered in Chapter 7. Reference to Section 74 is necessary while discussing forfeiture provisions. Section 75 has been referred to in Chapter 10. Section 73 is considered below : 12.3

SECTION 73

Section 73 of the Indian Contract Act reads : "Compensation for Loss or Damage Caused by Breach of Contract: "When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach or which the parties knew, when they made the contract, to be likely to result from the breach of it. "Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach. "Compensation for failure to discharge obligation resembling those created by contract - When an obligation resembling those created by contract has been incurred and has not been discharged, any person injured by the failure to discharge it is entitled to receive the same compensation from the party in default, as if such person had contracted to discharge it and has broken his contract. "Explanation - In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by the non-performance of the contract must be taken into account". Illustrations (a) A contracts to sell and deliver 50 maunds of saltpetre to B, at a certain price, to be. paid on delivery. A breaks his promise. B is entitled to receive from A, by way of compensation, the sum, if any, by which the contract price falls short of the price for which 1

General Manager, Northern Railways v. Sarvesh Chopra, 2002 (1) Arb. LR 506 (SC).

B might have obtained 50 maunds of saltpetre of like quality at the time when the saltpetre ought to have been delivered. (b) A hires B's ship to go to Bombay, and there lakes on board on the first of January, a cargo, which A is to provide, and to bring it to Calcutta, the freight lo be paid when earned. B's ship does not go to Bombay, but A has opportunities of procuring suitable conveyance for the cargo upon terms as advantageous as those on which he had chartered the ship. A avails himself of those opportunities, but is put to trouble and expense in doing so. A is entitled to receive compensation from B in respect of such trouble and expense. (c) A contracts to buy of B, at a stated price, 50 maunds of rice, on time being fixed for delivery. A afterwards informs B that he will not accept the rice if tendered to him. B is entitled to receive from A, by way of compensation, the amount, if any, by which the contract price exceeds that which B can obtain for the rice at the time when A informs B that he will not accept it.

(d) A contracts to buy B's ship for 60,000 rupees, but breaks his promise. A must pay to B, by way of compensation, the excess, if any, of the contract price over the price which B can obtain for the ship at the time of the breach of promise. (e) A, the owner of a boat, contracts with B to take a cargo of jute to Mirzapur, for sale at that place, starting on a specified day. The boat, owing to some avoidable cause, does not start at the time appointed, whereby the arrival of the cargo at Mirzapur is delayed beyond the time when it would have arrived if the boat had sailed according to the contract. After that date, and before the arrival of the cargo, the price of jute falls. The measure of the compensation payable to B by A is the difference between the price which B could have obtained for the cargo at Mirzapur at the time when it would have arrived if forwarded in due course, and its market price at the time when it actually arrived. (f) A contracts to repair B's house in a certain manner, and receives payment in advance. A repairs the house, but not according to contract. B is entitied to recover from A the cost of making the repairs conform to the contract. (g) A contracts to let his ship to B for a year, from the first of January, for a certain price. Freights rise, and, on the first of January, the hire price obtainable for the ship is higher than the contract price. A breaks his promise. He must pay to B, by way of compensation, a sum equal to the difference between the contract price and the price for which B could hire a similar ship for a year on and from the first of January. (h) A contracts to supply B with a certain quantity of iron at a fixed price, being a higher price than that for which A could procure and deliver the iron. B wrongfully refuses to receive the iron. B must pay to A, by way of compensation, the difference between the contract price of the iron and the sum for which A could have obtained and delivered it (i) A delivers to B, a common carrier, a machine, to be conveyed, without delay, to A's mill informing B that his mill is stopped for want of the machine. B unreasonably delays the delivery of the machine, and A, in consequence, loses a profitable contract with the Government. A is entitled to receive from B, by way of compensation, the average amount of profit which would have been made by the working of the mill during the time that delivery of it was delayed, but not the loss sustained through the loss of the Government contract. (j) A, having contracted with B, to supply B with 1,000 tons of iron at 100 rupees a ton, to be delivered at a stated time, contracts with C for the purchase of 1,000 tons of iron at 80 rupees a ton, telling C that he does so for the purpose of performing his contract with B. C fails to perform

his contract with A, who cannot procure other iron and B in consequence rescinds the contract. C must pay to A 20,000 rupees being the profit which A would have made by the performance of his contract with B. (k) A contracts with B to make and deliver to B, by a fixed day, for a specified price a certain piece of machinery. A does not deliver the piece of machinery at the time specified, and, in consequence of this, B is obliged to procure another at a higher price than that which he was to have paid to A, and is prevented from performing a contract which B had made with a third person at the time of his contract with A (but which had not been then communicated to A) and is compelled to make compensation for breach of contract. A must pay to B, by way of compensation, the difference between the contract price of the piece of machinery and the sum paid by B for another, but not the sum paid by B to the third person by way of compensation.

(1) A, a builder, contracts to erect and finish a house by the first of January, in order that B may give possession of it at that time to C to whom B has contracted to let it. A is informed of the

contract between B and C. A builds the house so badly that, before the first of January, it falls down, and has to be rebuilt by B, who, in consequence loses that rent which he was to have received from C, and is obliged to make compensation to C for die breach of his contract. A must make compensation to B for the cost of rebuilding the house, for the rent lost, and for the compensation made to C. (m) A sells certain merchandise to B, warranting it to be of a particular quality, and B, placing reliance upon this warranty, sells it to C with a similar warranty. The goods prove to be not according to the warranty, and B becomes liable to pay C a sum of money by way of compensation. B is entitled to be reimbursed this sum by A. (n) A contracts to pay a sum of money to B, on a specified day. A does not pay the money on that day. B in consequences of not receiving the money on that day, is unable to pay his debts, and is totally ruined. A is not liable to make good to B anything except the principal sum he contracted to pay, together with interest up to the day of payment. (o) A contracts to deliver 50 rnaunds of saltpetre to B on the first of January, at a certain price. B afterwards, before the first of January, contracts to sell the salpetre to C at a price higher than the market price of the first of January. A breaks his promise. In estimating the compensation payable by A to B, the market price of the first of January, and not the profit which would have arisen to B from the sale to C, is to be taken into account. A contracts to sell and deliver 500 bales of cotton to B on a fixed day. A knows nothing of B's mode of conducting his business. A breaks his promise, and B, having no cotton, is obliged to close his mill. A is not responsible to B for the loss caused to B by the closing of the mill.

(p)

(q) A contracts to sell and deliver to B, on the first of January, certain cloth which B intends to manufacture into caps of a particular kind, for which there is no demand, except at that season. The cloth is not delivered till after the appointed time, and too late to be used that year in making caps. B is entided to receive from A, by way of compensation, the difference between the contract price of the cloth and its market price at the time of delivery, but not the profits which he expected to obtain by making caps, nor the expenses which he has been put to in making preparation for the manufacture. (r) A, a shipowner, contracts with B to convey him from Calcutta to Sydney in A's ship, sailing on the first of January, and B pays to A, by way of deposit, one-half of his passage money. The ship does not sail on the first of January, and B, after being, in consequence detained in Calcutta for some time and thereby put to some expense, proceeds to Sydney in another vessel, and, in consequence, arriving too late in Sydney, loses a sum of money. A is liable to repay to B his deposit, with interest, and the expense to which he is put by his detention in Calcutta, and the excess, if any, of the passage money paid for the second ship over that agreed upon for the first, but not the sum of money which B lost by arriving in Sydney too late." The Section comprises three paragraphs and one explanation. The first two paragraphs and the explanation lay down the law with respect to compensation for loss or damage caused by a breach of contract. Paragraph 3 lays down the law with regard to compensation for failure to discharge obligations resembling those created by a contract.

12.4 ESSENTIAL CONDITIONS TO BE FULFILLED BY INJURED PARTY TO BE ENTITLED TO DAMAGES A plain reading of Section 73 makes it clear that for an injured party to be entitled to damages, from the party, who has breached the contract, the following conditions must be fulfilled: (1)

that there exists a contract or an obligation resembling those created by a contract;

(2)

that the defaulting party was under an obligation to perform that part which is alleged to have been breached. For example, if it is alleged by the contractor that the owner committed a breach of contract by not supplying materials agreed to be supplied, such a condition in the agreement has to be proved. If there is no express provision, say for handing over of the site, that it is an implied obligation undertaken by the owner, has to be alleged and established from the other relevant conditions of the contract;

(3) that there is a breach of contract or any condition of the contract must be established by the party making the allegation; (4)

that the breach of contract caused "loss or damage" to the injured party;

(5)

that the loss or damage caused by the breach of contract naturally arose in the usual course

of things from such breach, or (6)

that the parties to the contract knew, when they made the contract, such loss or damage 'to be likely to result form the breach of it,' must be established;

(7)

that the loss or damage sustained by reason of breach is neither remote nor indirect and the last but not the least.

(8)

that the injured party did take precautions to mitigate the losses to the maximum extent possible.

When all these eight conditions are fulfilled, the injured party is, 'entitled to receive from the party who has broken the contract, compensation for any loss or damage caused to him thereby.' If there is no loss proved damages are not payable.2

12.5 DISTINCTION BETWEEN COMPENSATION' AND 'DAMAGES' The word "compensation" would embrace in its purview any actual loss suffered Jb _y_. a ^artyJFor_example, if trees had to be cut or certain structure had to be altered or demolished, in that case a question of paying compensation would arise but the question as to what loss a party would, suffer in case he, is prevented from, making, any constructions or using the roof would not come within the meaning of the word "compensation". It would come under the wider definition of the word "damages."3 The distinction between the two terms can be stated thus : While the term '^amages" |§ .used in reference to pecuniary recompense awarded in rerjarato]_|or_a loss or injury caused byaJCTOngful acjor omission, the temi "compensation" is used in relation to a JawiuLacI which caused the injury in respect of which an indemnity Ts'oHained under the provisions of a particular Statute.

Section 73 uses the words "compensation for any loss or damage" which words mean, it is submitted, 'damages'. According to the Concise Oxford Dictionary damages mean : "Sum of money claimed or adjudged in compensation for loss or injury." Similarly Webster Comprehensive Dictionary Encyclopedic Edition gives the meaning "Money recoverable for a wrong or an injury.." ^- -i

j

For all practical purposes the distinction between the words used by the parties namely,"compensation" and "damages" in their correspondence or in pleadings would not { matter much, it is submitted. ' ' j> 2 3

Thyssen Stahlunion Ombh, Plaintiff v. Steel Authority of India, AIR 2002 Del. 255. Union of India v. Ram Chandra, AIR 1975, All. 221.

12.6

KINDS OF DAMAGES

The funciion of damages in conlracl, as already seen is to compensale for the expectation and losses. Damages for distress or mental agony, vexation or loss of enjoymenl are rarely awarded in contract. Similarly punilive damages awarded in tort are not awarded in breach of contract. Some times parties incorporate express provisions in their contracts lo exclude or restrict damages. , Damages, in general, may be classified as under : (1) General or Ordinary damages - these may be proximate, and remote, (2) Special damages, (3) Nominal damages, (4) Exemplary or vindictive damages.

12.6.1

General or Ordinary Damages

General or Ordinary Damages are those contemplated under S.73 namely, arising naturally in the usual course of things. The illustrations given under Section 73 include examples of general or ordinary damages. Where no loss is proved damages are not payable.

12.6.2

Special Damages

Special damages on the other hand are such as are natural and proximate consequences of the breach, also not in general following as its immediate effects, but which "the parties knew, when they made the contract, to be likely to result from the breach of it or the defendant had undertaken an obligation under the contract to pay them. The knowledge must, however, be such and acquired under such circumstances as to amount to evidence of an actual contract to pay the exceptional loss arising from the breach of contract". Illustrations (j), (k) and (1) given under Section 73 of the Indian Contract Act will help clarify this aspect. Special damages it must be noted, have to be specified in the pleadings and proved by evidence. Damages for anguish and vexation caused by breach of contract cannot be awarded in an ordinary commercial contract.5

12.6.3

Nominal Damages

Usually only a small sum of money is what an injured party would be entitled to get where he has not in fact, suffered any loss by reason of the breach.

12.6.4

Exemplary or Vindictive Damages

These are sometimes awarded in the law of torts as a sort of punishment and have no place in the law of contract. 4

M/s. Thakral and Sons, Plaintiff v. Indian Petro Chemicals Corporation Ltd. and others, Defendants AIR 1994 Del.226. Ghaziabad Development Authority, Appellant v. Union of India and another, AIR 2000 S C 2003.

5

12.7

GENERAL PRINCIPLES OF ASSESSMENT OF DAMAGES

The object of awarding damages for breach of contract is to put the injured party into the position in which he would have been had the contract been performed. The Supreme Court of India, laid down this principle in these words: 5 "The two principles on which damages in such cases are calculated are well settled. The first is that, as far as possible, he who has proved a breach of a bargain to supply what he contracted to get is to be placed, js_£ar as money can do.it, J&.ajs good a situation as. if .the coMact^hj^ biit.lhis..pjrinciple..is..qualified by a.second, which.imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach, jnd debars him from clairning any part of the damage which is due to his neglect to take such steps: These two principles also follow from the law as laid down in S. 73 read with the Explanation thereof The claim should be assessed as on the date of termination of the contract and future conduct of the parties or subsequent events may be wholly irrelevant.6 The measure of damages in a contract, is compensation for consequences which flows as a natural and capable consequence of the breach or, in other words, which could be foreseen and not remote. ILLUSTRATION In a case of works contract the time to complete the works expired and application for extension made by the appellant-contractor on 4.9.1967 was rejected by the respondent on 14.2.1968. The appellant filed a suit for the sum due to him for the work done and also claimed Rs. 10.000/- as damages. The damages were claimed for the loss of profit on the ground that if thedepartranj^ on the expiry "oFThe sl^uj^djime Jirnit, the appellant would have been able to get some work-else where, wrJulaHrave executed work worth Rs. 1,00,000/- and would have easily earned a profit of

^RrioTToo/-:' The Allahabad High Court observed that the statement that the appellant would have got another contract and earned a profit, was not supported by any evidence. Nothing was brought on record to demonstrate that a future contract was even available. There was no material on record to prove the quantum of damages. The claim was held to be remote..7

12.8 ASSESSMENT OF DAMAGES IN CONSTRUCTION CONTRACTSBREACH OF CONTRACT BY THE OWNER From the-point of view of damages, the breaches of contract by the owner would be of two kinds: (i) Refusal to perform the contract having the effect of bringing the work to an end or 5 6 7

M/s. Murlidhar v. M/s. Harish Chandra AIR 1962 SC 366. M.D., AWHO v. Sumangal Services Pvt Ltd., 2003(3) Arb. LR 361 (SC). Devender Singh v. State AIR 1987 All . 306.

preventing its starting, thereby depriving the contractor of the right to his profits upon work never actually carried out, and ' (ii) the breaches which reduce the contractor's profits or increase the cost of work i,. done by him. The first kind of breach is dealt with in Chapter 10 and 11. Before considering the effect of the second kind of breach, it is necessary to deal with an exemption clause generally found in public works contract, which denies payment of compensation to the contractor, in the event of the owner not requiring a part of the work or the whole work as specified in the agreement or is in breach of one or the other condition of the contract.

12.8.1 Exclusion of Right to Claim Damages by Express Provisions in Contract In certain standard form contracts used for public works, it is common to include express provisions denying the contractor the right to compensation even though the employer may commit breach of certain contract conditions. Consider for example, Clause 13 of the C.P.W.D. Standard Form contract. The said clause reads: " No compensation for alteration in or restriction of work to be carried out: If at any time after the commencement of the work the President of India shall for any reason whatsoever not require the whole thereof as specified in the tender to be carried out the Engineer-in-Charge shall give notice in writing of the fact to the contractor who shall have no claim to any payment of compensation whatsoever on account of any profit or advantage which he might have derived from the execution of the work in full, but which he did not derive in consequence of the full amount of the work not having been carried out, neither shall he have any claim for compensation by reason of any alterations having been made in the original specifications, drawings, designs and instructions which shall involve any curtailment of the work as originally contemplated. ..." The clause contains a proviso entitling the contractor to "the charges on the cartage only of materials actually and bona fide brought to the site of work" and the cost of the materials at "their purchase price or local current rates whichever may be less". The above provision is inserted in the standard form with a view to protect the Government from claims of compensation by the contractor in the event there is breach of contract by the Government. In other words it is admitted that but for this provision the contractor would be entitled to recover compensation under S. 73. It means that this is an exemption clause. It will, therefore, receive strict construction against the Government. According to the relevant rules of construction8 this clause, to become operative the following conditions have to be satisfied: 1. If at any time after the 'commencement of the work' : are the opening words which will make this clause applicable only if the contractor has already commenced 8

See Chapter 4.

the work and not before. As such the Government cannot successfully resist the claims of the contractor if the termination order is issued afteF making of the contract but before commencement of the work by the contractor. The proviso read with this opening clause supports this contention, it is submitted. 2. Secondly, the next few words: "the President of India shall for any reason whatsoever not require the whole (work) thereof as specified in the tender to be carried out

go to suggest that this clause will not cover the cases where the project or work as a whole is abandoned or the contract in its entirety is terminated. The para heading "No compensation for alteration in or restriction of work to be carried out" supports this view inasmuch as the clause deals with "restriction of work" and not its total abandonment. The words "- which (profit or advantage) he did not receive in consequence of the full amount of work not having been carried out" suggest that the clause contemplates a situation when the work in part is carried out by the contractor. 3. Thirdly, the words "Not require the whole thereof as specified in the tender" will make this clause applicable to cases where "for alteration in" (the words in para heading) the work as specified in the tender, the work is proposed to be deleted from the scope of the contract. Even part of the work should (i) either be bona fide not required at all or (ii) involve major changes resulting in curtailment of the contract work. The contractor, in the light of the discussion above mentioned will be entitled to receive compensation, in spite of C.13, when : (1) The contract is terminated before he has commenced the work, or (2) After he has commenced the work, the whole of the work is abandoned and the contract is terminated, or (3) Part of the work is deleted from the scope of his contract for getting it done through another agency or departmentally without any alterations,9 or (4) The curtailment in the work is not as a result of any bona fide alterations in the original specifications, drawings, designs and instructions. In other words the clause will be applicable to bona fide curtailment of the work due to: CO part of the work not at all required to be executed or (ii) any alterations having been made in the original specifications, drawings, designs and instructions. Reference to few other cases decided under the Arbitration Act needs to be made in which the award was set aside in view of the agreement containing prohibitive conditions denying compensation or escalation in cost. Such a plea, however, if not taken at proper time may not be allowed to be raised for the first time in appeal against decision of the trial Court upholding an award allowing compensation.10 9 10

Gallagher v. Hirsch (1899) N.Y. 45 App. Div. 467. N. Y. Supp. 61, 607; Can- v. J.A. Bemman Pty. Ltd. (1953) 27 AL.J. 273 (Australia) See Hudson's B.O.C. 10th Ed. Pp. 532, 533. Oil & Natural Gas Corporation Ltd v. Comex Services SA 2003 (3) Arb. LR 197 (Bombay) (DB).

(1) Associated Engineering Co. v. Government of Andhra Pradesh," . In the said case award in respect of four claims, not payable under the contract, was set aside holding that a conscious disregard of the law or the provisions of the contract from which the arbitrator had derived his authority vitiates the award. (2) Steei Authority of India Ltd. v. J. C. Budharaja12. In this case clause 32 specifically stipulated that no claim whatsoever for not giving the possession of the entire site on award of contract will be tenable and the contractor would have to arrange his working programme accordingly. The award granting compensation was set aside holding that it was not open for the arbitrator to ignore the said conditions. The distinguishing factor in the said case was after the claim

was raised a supplementary agreement was signed by the parties for the same work at increased rates. (3) State of Orissa v. Sudhakar DasL\ The agreement did not contain escalation clause and yet the arbitrator awarded escalation. It was held the award was not sustainable and suffered from a patent error. It is not clear if the escalation awarded was by way compensation for the delay or not.

(4) National Building Construction Corporation Ltd. v. Decor India Pvt. Ltd.14. In this case the tender was submitted with a letter stating that the rates were valid for 30 days and thereafter the right was reserved to revise them according to the market conditions. The said condition did not form part of the agreement subsequently signed by the parties. The agreement did not contain escalation clause rather Clauses 18 and 32 clearly stipulated that no escalation should be allowed. The award allowing escalation was set aside relying on the authority of State of Orissa v. Sudhakar Das. (5) D.S.A. Engineers v. Housing and Urban Dev. Corporation15. The agreement contained provisions for extension of time if the site was not made available in accordance with the agreed programme or for force majure or suspension of work by the employer but clearly disentitled the contractor from making any claims of compensation whatsoever on the said counts. The award allowing compensation towards extra overheads was set aside. The contention that the prohibition would not be valid for extension beyond 20 to 25% of the time allowed was rejected by holding that the clause cannot be said to be qualified by the words "reasonable period". 11

12 13 14 15

Associated Engineering Co. v. Government of Andhra Pradesh JT 1991 (3) SC123 = 1991(2) Arb. LR 180 (SC); also see The New India Civil Erectors (p) Ltd. V. Oil and Natural Gas Corporation, AIR 1997 SC 980=JT 1997(2) SC 633= 1997(1) Arb. LR 292 (SC); V.G. George v. Indian Rare Earths Ltd. JT 1999(2) SC 629= 1999(2) Arb. LR 47(SC); Rajasthan State Mines and Minerals Ltd. v. Eastern Engineering Enterprises and another, AIR 1999 SC 3627= 1999(3) Arb. LR 350 (SC); 7.; New India Civil Erectors (P) Ltd. v. Oil and Natural Gas Corporation, AIR 1997 SC 980; State of Tripura v. Anita Barman AIR 2001 Gau. 34 Steel Authority of India Ltd. v. J.C.Budharaja, (1999) 8 SCC 122 =1999(3) Arb. LR 335 (SQ: AIR 1999 SC 3275; State of Orissa v. Sudhakar Das (2000) 3 SCC 27 = 2000(1) Arb. LR 444 (SQ. National Building Construction Corporation Ltd. V. D6cor India Pvt. Ltd. 2004 (2) Arb. LR 1 (Delhi). D.S.A. Engineers v. Housing and Urban Dev. Corporation 2004 (2) Arb. LR 33 0)elhi).Also see: Shyama Charan Agarwala & Sons v. Union of India,. 2002 (2) Arb. LR 64 1 (SQ.

(6) India Civil Erectors (P) Ltd. v. Oil and Natural Gas Corporation16. The appellant in the Supreme Court claimed an amount of Rs. 32,21,099.89 p.

against which the

escalation in the cost of construction during the period subsequent to the expiry of the original contract period. The appellant's claim on this account was resisted by the respondent-corporation with reference to and on/the basis of the stipulation in the corporations' acceptance letter dated 10th January, 1985 which stated clearly that "the above price is firm and is not subject to any escalation under whatsoever ground till the completion of the work". The learned Single Judge upheld the award. The Division Bench, in appeal had held, that in the face of the said express stipulation between the parties, the appellant could not have claimed any amount on account of escalation in the cost of construction carried on by him after the expiry of the original contract period. The Supreme Court held: arbitrators had awarded a sum of Rs. 16,31,425/-. The claim was made on account of

aforesaid stipulation provides clearly that there shall be no escalation on any ground whatsoever and the said prohibition is effective till the completion of the work. The learned arbitrators, could not therefore have awarded any amount on the ground that the appellant must have incurred extra expense in carrying out the construction after the expiry of the original contract period. The aforesaid stipulation between the parties is binding upon them both and the arbitrators. We are of the opinion that the learned single Judge was not right in holding that the said prohibition is confined to the original contract period and does not operate thereafter. Merely because the time was made the essence of the contract and the work was contemplated to be completed within 15 months, it does not follow that the aforesaid stipulation was confined to the original contract period. This is not a case of the arbitrators construing the agreement. It is a clear case of the arbitrators acting contrary to the specific stipulation/condition contained in the agreement between the parties. We, therefore, affirm the decision of the Division Bench on this count as well." "The

The author with respect submits that the view in illustration (5) above which also finds support in the Supreme Court decision does not lay down good law. Interpreting or construing a contract quite often involves inserting or reading words not used by the drafters.17 One must not overlook the fact, while interpreting the construction contracts that the cost/rates tendered have a definite relationship with the time limit stipulated for completion of the work. The cost/rates cannot be said to be valid for indefinite period and as such when exemption clauses such as the those in the case under study do not stipulate limit on the extension of time, it is necessary to interpret that the parties agreed to a reasonable extension of the originally stipulated period beyond which the exemption clause would not be applicable. Whether 20% or 25% can be considered as reasonable extension of time may be debatable but to hold that the clause is not qualified at all is erroneous, it is submitted with utmost respect. The law is well settled that what is 'reasonable' is a question Of fact to be decided in each case. (7) Osnar Paints & Contracts Pvt. Ltd. v. N.B.C.C.18 Three contracts for painting 665 houses 16 17

New India Civil Erectors (P) Ltd. v. Oil and Natural Gas Corporation, , AIR 1997 SC 980. See Doctrine of Presumed Intent in Ch. 4, Art 4-15 pp-259.

contained the provision under the heading "Rates to be firm" which stipulated that the painting contractor would have no right to claim any increase in the agreed contract rates because of increase in the cost of living, or increase in price of oil or any other increase whatsoever. The delay in completion of the work was alleged to be on the part of the contractor. The award allowing compensation was set aside. (8) State of Kerala v. MathaP. In this case, decided under the 1940 Act, award allowing enhanced rates on extra items of work by holding that the supplementary agreement containing prohibitive condition was signed under compulsion of the department, was set aside. It was held that once the agreement had been entered into, the arbitrator was not called upon to adjudicate as to the circumstances under which the parties had come to the agreement; that is a matter for an appropriate Court to consider. It is to be noted that under the 1996 Act, the arbitrator is empowered to decide the validity of the agreement and this decision will be of doubtful utility to cases to be decided under the 1996 Act, it is respectfully submitted. (9) Union of India v. Mohanlal Harbanslal Bhyana & Co.20. An award granting revision of rates for the work done when the work could not be completed within the stipulated period was set aside on the ground that the agreement clause 10 CC provided for escalation

and the arbitrator could not ignore the said clause and award escalation over and above the escalation paid and extension of time granted. Reliance was placed on the Division Bench decision in Delhi Development Authority v. KCGoyal & Co. and Delhi Development Authority v. U. Kashyap21 The author with respect submits that the Division Bench decision in Metro Electric & Co. v. Delhi Development Authority22 had laid down good law by holding that the Clause 10C incorporated in the agreement contemplates completion of the work wifJiin the agreed time schedule and if the work prolongs beyond the completion date so stipulated, the Clause is not attracted to prohibit payment of compensation for breach of contract, if the actual loss is in excess of the escalation payable under Clause 10 C. Clause 10(CC) also stipulates payment of escalation "only for the work done during the stipulated period of the contract including such period for which the contract is validly extended...". Of course, as stated in the analysis of case (5) above, if the extended period vis-a-vis the originally stipulated period is 'reasonable' the claim may not be tenable. Where it is found that the agreed escalation formulae gave partial relief that would not neutralize value increase in prices of materials, award of compensation can be allowed.23 Similarly, if the contract duration is not validly extended under clause 5 of the conditions of contract without any action under Clause 2 18 19 20 21

22 23

Osnar Paints & Contracts Pvt. Ltd. v. N.B.C.C 2002 (3) Arb. LR 653 (Delhi); also see: Rajasthan State Mines and Minerals Ltd., v. Eastern Engineering Enterprises and another, AIR 1999 SC 3627; State of Kerala v. Mathai 2003(3) Arb. LR 29 (Kerala) (DB); S. K. Samanta and Company v. Central Coalfield Limited, AIR 2000 Pat. 36. Union of India v. Mohanlal Harbanslal Bhyana & Co, 2002 (Suppl.) Arb. LR 474 (Delhi). Delhi Development Authority v. KCGoyal & Co. 2001 II AD (Delhi) 116; and Delhi Development Authority v. U. Kashyap 1999 (1) Arb. LR 88 (Delhi); Also see: Jagat Ram Trehan & Sons v. DelhiDevelopment Aauthority, 2003 (2) Arb. LR 110 (Delhi). Metro Electric & Co. v. Delhi Development Authority, AIR 1980 Del.266 . Prem Chand Sharma & Co. v. Delhi Development Authority, 2003(1) Arb. LR 417 ( Delhi).

thereof , the payment of escalation under 10 CC would have no application and award of compensation or escalation will be in order. 24

(10) Bengal Trading Syndicate v. Union of India : Placing reliance on the decision in Steel Authority of India v. J.C. Budharaja 25 in which the Supreme Court has held that the Arbitrator cannot exceed his jurisdiction or go beyond the terms of the agreement it was held 26 : "From the aforesaid decision, it is apparent that the Arbitrator his passed award in respect of Item

No. 5 contrary to the express terms of the agreement which are not capable of two interpretations. Thus the arbitrator has exceeded his jurisdiction while holding that foundation work was not included whereas it was included in the express terms of the agreement and the prices were quoted with respect to Building No. 5 by the contractor in a lumpsum contract. We have come to this conclusion particularly in view of the absence of finding by the Arbitrator that there was any deviation ..." (11) M/s. Hydcl Construction Ltd. v. H.P. State Electricity Board : In case it was held to be an error apparent on the face of the record vitiating the decisions of the Arbitrators in respect of Claim No. 3 as they have gone beyond Para 1.09 of Technical Conditions. It was further held "This was not a case of interpretation of a clause of Contract Agreement or technical conditions annexed thereto but a case in which the Arbitrators have read something in Para 1.09 of Technical Conditions which is specifically prohibited. Had the sentence "No extra payment shall be made for use of manufactured sand for such change over" not been there, the Arbitrators would have been right in allowing this claim Therefore, we have no hesitation to uphold the findings of the learned

single Judge whereby he has set aside the award of the Arbitrators against Claim No. 3 by accepting the Objections of the Board.28" (12) New India Civil Erectors (P) Ltd. v. O.N.G.C. Ltd.: In a case, the agreement between the parties clearly stipulated that in measuring the built-up area, the balcony areas should be excluded. It was held by the Supreme Court that the arbitrators could not have acted contrary to the said stipulation and awarded any amount to the appellant on that account.29 To conclude the discussion reference can be gainfully made to the case below decided by a Bench of Three Judges of the Supreme Court of India.

(13) Bengal Traders v. West Bengal State Electricity Board30 The contract in the said case included a provision : "49. Escalation: The unit rates quoted shall be firm and shall remain applicable during the entire period of execution of work up 24

25 26

M/s G. D. Tewri & Company v. DDA in suit No. 2376/93 decided on 2.5.1995 followed in D.D.A. v. Hindustan Construction Corporation, 2002(1) Arb. LR 98 ( Delhi) also see Union of India v. M/s. Supreme Construction, AIR 1998 Bom. 198. Steel Authority of India v. J.C. Budharaja (1999) 8 SCC 122 : (AIR 1999 SC 3275). Bengal Trading Syndicate v. Union of India AIR 2001 MP 71.

28 29 30

M/s. Hydel Construction Ltd. v. HP. State Electricity Board, AIR 2000 HP 19. New India Civil Erectors (P) Ltd. v. Oil and Natural Gas Corporation, AIR 1997 SC 980. Bengal Traders v. West Bengal State Electricity Board, 2001 (Suppl. ) Arb LR 7 (SC).

to the completion and no escalation in rates will be permitted due to increase in prices ol' materials, rise in labour wages, railway freight or due to any other reasons." The appellant-contractor's claim before the Arbitrator was this : "Ref. 1. Loss of expenditure, overhead, establishment, idleness of imported labour, increase in costs of execution during prolonged period and compensation of loss and profit Rs.

4,56,684.03. Ref. 2. Loss due to blockage of capital by way of interest at the rate of 18% on Rs. 4,80,631 fromJuly, 1983—Rs. 3,81,851." The Arbitrator made a lumpsum award. He said, "The West Bengal State Electricity Board, the respondent shall pay a sum of Rs. 3,50,000 (Rupees three lacs fifty thousand only) to the claimant within 3 (three) months from the date in full and final settlement of the claims". He also awarded post-award interest. The award was challenged by the respondent. The learned single Judge rejected the challenge and made the award a Rule of the Court. In appeal there against, the only case that was advanced was that the entire claim of the appellant before the Arbitrator was for compensation on account of escalation and this was untenable because of the prohibition contained in Clause 49. The contention was upheld by a Division Bench of the Calcutta High Court. Learned counsel for the appellant had pointed out that the claim of the appellant before the Arbitrator was riot exclusively for escalation. In this behalf, he has also drew attention to the Statement of Objections that was filed by the respondent before the High Court, where it was stated :

519

Building and ijiginccrtng Contracts

"The claims of the respondent were in the nature of damages and/or compensation including loss of profit. There is also a claim for escalation made by the respondent. The alleged claims of the respondent have raised for alleged breach of the petitioner delaying the completion of the Work." "Attention has also been drawn to the judgment of the Hon'ble Supreme Court in State of Andhra Pradesh and others vs. R.V. Rayanim and others'31. Learned counsel appearing on behalf of the respondent had submitted that a reading of the claims made by the appellant before the arbitrator showed that they were for escalation in the sense that the claims were for damages for the delay in the execution of the work. He submitted that, therefore, they were covered by the bar of Clause 49." It was held: "We cannot agree. What Clause 49 disables the appellant from claiming is escalation of unit 31 State of Andhra Pradesh and others vs. R.V. Rayanim and others' 1990 (1) SCC 433 = 1990 (1) Arb. LR 1(SC).

rates. It does not apply to a claim tor damages of the nature made by the appellant. To the case, the rationale of the judgment in Rayanim's case squarely applies." The appeal was allowed. The judgment and order under challenge was set aside and the order of learned single Judge was restored. The author respectfully submits that this Judgement lays down good law. Where, however, the contract expressly prohibits payment of compensation, such provision being an exemption clause will have to be strictly construed and should be made applicable only when a party is

adhering to the terms of the contract and not deviating or breaching the said terms.32

(14) Himachal Pradesh Nagar Tatha Vikas Pradhikaran v. M/s. Agrawal Construction Company33 The department was found responsible for the delay in execution of the works contract. The arbitrator awarded increase of 25% over and above the tendered rates of the contractor for all works executed after the stipulated date of completion of work. The department had supplied material and did not charge increased rates. The contractor was held not entitled to 25% of escalated cost in that behalf. Care needs to be exercised by an arbitral Tribunal to exclude the cost of owner supplied materials at fixed rates while working out the percentage increase to be awarde, it is submitted.

12.9 DELAY IN COMPLETION OR TERMINATION OF CONTRACT BY THE OWNER Experience shows that majority of the cases which lead to arbitration and/or Court proceedings arise out of the facts which develop somewhat as under : (i) Delay in completion of the work due to non-availability of (i) site , and/or (ii) designs and drawings and/or (iii) funds resulting in non-payment or delay in payment of running account bills,

(ii) The breach, if of a serious nature, the contractor treats himself discharged from the further performance of the work or repudiates the contract himself, or (iii) The owner after granting an extension of time or without granting it, wrongfully and illegally terminates the contract, or

520

Building and ijiginccrtng Contracts

(iv) The contractor completes the work or pending completion of the work commences legal proceedings for recovery of damages caused by the delay in completion of the work. In all the above cases, if it is established that the owner has committed the breach of contract which goes to the root of the contract and as a result, the contract is terminated by either party, or the contractor completes the work and stakes his claim for compensation, the owner will be liable to pay compensation to the contractor.34 32 33 34

Hyderabd Municipal Corporation v. M. Krishnaswami, AIR 1985 SC 607. Himachal Pradesh Nagar Tatha Vikas Pradhikaran v. M/s. Agrawal Construction Company, AIR 1997 SC 1027; Also see Govt, of A.P. and others, v. V. Satyam Rao, AIR 1996 AP 288. D.D. Sharma v. Union of India; 2004(2). Arb. LR 119 (SC).

(1) The contractor was to complete the work of widening a portion of N. H.- 42 on the basis of the agreement within 24 calendar months from the date of commencement of the work at an agreed cost of Rs. 56,86,233/-. The Contractor could not progress with the work in accordance with the specified time schedule. He submitted revised programme for execution of the work, but he could not adhere even to the revised schedule. Ultimately the contractor abandoned the work in an incomplete state after execution of work worth Rs.13, 30,741/-. Both sides have accused each other for being responsible for delay in execution of the work. As the respondent-contractor left the work incomplete, the contract was rescinded by the appellant after giving a show cause notice. Appellant State also levied compensation for inability to execute the assigned work in accordance with the agreed time schedule. The basic dispute between the parties was who was responsible for the delay in execution of the work. Upon a consideration of the materials placed before it, Tribunal came to a finding that the State Government was mainly responsible for the delay. The Tribunal recorded that out of 84.28 acres of private land needed for executing the work, only 27.18 acres were delivered by the claimant during the period from 1981 up to the time when the Contractor abandoned the work for non-availability of land, the Contractor was not allowed to construct at least 7 numbers of culverts in accordance with the agreement. The Tribunal also found that unauthorised deductions from the running bills crippled the contractor financially. Tribunal also found that refusal to allow additional amount for increase in the wages in spite of specific stipulation in the agreement rendered execution of the work uneconomic and forced the contractor to leave the work. Tribunal considered various claims under different heads and ultimately found that the Contractor was entitled to receive a sum of Rs. 3,09,689 / - from the State. The Orissa High Court, disposing of the challenge to the award held35: "In view of such finding it cannot be accepted that there was any circumstances warranting invocation of clauses authorising the appellant to claim compensation to impose penalty and to forfeit the security." (2) Where the contractor was asked to suspend the construction work for one month and the scope of the work was also reduced and the contract was arbitrarily terminated award of compensation on account of overheads and lost profit was upheld by the Karnataka High Court.36

12.10 THE ASSESSMENT OF DAMAGES PAYABLE TO THE CONTRACTOR In all cases, the main question will be as to what amount of compensation, the contractor will be entitled to, due to the breach of contract committed by the owner. It 35 36

State of Orissa, v. Birat Chandra Dagara, AIR 1997 Ori 142. K.S.R.T.C. v. M. Keshava Raju, AIR 2004 Kant. 109; also see C. T. Xavier v. P. V. Joseph, AIR ■• 1995 Ker. 140.

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needs to be noted that the contractor's price build up in his tender, or, in other words the tendered cost, consists of five heads: Cost of: (i) (ii)

Materials, Labour,

(iii) (iv) (v)

Machinery and equipment, Management and Profit.

The first three are called direct costs and the last two indirect costs. The cost of work bears a definite relationship with the time allowed for completion. The early completion may increase the direct costs but results in decrease of the indirect costs and possible increased margin of profit. The delay in completion, in these days of inflation when prices of inputs increase with the passage of the time, generally results in increase in the cost of all heads. The burden of increased cost, for the purpose of establishing with evidence, can and is usually divided into damages as follows: 1. Loss of overheads and profit : (i) During the stipulated period for completion of the work and (ii) During the extended period. 2. Direct losses on account of idle labour and/or reduced productivity from machinery and equipment: (i) During the stipulated period, and (ii) During the extended period. 3. Increased cost of materials, and labour: (i) During the stipulated period, and/or (ii) During the extended period. 4.

Claim for enhancement in the agreed rates or revision of rates for the work done beyond the stipulated period.

5.

As an alternative to all the above claims the contractor may claim payment for the work done on the basis of "quantum meruit".

The claim for enhancement in the agreed rates or revision of rates for the work done beyond the stipulated period when made should incorporate within its fold the claims under the first three categories for the extended period. In other words the fourth head must include sub head (ii) of the first three categories. The contractor is bound to carry out the work at the agreed rates during the stipulated period, and as such the claim for loss on account of increased cost of inputs like materials, etc. under category 3 (i) is difficult to establish though not impossible to be conceived. For example, if the contractor had arranged to purchase materials at agreed prices which are valid for first few months and which he could not receive due to say non-availability of site and after the site is made available, the supplier has charged higher rates, the difference in cost to that extent is clearly a damage which the contractor will be entitled to be compensated, il' properly established by producing the agreement with the supplier, the need for the materials as per

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the programme submitted and subsequent modification in the supplier's agreed rates, etc. These claims are further explained below.

12.10.1 Loss of Overheads and Profit For proper appreciation of this claim, a little understanding of the contractor's price build up is necessary. The cost of any item of work consists of the cost of materials, labour, and machinery, which is called direct cost as already stated. After a detailed analysis of each item rate, the prime cost of the whole project is found by multiplying the quantity of work under each item by the rate so worked out. To this prime cost or direct cost is added generally a single percentage for both the overheads and profit.

"Overheads" are indirect expenses required to be incurred by the contractor for the management of execution of the work and are of such nature that they cannot be specifically attributed to any particular item of work or contract. There are literally dozens of items ' expenses such as interest on borrowed capital, office rent, power bills, salaries of office and supervisory staff, stationery, postage, telephone bills, travel expenses, insurance, etc. In a similar manner the costs of small tools and plant such as iron baskets, ladders, rope etc. are also included under this heading. Every firm maintains or is expected to maintain the accounts of expenses under this heading At the end of each financial year, it is, therefore, possible to find out the percentage these costs bear on the total turnover of the firm. For example, if the overheads of a firm in a year amounted to Rs-95,00,000 and the total turnover of the firm in that year was Rs.10,00,00,000/- the firm worked with overheads amounting to 9.5% of the total turnover. This percentage figure will vary from firm to firm depending upon the size of the firm and efficiency of its site organisation and management.

"Profit" is the only remuneration that a contractor gets for execution of a works contract. It has been said that "the profit is the cost of being in business today and remaining in business tomorrow." The margin of profit a contractor may expect depends upon many factors such as the nature and volume of the work, availability of machinery and equipment, works in hand, etc. The percentage figure may vary from 15% on small jobs to 5% on big ones. The Cost Committee Report published by the Government of India, the Ministry of Irrigation and Power (Central Water and Power Commission) in 1950, after investigation and survey of the various major irrigation projects in India, has laid down and recommended the percentage of overheads and profits to be considered in the estimates to be prepared by the various departments of the Government as under : "Overheads" : An allowance of 10 per cent would be adequate for the contractor's actual expense on supervisory establishments, field office and share of head office charges, travelling expenses, insurance of damage to plant and injury to labour." "Profit: We believe that in normal circumstances an allowance of 10 per cent of the prime cost as contractor's profit is reasonable." In view of the above, compensation is often awarded on the basis of 20% allowance for overheads and profit. Award of loss of profit at 10% in cases of termination of contract being a direct loss is also not uncommon/' 8 In exceptional cases, wherein the contractor's

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tendered rates are higher or lower than the prevailing market rates, the percentage to be adopted would be accordingly, higher or lower, depending upon the proof tendered.

12.10.2 "The Hudson Formula" Critically Examined and Explained For the assessment of the contractor's losses due to delay, under this head, the formula as

stated by Hudson in his book 'Building and Engineering Contracts', 10th Edition on page 59939 is as follows : (H.O/Profit Percentage) divided by 100 x Contract Sum divided by contract period in weeks/ months x Period of delay in weeks/months. The above formula is based on the simple rule of three. One has to find out the weekly or monthly expected turnover which when multiplied by percentage of overheads and profit will yield the rate of expected overheads and profit per week or month v/hich when multiplied by the delay in weeks or months will give the loss of overheads and profit. If, for example, overheads and profit combined contribute Rs.20 in the contractor's tendered rate of Rs.100, the contract sum is Rs.10,00,000/- and the time limit allowed is 40 weeks, the pro-rata amount per week, the contractor expects towards overheads and profit from this contract would be : 20 10,00,000 ------x ------------------ = Rs.5000/100 40 This amount represents the loss per week for each week's delay at the site of the work. Let us consider, that there is a delay of 10 weeks in completion. The compensation under this head, according to this formula works out to Rs. 5000/- x 10 weeks =Rs. 50,000/-. Let us analyse the contractor's financial position. On completion of the work, the contractor had received considering only this aspect, the losses on the other counts apart, towards overheads and profit 20% of Rs.10,00,000 = Rs. 2,00,000/- plus Rs. 50, 000/- by way of compensation totalling to Rs. 2,50,000/-.He would have received Rs.2,00,000/- only, had he completed the work in 40 weeks as scheduled i.e. at the rate of Rs.5000/- per week.. As against this he receives Rs.2,50,000 in 50 weeks which works out to Rs Rs. .5,000/- per week. Now, it is to be understood that the overheads of an organisation are somewhat in the nature of "standing charges" and remain more or less the same irrespective of the actual turnover. 38

39

Delhi Development Authority v. Polo Singh & Co., 2003 (1) Arb. LR 270 (Delhi) (DB); Also see C. T. Xavief and others, Appellants v. P. V. Joseph and another, AIR 1995 Ker. 140. The Superintending Engineer, T.N.U.D.P., Madras Circle and another, Petitioners v. A.V. Rangaraju and another, AIR 1994 Mad 217. In 11th Edition at page 1076.

The profit-earning capacity also, therefore, musl be presumed to remain the same, in other words, in the above example, the contraclor is actually capable of getting Rs. 5,000/ - per week (say Rs. 2,500/- by way of actual expenses under "overheads" and Rs. 2,500/-by way of profit earning capacity) and his organisation remains at the site for a period of 50 weeks. If he has lo be put in the same position, as far as payment of money could do it, in which position he would have been if the owner had nol committed breaches of contract, the

»

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amount of compensation as per the principles universally accepted including by the Supreme Court of India40 would be: Compensation payable = Rs.5000 per week x 50 weeks = Rs.2,50,000/-(less received in final bill 20 x 10,00,000/- =) Rs. 2.00.000/- = Rs. 50.000/- which is the same amount worked out by the Hudson formula. Thus the formula holds good for compensating the contractor for the shortfall in progress during the stipulated period and also during the extended period. Similarly, it compensates both the profit actually lost and loss in profitability. In practice, while drafting pleadings and arguing cases or giving awards some difficulties are likely to arise. For example, the formula assumes that the profit expected by the contractor in his prices was in fact capable of being earned by him elsewhere had the contractor been free to leave the delayed contract at the proper time. It requires two factors to be established41 : (i) the rate tendered by the contractor contained the profit percentage and the percentage was realistic; and (ii) there was no change in the market, so that the work of at least the same general level of profitability would have been available to him at the end of the contract period. There is no doubt that satisfactory evidence on these matters is necessary, even if one succeeds in persuading that the loss is not remote and imaginary. More often than not it is difficult to establish the second one at least, of the above factors. If an arbitrator or Court were to reject the claim for profitability, there is a chance that the formula would be adopted eliminating the profit margin altogether whereby the claim is likely to be upheld up to 50%, in which event the loss in the profit margin during the stipulated period, which can be easily established, is also likely to be denied to the contractor. The second practical difficulty is also likely to arise in using the formula straightaway. In a bulk of the cases, it is seen that the actual turnover during the stipulated period is never proportional to the total time taken for actual completion vis-a-vis the time-limit stipulated for completion.^ To explain this point, in the above illustration, it is seen that for rupees one million cost, the time-limit is 40 weeks giving an average estimated turnover of Rs. 40 41

M/s Murrlidhar v. M/s Harichandra, AIR 1962 SC 366. For example, see: All India Radio v. Unibros & Anr., 2002 (Snppl.) Arb. LR 618 (Delhi).

25 ,000/- per week. In the 40 weeks if work valued at Rs.7.5 lakhs is completed leaving 25%

of the value of work to be completed in the extension of 10 weeks, the average turnover per week in the extended period will be Rs. 25 ,000 that is equal to the estimated turnover. This rarely happens. The actual turnover in the first ten months may be only Rs. two lakhs or less, or may be nearly Rs.ten lakhs due to extra items and excess quantities. Also the balance work sometimes lingers for a period too far in excess of the originally stipulated period or is done more expeditiously than the originally contemplated average speed. The final bill value and the contract sum may also differ considerably. The application of the above formula will yield non-acceptable results in the light of the defence arguments and evidence available. This can

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be demonstrated by comparing the results with the form tried, tested, and developed by the author and used successfully in practice for the past over 25 years.

12.10.3 Suggested Basis42 : "Patil Form" The principle : The principle used is the one generally accepted by the judiciary including the Supreme Court of India, namely, ascertainment of that sum of money which when paid by the owner to the contractor, the contractor would be placed in the position in which he would have been if the project would have been completed within the stipulated period, as far as overheads and profit elements are concerned.

Illustrative Example (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14)

Contract sum .............. ............... ............... Prime cost ................................. ............... ................ Overheads & profit ............... ............... .............. Time-limit ................................... ................ .............. Value of the work done within the stipulated period. Pro-rata overheads & profit received / receivable during the stipulated period: Serial No. (3) divided by (1) x (5) = Rs Net loss incurred as on the date stipulated for completion = (3) - (6) = i e 2.00.000- 70.000 = Rate of overheads per month= Serial No. (3) divided by (4) = Rs. Delay in months Amount pro-rata due for the extended period = Serial No. (8) x (9) = Value of the work done in the extended period (including extra work)= Amount pro-rata received =Serial No. (3) divided by (1) x (11) = Net loss incurred during the extended period = Sr.No. (10) minus (12)= Grand total loss incurred during the original and the extendeH$ period .................................... ............... ...........................

42 For convenience of reference called "Patil form"

Rs. 10,00,000/Rs. 8,00,000/Rs. 2,00,000/10 months Rs. 3,50,000/70,000/Rs.

1,30,000/20,000/8 months

Rs.

1,60,000/-

Rs. 8,00,000/Rs.

1,60,000/Rs. NIL

Rs.

1,30,000/-

Building and Engineering Contracts

Hudson formula gives the result = Expected rale of Overheads and profit per week Rs. 20,000 x 8 weeks delay = Rs. 1,60,000/-. The difference is due lo the execution of the extra work valued at Rs. 1,50,000/- during the extended period. If due to the curtailment of the scope of work, the final value of the work is reduced to say, Rs. 8,50,000/-. The loss incurred in the extended period in the above example would be :

(11) Value of the work executed in the extended period (Rs.8,50,000 Rs.3,50,000) (12) Pro-rata overheads & profit received @ 20% (13) Loss incurred during the extended period (10) - (12) (Rs. 1,60,000-Rs. 1,00,000) (14) Grand total of loss incurred during the completion period (= Rs.1,30,000/- + Rs.60,000/-)

Rs. 5,00,000/Rs. 1,00,000/Rs. 60,000/Rs. 1,90,000/-

This is against Rs.1,60,000/- evaluated by the Hudson Formula. It will be seen that the Patil Form has the advantage of no separate claim being required to be raised for curtailment of the scope of the work. It is possible to establish each of the elements reflected in the above analysis by tendering appropriate proof, and the method is flexible enough to permit correct evaluation wherever differing elements enter into the analysis or the proof falls short and part of the claim is to be rejected on that ground or on any other count.43 This method would help eliminate the stock argument :hat assessment of loss is done on the basis of ad hoc formula without due consideration to the evidence on record or without there being any evidence introduced at all. This form has a further advantage inasmuch as in a case where the owner wrongfully and illegally terminates the contract immediately after the stipulated date for completion of the work, the contractor will be entitled to compensation worked out by the above method up to the date of completion originally stipulated in the contract. For use of the Hudson formula in such a case, pro-rata delay has to be assumed.

Proof to be tendered In order to succeed in getting compensation for the loss of overheads, the contractor should tender proof in the manner suggested as follows: (i) Analysis of tendered rates/cost to ascertain what percentage provision was made for overheads and profit supported by evidence that the other inputs like cost of materials, labour and machinery etc. was realistic. (ii) Extracts from audited balance sheets of previous couple of years to show that the provision for overheads made in the tendered cost was realistic. (iii) Audited balance sheets of the relevant years when the work in question was in progress to ascertain the percentage of overheads actually incurred against the total receipts from all contracts and the same percentage can be used on pro-rata basis to work out the actual overheads incurred on the project. 43

See for example, claim for overheads allowed in Rajesh Khanna v. Govt, of NCT of Delhi, 2005 (1) Arb. LR 247 (Delhi).

If lhe aclual overheads incurred on lhe contract as worked out in (iii) above is equal to or more than the provision made in lhe tendered cost, thai is (i) above, the difference, as claimed in lhe Patil Form, would be fully payable as compensation and not the actual loss as seems to be apparently suggested by the Eichleay Formula.

Building and Engineering Contracts

12.10.4 Eichleay Formula The Eichleay Formula finds mention in Hudson's book in 11"' edition which incorporates the basis suggested above by the author and the manner of establishing the loss with one major

difference. The Eichleay Formula apparently justifies the amount claimed as lost, on the basis of actual expenses incurred on overheads, without restricting the amount to the provision made in the tendered cost. The compensation to be paid has to be restricted to the loss which the parties knew when they made the contract to result if there would be a breach of contract. Thus, the Patil Form which restricts the compensation to the loss anticipated by the parties at the time they made the contract not only meets this essential legal requirement under the Indian law, but also meets the possible defence arguments that the actual overheads could have increased due to mismanagement of other contracts.44

12.10.5 Loss of Profit The undisputed position is that where in a works contract, the party entrusting the work commits breach of the contract, the contractor would be entitled to claim damages for loss of profit which he expected to earn by undertaking the works contract. What must be the measure of profit and what proof should be tendered to sustain the claim are different matters. But the claim under this head is certainly admissible.45 The claim should be assessed as on the date of termination of the contract and future conduct of the parties or subsequent events may be wholly irrelevant.46 The proof to be tendered to claim loss of expected profit is the analysis of the tendered rates with supporting evidence that the profit provided was capable of being earned from the contract if there would have been no breach of the contract. The books of accounts would be of little help unless the contractor has maintained separate accounts for the contract in question, which is rarely the case. It is so because the overall company's position may show profit earned but it can always be argued that it was from the other contracts in hand. It is submitted that the margin of the profit expected if proved, and the breach of contract by the employer is established, the contractor will be entitled to the compensation of the loss of expected profit, without any further proof. ILLUSTRATIONS (1) In a contract for providing cement concrete surface for the section 18 to 40 miles to the then existing road, a tender 7.5 % lower than the estimated cost was accepted for a sum ol' Rs. 44 45 46

An example case in which Patil form was adopted see: Bhowandas Sadhwani v. State Government of M.P.& Ors., MPArbitration Tribunal, Arb.LR (Suppl.) 1996; Vol. 24 Pp475. M/s. A.T. Brij Paul Singh & Bros. v. State of Gujarat, AIR 1984 SC 1703; Mohd. Salamatullah v. Government of Andhra Pradesh, AIR 1977 SC 1481. Dwarka Das, Appellant v. State of M. AIR 1999 SC 1031. M.D., AWHO v. Sumangal Serices Pvt. Ltd., 2003(3) Arb. LR 361 (SC).

16,59,900/-.

The time limit l'or completion of the work was 14 months from the dale fixed by the writlen order lo

completed sub-grade work over live miles and concrete was 1/2 miles. Certain dispules arose between the parties as a result of which the state rescinded the contract imputing thai as time was of the essence of the contract and as the contractor failed to execule the work within the stipulated time, he was guilty of committing a breach of the contract. The contractor, after accepting payment of the final bill uncjer protest, filed a suil for recovery of damages on various counts including cost of alleged extra work done.

commence the work. The contractor commenced the work, laid for 2

Building and Engineering Contracts

The trial Court held that although a witness on behalf of the contractor had orally given the minutest details and measurements of the work executed by the contractor, no documentary evidence was produced to substantiate the claim and therefore, the plaintiff contractor failed to prove the damages as claimed. In the appeal the High Court reversed the findings of the lower Court on the question of justification of rescission of the contract by the State, examined the principal contention whether the contractor was entitled to recover damages for expected profits and rejected the claim for want of proof. The Supreme Court of India held that the State was guilty of breach of works contract, part of which was already performed and as such the contractor would be entitled to damages. The Supreme Court of India further observed : " .... What would be the measure of profit would depend upon the facts and circumstances of each case. But that there shall be a reasonable expectation of profit is implicit in a works contract and its loss has to be compensated by way of damages if the other party to the contract is guilty of breach of contract cannot be gainsaid." It was finally held : "... Adopting the measure accepted by the High Court in the facts and circumstances of the case between the same parties and for the same type of work at 15% of the value of the remaining parts of the works contract, the damages for the loss of profit can be measured." It is pertinent to note that in the course of their Judgment, their Lordships did refer to the reference made by the High Court to Hudson's Building and Engineering Contracts, 10th Edition, wherein it is observed that "head office overheads and profit is between 3% to 7% of the total price of cost," and that the tender submitted by the contractor was 7.5 % less than the original estimated cost. The author respectfully submits that the percentage of overheads and profit in each case requires to be, and can be proved, and 3% to 7% margin is low when considered in the light of experience of rates tendered in India. This combined percentage varies from 15% to 25%, though in the cases of some big companies and highly specialized jobs it may be as high as 30%. In this connection it may be noted that exact proof is not required in establishing damages. This proposition gains support from the following observations of the Supreme Court of India: "In our opinion, while estimating the loss of profit that can be claimed for the breach of contract by the. other side, it would be unnecessary to go into the minutest details of the works contract. A broad evaluation would be sufficient. "The law does not need absolute certainty of data upon which lost profits are to be estimated. All that is required is such 47

AIR 1984 SC 1703.

reasonable certainty that damages may not be based wholly upon speculation and it is sufficient if there is a certain standard or fixed method by which profits sought to be recovered may be estimated with a fair degree of accuracy." ( 2 )Wherc the arbitrator, after holding the termination of the contract as illegal awarded 10%

of the contract sum as loss of profit, the award was held to be valid. 47 (3) In another case it was observed:

48

The plaintiffs have suffered damages for loss of profit at 10% in regard thereto and therefore have claimed Rs. 79,263 /- in regard thereto. This demand is more than reasonable because any contractor expecting ten per cent profit and claiming damages in regard thereto on the basis of loss should be considered, reasonable in regard thereto. Ten per cent profits should be held to be justifiable."

Building and Engineering Contracts

(4) The respondent claimed Rs. 1,01,250/- estimating the loss of profit which he could have derived if he had executed the balance work and the profit was calculated at 15%. The learned arbitrator arrived at the value of the balance work not executed at Rs. 2.44 lakhs and calculated profit thereon at 15%. The arbitrator held that the respondent having committed breach of contract by not stopping the flow in the canal after July, 1985 for at least two months to complete the balance work, the Government was liable to pay him damages towards loss of profit on the balance work which the contractor was prevented from executing. The plea that the alleged damage was remote was negated. The learned Government Pleader appearing for the appellant had contended that this claim was not admissible on the principle of remoteness of damage and he placed reliance on the Division Bench decision of this Court in Govt, of A.P. v. E. C. Techno Industries Ltd., (1989) 2 Andh LT 320. It was contended that such a claim based on hypothetical considerations should have been ignored. It was held:

49

"We are unable to accept this contention. We do not think that any error of law has been committed by the arbitrator in awarding the aforementioned sum towards loss of profit which he could have made in the normal course of things if he was not disabled from performing the contract by reason of the breach on the part of the appellant."

Claim for Loss of Profit When not Allowed Where the claim of compensation for extra expenditure is claimed and also loss of expected profit is claimed it must be carefully examined to see that there is no overlapping or duplication of the relief. If the Patil Form is pressed into service there would be no question about duplication of the relief because total receipts under the contract get credited to find out the exact loss of turnover and resultant loss of expected profit. Where in a case, the claim made for loss of profit was in a sum of Rs. 10 lakhs, the Arbitrator held that on account of escalation in wages and .prices of materials compensation was obtained and, therefore there was not much justification in asking for 47 48 49

Superintending Engineer, T.N.U.D.P., Madras v. A.V. Rangaraju" AIR 1994 MAD. 217. Govt, of A.P. v. Satyam Rao, AIR 1996 AP 288. Govt, of A.P. v. Satyam Rao, AIR 1996 AP288; also see Oil & Natural Gas Corporation Ltd v. Comex Services SA 2003 (3) Arb. LR 197 (Bombay) (DB).

compensation for loss of profits on -account of prolongation of works. However, he came to the conclusion that while a sum of Rs. 12,00,000 would be the appropriate entitlement, he held that a sum of Rs. 6,00,000 would be appropriate. He also awarded interest on the amounts payable at 15% per annum. The award was upheld by the trial Court and the appeal dismissed by the High Court. The matter came up before the Supreme Court wherein it was held50: "Here when claim.for escalation of wages bills and price for materials compensation has been paid and compensation for delay in the payment of the amount payable under tne contract or for other extra works is to be paid with interest thereon, it is rather difficult for us to accept the proposition that in addition 15% of the total profit should be computed under the heading 'Loss of Profit'. It is not unusual for the contractors to claim loss of profit arising out of diminution in turn over on account of delay in the matter of completion of the work. What he should establish in such a situation is that had he received the amount due under the contract, he could have utilized the same for some other business in which he could have earned profit. Unless such a plea is raised and established, claim for loss of profit could not have been granted. In this case, no such material is available on record. In the absence of any evidence, the Arbitrator could not have awarded the same. This aspect was very well settled in Sunleyn

Building and Engineering Contracts

(B) & Co. Ltd. vs. Cunard White Star Ltd., (1940) I K.B. 740, by the Court of Appeal in England. Therefore, we have no hesitation in deleting a sum of Rs. 6,00,000 awarded to the claimant." The above observations, it is submitted with respect, do not affect the right of the contractor for loss of profit on account of breach of contract resulting in delay and/or termination of the contract by the employer. When the claim itself is for loss of profit, the question of reinvesting it to earn further profit cannot arise, it is submitted. The authority relied upon in the above decision lays down the proposition that in the absence of evidence as to actual loss of profit, from an excavating machine, the damage was loss of depreciation during the period, interest on the money invested, some maintenance and some wages thrown away, which are normally known in the engineering practice as 'standing charges'51 The law laid down by the Supreme Court in the cases discussed above 52 holds good, it is repectfully submitted.

12.10.6 Loss due to Idle Labour/Machinery and/or Reduced Productivity When a breach of the contract by the owner adversely affects the planned progress of the contractor's work, it is inevitable that the contractor's labour and machinery will be either rendered idle or will give reduced productivity. In the process, the contractor will incur losses which he will be entitled to claim by way of damages. This right to claim damages will be independent of the fact whether there is or is not any overall delay. This damage is usually very hard lo assess. Particularly evidence in respecl of idle labour wages is rarely available. 50 51 52

Bharat Coking Coal Ltd. v. L. K. Ahuja, 2004(1) Arb. LR 652 (SC). Hudson's Building and Engineering Contracts, 10th Ed. Illustration at page 600; also see Chitty on Contracts 24th Edx. Pp 726. M/s. A.T. Brij Paul Singh & Bros. v. State of Gujarat, AIR 1984 SC 1703 and other cases discussed above.

When evidence is produced, lhe award is nol bad." Where a claim was made (or idle labour due to non-availability of the sile for conlinuous work but no record was produced in evidence, the award was sel aside to the extenl compensation was allowed. 54

It is possible to establish the loss due to machinery and equipment. While assessing the loss of productivity of plant "standing" charges alone are to be considered and "operating" charges component in the hire charges should be considered as possible to be mitigated. It is not

necessary that the equipment should have been procured by the contractor on hire because even in respect of equipment owned by the contractor his loss will be the "standing charges". When the deployment of bare minimum machinery is not disputed and there is a finding by the arbitrator that the work was prolonged for no fault of the contractor, award of idle charges on per day basis for the number of days the machinery remained idle, it was held that there was no infirmity in the award.55 It is not unusual in the absence of any more precise method, to claim this type of loss as an arbitrary percentage on total labour or plant expenditure during the period of dislocation. In the contractor's price build up, the normal component for machinery, in die case of building works will be about 5% and in the case of big engineering projects like dams, canals, highways, etc. requiring use of heavy machinery and equipment, the component may be of the order of 10 per cent. The labour component is generally 20 to 25%. In plumbing contracts, it may be 12% to 15%. ILLUSTRATION

Building and Engineering Contracts

Working hours contained in clause of a contract were curtailed with respect to vehicles further from 10.00 hrs. to 12.00 hrs and from 14.00 hrs to 16.00 hrs. However, the Clause 3.4 further provided that contract labour shall leave the site gates by those hours and no claim for compensation shall be admitted by Govt, for any less working time on account of time spent in check at the gate and searching by security staff from time to time. The arbitrator awarded the amount for imposing further restrictions on the time agreed as per the agreement between the parties which was substantially reduced for vehicle to four hours. It was not the case of the respondents that time was consumed in security. Only with respect to the loss of time in thorough search on account of security of the transport vehicles, no claim of compensation would be entertained as per alternation made in Clause 3.4 of the Special Conditions. It was not on account of this that the Arbitrator had awarded the amount. The trial Court set aside the award. Deciding the appeal it was held:56 "..Where there are certain clauses which are considered by the Arbitrator, even if the clauses are such where two views are possible, if the Arbitrator has adopted a particular interpretation it is not possible for the Court to interfere with the award. As parties have 53 54 55 56

C. Srinivasa Rao v. P. rarnankutty AIR 1999 mad. 317. State of A.P. v. K. Krishnam Raju, 2004(1) Arb. LR 566 (AP). Jagat Ram Trehan & Sons v. Delhi Development Authority, 2003 (2) Arb. LR 110 (Delhi); Also see: J.S.Constniction v. Delhi Development Authority, , 2002(1) Arb. LR 311 (Delhi) Bengal Trading Syndicate, v. Union of India, AIR 2001 M P71.

agreed for settlement of their dispute by the Arbitrator the award should not normally be interfered with if it is within the purview of the agreement. The law in this regard is cicalas per the ratio of the decisions in M/s. Hind Builders v. Union of India, AIR 1990 SC 1340 and U.P. Hotels v. U. P. State Electricity Board (1989) 1 SC 359. Though it was restricted area, but it was a case of imposition of further restrictions and when the Arbitrator has come to a conclusion that further restrictions not contemplated under the agreement are in violation of it, were unreasonable even if it is possible to take a different view by Court. It is not permissible for a Court to make interference in an award as such an error is not an error which calls for correction by the Court. Thus, as there was no mistake with respect to Item

No. 31(a) on the face of the award, it is not for the Court to appreciate the evidence and substitute its own view as pronounced in the case of Hindustan Construction Co. Ltd. v. Governor of Orissa (1995) 3 SCC 8 : (AIR 1995 SC 2189) by the Apex Court. "It was further observed: Terms of the agreement can be seen in order to find out whether the

arbitrator has exceeded jurisdiction as laid down in Tarapore and Co. v. State of M.P. (1994) 3 SCC 521. With that view we have examined clauses 3.1 and 3.4 of the agreement so as to find out whether error was committed by the Arbitrator by crossing its jurisdiction and violating the agreement. We find that no such violation had been committed by the Arbitrator." Where on account of breaches of contract conditions the machinery and equipment is rendered idle during different periods, the loss would be incurred and can be assessed separately for the said periods. As a result of the breaches if there is delay, the claim for loss of profit if made is in essence the claim for loss of profit earning capacity. If all sorts of claims are made out of the same cause of actions, it is likely to be held as duplication of relief and if the basis is not properly explained such as in a non-speaking award, the entire award gets vitiated.57 The claim for loss of profit and reduced productivity and idling of machinery, equipment are different heads and the loss incurred is independent under each head and there is no duplication. Profit is a remuneration expected by the contractor and as such is related to the time originally agreed to be spent and time actually spent at the site. When losses incurred

532

Building and Engineering (loniracts

under all other heads are fully compensated the contractor recovers his actual investment or outgoings and if loss of profit is not added to work out compensation, it amounts to his having agreed to work without expecting any profit, which is contradictory to the otherwise well established principle of the law.

12.10.7 Loss clue to Increased Cost of Materials and Labour (a) Loss during the stipulated period If due to breach of contract by the owner the contractor's planned programme is adversely affected it is possible that he may have to pay more for materials and labour due to delay and price fluctuation. This increased cost, he is entitled to receive by way of damages. This claim, however, can be conceived in theory but difficult to get in practice, firstly, for want of proper proof of the contractor's planned programme for procurement of materials, the increase in 57 Punjab Mandi Board v. Gurubax Singh and Ors., 2003(3) Arb.LR 630 (P &H).

cosl, elc. and secondly, because most present day works conlracls provide for price escalation clause in lhe contract. It is Irue thai lhe contractor under Ihese facts and circumstances will be bound by his tendered rates subject lo price adjustment according lo "escalation" provision, for the full period stipulated for completion of the work and the claim ordinarily will not be tenable.

(b) Loss during the extended period The contention that the contractor will be bound by the agreed rates till completion of the project, when the contract contains a provision for extension of time and the extension of time is granted to him, needs careful consideration. The fact that the contractor has undertaken to complete the work at the agreed rates (i) within the stipulated period, and (ii) with a provision for extension of time lends support to the above contention that his agreed rates will be binding till completion of the work. In fact, on proper construction of the terms of contracts, this contention appears sound but within a reasonable limit. In practice, one comes across, and quite frequently too, where this contention is attempted to be extended beyond its elastic limit and abused to the point of shocking the conscience of a reasonable man. The author had in his practice to deal with cases where completion of the project got delayed by over 100% of the originally stipulated time-limit, which in some cases itself was 3-6 years. The delay was caused by the breaches of contract committed by the owner. The work to be executed during the extended period amounted to several crores of rupees. With prices of building materials and labour cost skyrocketing and the value of the rupee going down the cavernous depths each year, if the above principle were to be applied it would have resulted in total financial disaster to the concerned contractors. With the use of standard form adhesive contracts containing exemption clauses and other provisions drafted to protect the owner under any eventuality and the judicial pronouncements attempting to uphold the sanctity of the contract, to get relief of a thorough revision of rates by way of damages becomes a difficult task but not an impossible one. For, one must begin with a basic supposition that in a civilized nation with a rule of law prevailing, there is no law in existence which upholds the "wrong" and punishes the "right". The concepts of "right" and "wrong" keep changing with the time and the judiciary takes note of it and the law becomes to that extent flexible. In the realm of the works contracts, this process takes place under the name of "proper construction of contracts". Applying the well-established principles of construction of contracts, it is possible to lay down the general propositions, some of which

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Building and Engineering (loniracts

have also found recognition, though by implication, in certain .cases decided by the Courts. An attempt is made below to formulate the general principles.

12.11 FACTS AND CIRCUMSTANCES JUSTIFYING PAYMENT AT THE ORIGINALLY AGREED RATES DURING THE EXTENDED 1PERIOD The facts and circumstances, under which, it can be said that the contractor's claim for enhancement in the original rates will not be tenable under the terms of l.h e c o n t r a c t , a p a r t fr o m wh e n H i : - , c o n l r a c l o r i s l o h e N a m e d To r d e l a y. , c a n h e s u mma r i s e d as f ol l ow s : ( I j I f I he parties have n o t agreed al t he L i me of making of i h e conlracl as l o i h e exlenl or duration of t h e extended period, t he l aw w i l l presume that the extension of lime contemplated by the parties i n iheir contract w as "reasonable lime". As l o whal i s a reasonable lime will be a question of fact i n each case. Barring exceptional provisions or circumstances, the e x t e n de d lime may h e presumed l o be 10% to 25% of the originally agreed lime, a small percentage lo i e adopted in cases where the original time exceeds one year and the high percentage lo be adopted where the original time for completion as stipulated in I he agreement is less than one year. This contention was not accepted in a case which decision is considered in Art. 12.8.1.58

(2) The projects get completed within the reasonable extended lime, and such extension is not necessitated on account of breach of conlracl committed by the owner. (3) Where the extension of time is caused by an increased quantum of work or extra items and the contract provides for new rates to be agreed between the parties for such excess quantities (beyond reasonable variation of the originally agreed quantity) or extra items. (4) The extension is necessitated due to factors beyond the control of both the parties to the contract and none of which will amount to breach of contract committed by either party.

12.11.1 Escalation and delay in Completion Where the contractor is to be blamed for the delay, obviously he may not be entitled to escalation payment.59That apart certain difficulties encountered in giving effect to contract provisions pertaining to extension of time and payment of escalation need to be considered here. The questions commonly asked and possible answers to them are as follows : Question:(a) The escalation clause in a P.W.D. contract stipulates that no escalation will be paid, if the printed clause is deleted or time limit specified for completion of the work is less than 12 months. If extension without imposing penalty/liquidated damages is granted in a contract whereby the completion period exceeds 12 months, will the escalation be payable, and if yes, for which period ? (b) If the original period is more than 12 months, whether escalation will be payable for the first twelve months or not 7 The answer to the above question can be summarized as follows: (a) The question of payment of escalation under the escalation clause will not and cannot arise if the printed clause is deleted and the deletion is prior to signing of the Agreement 58 59

D.S.A. Engineers v. Housing and Urban Dev. Corporation 2004 (2) Arb. LR 33 (Delhi); See Art. 12.8.1. Gujarat Housing Board, v. Harilal Jethalal, AIR 2001 Guj. 259 .

('haptrr -12

Remedies jar Breach of Contract

547

and bears lhe signatures of both lhe parlies. If lhe escalation clause is nol applicable clue lo lime limit specified being less than 12 months and if extension is granted, strictly speaking, no escalation is or will be payable under the escalation clause. Bui, if the delay is due lo breaches of contract comrnilted by the Department, the contractor will be entitled to the loss of increased cost of executing the work, overheads, profit, etc. for the extended period only. In negotiations, it may be to the advantage of the Department to settle such a claim on the basis of lhe escalation formulae in the agreement though the same may not be directly applicable. (b) This part of the question can be answered in the light of the language of the escalation clause. If the clause expressly provides no escalation will be payable for the first 12 months, the provision is valid and the intending tenderer.is expected to make provision for possible increase

in the prices and labour wages during the first twelve months. If the wording indicates that the escalation clause will not be applicable for contracts with a time limit of less than 12 months, and if the time stipulated is in excess of twelve months escalation will be payable for the full completion period, from day one as per the provisions made. Question: Escalation Clause in the contract excludes from the purview of its provisions, materials supplied by the employer at fixed rates and if for some reason materials have to brought by the contractor, what is the correct action to be adopted ? Answer: It is submitted that the escalation clause cannot be changed to apply to a new situation, unilaterally, and the correct action would be to compensate the contractor fully for "extra overexpenditure" actually incurred. Question: Escalation clause provides for payment of escalation on the basis of actual consumption of certain materials like steel, during the construction. The agreement also provides for payment of 90% of secured advance. Whether escalation is to be paid on the basis of prevailing rate of steel on the date of consumption or on the date the steel was procured? Answer: The answer to this question also cannot be free from doubt and will depend upon the full text of the relevant provisions for a harmonious interpretation. However, prima facie, it appears that the agreement provisions will have to be given full effect. Escalation will be payable on the basis of the rate prevailing during the period of actual consumption. Question: The escalation provision in the agreement prohibits payment of escalation during the extended period, if the delay is attributable to the contractor. What should be the basis of payment, originally agreed rates or those with escalation at the end of the stipulated period? Conditions of standard forms like FIDIC 1999 edition? makes the answer to the above question easy. The relevant provision reads: "If lhe conlraclor Fails lo complete lhe works wilhin lhe Time for Cornplelion, adjustment ol' price thereafter shall be made using either (i) each index or price applicable on the dale 49 days prior lo lhe expiry of lhe Time for Cornplelion of lhe works, or (ii) lhe current index or price: whichever is more favourable to lhe Employer." No such clear provision is lo be found in lhe Governmenl of India Form, 2001. In the said or similar cases the escalation will stand frozen at lhe level in the quarter prior lo lhe end of the stipulated period, and the contractor cannot be denied the escalation altogether, it is submitted.

ILLUSTRATIONS

(1) An award given by the Special Arbitration Tribunal (hereinafter referred to as 'the Special Tribunal') was set aside by the High Court and the proceeding were remitted to the Arbitration Tribunal for fresh adjudication. That order was under challenge in the appeal before the Supreme Court of India. Brief facts were as follows: On 16-7-1979, tenders were invited by the respondents for construction work of concrete-cummasonry dam in the State of Orissa. The tender of the appellant having been accepted, an agreement was executed between the appellant and the respondent State for the execution of the said project. The work order was issued to the appellant on 2-1-1981. The work was to be completed by 30-9-1982. In terms of the agreement, escalation charges were to be paid to the contractor. The respondents granted extension for the completion of lhe project by the end of December, 1985. There is no dispute that work was completed before that date. However, escalation charges were paid by the Executive Engineer in the bills only till 31-3-1985 after which no payment in this respect was made. Some other amounts also remained to be paid including the refund of security deposits, which led to the reference of the dispute to the Arbitration Tribunal, constituted under Section 41 A of the Arbitration Act, as introduced by Arbitration (Orissa Amendment) Act, 1982. A counterclaim was also filed before the Arbitration Tribunal, on behalf of the State. The State Government referred the dispute aforesaid by a Notification to the Special Tribunal, which had been constituted with a retired Judge of the High Court.The High Court declared the award invalid by holding that the Special Tribunal had not considered important documents which were on the record of the arbitration proceeding. The Supreme Court observed : "In this connection our attention was drawn to a letter dated 28-81982 addressed by the appellant Company to the Executive Engineer saying that they were applying for extension of time for completion of works up to 30-6-1984 because of valid reasons given in the prescribed pro forma. In the pro forma attached to the said letter, it was said on behalf of the appellant-Company that they had undertaken that they shall not claim any compensation or extra rate for executing the work beyond the stipulated date except whatever was permissible as per the contract. It was urged that the letter and the pro forma aforesaid was not considered by the Special Tribunal while making order in respect of escalations. According to the respondent-State as the extension was given at the request of the appellant, they were not entitled for any escalation charges. Reference was also made on behalf of the respondents to the supplementary agreement, especially clauses VI and VII thereof. In Clause VI, it has been stated that any extra arrangement if required t o he made by the Company t o complete the work as per the above agreed schedule "shall lie done by them without liability to the Government of Orissa". In Clause Vll o f the said supplementary agreement, il has been said that the Government o f Orissa shall consider to extend the dale of completion of the work up to 30-61984 "without liability to the both contracting parties". On basis of the aforesaid clauses, it was urged on behalf of the respondents, which has been accepted by the High Court, that the State Government was not bound to pay any charges under the head 'escalation'. On behalf of the appellant, it was demonstrated that the aforesaid no liability clause in the supplementary

agreement related to Clause 13 of the original agreement under the heading 'Compensation for delay in works'. It says that the contractor's rates are based on the assumption that the contract will be completed by 30th September, 1982 and the contractor shall not claim "any compensation or revision of rates if the work gets delayed up to 6 months beyond the contract completion time i.e. 30-9-1982". It further says that if the contract completion date gets delayed beyond 31-3-1983 for the reasons not attributable to the contractor, the rates shall be revised for the unfinished work as on 31-3-1983 by Engineer-in-charge- in consultation with the contractor, subject to the approval of the Government. When in the supplementary agreement in clauses VI and VII it was said that extra arrangement for completion of the work as per the agreed schedule shall be done by the Contractor without liability to the Government of Orissa or without liability to both contracting parties, it was with reference to the aforesaid clause 13 which stipulated compensation for delay in works. According to the appellant, the Special Tribunal has awarded extra amount in respect of escalations of labour charges which had been stipulated in Para 12.1 of the agreement saying that for the increase in the cost of labour the Contractor shall be paid extra as per the formula given in the said clause. In other words, the escalation charges allowed to the appellant by the Special Tribunal is in respect of escalation of the labour charges and that

was not regulated by Clauses VI and VII of the supplementary agreement. The learned counsel for the appellant pointed out from the award that the Special Tribunal was conscious of Clause 13 relating to 'compensation for delay in works' and 'labour escalation's' under Clause 12.1 of the agreement. It has been said in the award that the competent authority by a letter dated 16-101984, addressed to the appellant, had categorically assured that the appellant shall be paid the escalation charges under Clauses 12.1, 12.2 and 12.3 of the special conditions. The Tribunal has also held that the said authority was competent to give such assurance on behalf of the State apart from the fact that under Clauses 12.1, 12.2 and 12.3 of the special conditions, the appellant was entitled to the escalation charges. The Supreme Court held60: "In this background, it cannot be said that there is any error apparent on the face of the award which required an interference by the High Court." In the result, the appeal was allowed and the order of the High Court set aside. The order making the award the Rule of the Court, by the learned Subordinate Judge was upheld. (2) The Tribunal in a case had considered Clause 33 in the agreement and interpreted the same to make the State liable to compensate the increase of cost due to enhancement of wages. Clause 33 described as fair wage clause made it compulsory for the contractor to pay such wages as determined 60 . Hindustan Construction Co. Ltd. v. Governor of Orissa AIR 1995 SUPREME COURT 2189 = 1995 AIR SCW 1575. from time to time by the Stale. Compulsive nature ol' lhe clause, it was observed, necessarily implied an obligation on the part of the Department to compensate the increase in expenditure due to such wage rise. Il has been calculated by the Tribunal

that due to wage rise there was an average rise of rates by 25% over pre revised rates and thereby there was an increase of wage bill to the extent of 10% of lhe value of work done after wage rise. The Orissa High Court observed61: " It is well known that a contractor submits its tender upon calculation of various costs including the cost of labour component. The entire agreement will be rendered uneconomic from the contractor's point of view if he is compelled to bear the burden of increase of wages over which he has no control. The extent of increase in the present case has been calculated and assessed by. the Tribunal. In the circumstances, the construction of CI. 33 as made by the Tribunal cannot be said to be absurd or unreasonable." Reliance was placed upon the Supreme Court decision in Tarapore & Co. v. Cochin Shipyard Ltd., reported in AIR 1984 SC 1072 in which it was observed .-"Once the rates became irrelevant on account of circumstances beyond the control of the contractor it was open to the contractor to make a claim for compensation." 12.12 CLAIM FOR REVISION OF RATES - WHEN TENABLE ? In all cases where the extended time exceeds the "reasonable" extension originally presumed to have been contemplated by the parties, and where the delay and extension of time are not caused by the acts of omission and commission of the contractor which would amount to a breach on the part of the contractor, the claim for revision of rates would be prima facie tenable and requires to be thoroughly investigated and impartially decided. Such an approach by the owner and architects/engineers would not only reduce disputes and delays and consequent losses due to delayed completion, but the contractor could be persuaded to accept enhancement which would be less than that which he will get in a judicial proceeding. In other words the owner might get the benefit of "bargaining power". It can be said that the contractor's right to claim and get a revision of the rates, if there is a breach of contract on the part of the owner, is now getting recognition by the Courts of law in India and can be said to be well-established. As the disputes in works contract are invariably referred to arbitration in terms of the provisions made in the standard form contract and arbitrators awards get neither publicity nor recognition as

61

State of Orissa, v. Birat Chandra Dagara, AIR 1997 Ori 142.

a precedent, the reported cases on the subject are few. As many such cases are decided under the provisions of the Arbitration Act, the decisions given by the Courts are obviously given under the limited scope of provisions in the said Act and it would be dangerous to presume these decisions as if given on the merits of. the cases involved and on the basis of the Indian Contract Act, unless the observations and propositions clearly emerge form the judgments. Wi l l ) l u l l kn o w l e d g e o f Ihese f a c t o r s , l l i e a u 'h o r r e s p c c i i u i l y s u b m i t s l h a l l l 'i e l o l l o w i n g c a s e s c l e a r l y u p h o l d i h e con tractor's r i gh t l o ge l a r e vi s i o n o l ' i h e rales u n d e r c e r t a i n facts and circumstances.

Simple justice demands Lhal ihe judiciary give its recognition to ihe basic engineering fact lhal the estimate of cost can only be prepared with a given time limit and the rates and costs tendered cannot be valid for an indefinite period. The following cases trace ihe development of ihe law in support of this proposition. ILLUSTRATIONS (1) Hon. Mr. Justice Sultan Singh in his Judgment dated 24-9-1979 in the case M/s Alkaram, Petitioner Delhi Development Authority 62 and another in no uncertain words upheld the following principle : "If a contractor is required to do a work within certain time and the department fails to vacate the premises for carrying out the required work and after expiry of contracted period there has been a sharp increase in prices of the materials, the department cannot compel the contractor to carry out the work at the same rates at which he had agreed to do the same within the stipulated period. ..In the instant case the department had agreed to get the work completed within a certain period, but the first four floors of the building were not vacated and were not made available to the contractors for carrying out the work. This delay was entirely due to the fault of the department. The contractor's could not be compelled in the circumstances to do the work at the old rates under the terms of the agreement. Therefore, the contractor's claim for enhanced rate could be entertained by the arbitrator when the same had been referred to him by the parties and the same could not be deemed to be misconduct on the part of the arbitrator". The above decision, was upheld by the Division Bench of the Delhi High Court

63

.

(2) In Hyderabad Municipal Corporation v, M. Krishnaswami, 54 the Supreme Court of India observed : ".. drainage works for CSIR Laboratory at Uppal was entrusted to the respondent-plaintiff and under the terms of the contract the work was to be completed by the plaintiff within a period of one year, i.e. from 26th March 1951 to 25th March 1952. Admittedly at the instance of the Executive Engineer P.W.D. due to financial difficulties less budget having been provided for in the year 1951-52 the plaintiff was requested to spread over the work for two years more, that is to say to complete the same in three years but the respondentplaintiff was agreeable to spread over the work for two years more as suggested on condition that extra payment will have to be made to him in view of increased rates of either material or wages. "The Government did not intimate to the respondent-plaintiff that no extra payment on account of increased rates would be paid to him or that he will have to complete the work on the basis of original rates. In fact no reply was sent by the Government and studied 62 63 64

M/s Alkaram, Petitioner Delhi Development Authority, AIR 1980 NOC 47. Delhi Development Authority v. M/s Alkaram, AIR 1982 Delhi 365. Hyderabad Municipal Corporation v, M. ' Krishnaswami, AIR 1985 SC 607; Food Corporation oflndia v. Ratanlal N. Gwalani, AIR 2004 M.P. 215.

silence was maintained by the Government in regard to the respondent-plaintiff, demand for extra payment, in spile of several reminders in lhal behalf, till lhe plaintiff actually

completed the work during the spread over period and only when after completion of work the plaintiff-respondent submitted his final bill claiming 20 per cent extra over and above the rates originally agreed upon between the parties, the Government slated that he was not entitled to increased rates. After considering the correspondence exchanged between the parties and the other materials on record the High Court has taken the view that the government was liable to make extra payment for the work done as there was no dispute that the rates of material, etc. had increased during the extended period of two years and plaintiff was entitled to such extra payment. After considering the relevant material on record we are of the view \baX_both in equity and in law the plaintiff contractor is entitled to receive extra payment and the High Court was right in deciding the question in respondent-plaintiff's favour " (Emphasis supplied). The question arises : whether the above observations and the decision of the Supreme Court of India would apply to cases where the contractor's claim is rejected by the Department at about the relevant time and yet the contractor continues to carry out the work without prejudice to his claim. It is submitted that the words "both in equity and in law" make the observations and the decision binding at least "in law", to delays caused by. other breaches. In most construction contracts, the time of completion not being of the essence of the contract, neither party is entitled to put an end to the contract and bound to agree for an extension of time, ( unless the breach is fundamental and goes to the root of the contract), the contractor is bound to keep the work in progress and complete it, without prejudice to the claim of compensation by way of revised rates or otherwise. (3) In a contract the value of the work was over Rs. 24 crores. The nature of the work required the contractors to import specialized equipment at the estimated investment of Rs.2 crores. On this basic understanding the contract was entered into. The required pile driving equipment and the technical know-how against Japanese Yen Credit were not available as provided for in the agreement. Ultimately the equipment more or less of the same specifications could be procured from Holland. In the mean time there were variations in the rate of foreign exchange and customs duty also went up. The plaintiff contractor claimed Rs. 61.27 lakhs from the Cochin Shipyard Ltd., being the increase in the cost of equipment and technical know-how fees. The Defendant declined to pay and the matter was referred to an arbitrator. The arbitrator upheld the claim of the contractors. The award was challenged. The Supreme Court observed 65: "The rates payable to the contractor were related to the investment of Rs. 2 crores under this head by the contractor. Once the rates become irrelevant on account of circumstances beyond the control of the contractor, it was open to the contractor to make a claim for compensation". The principle upheld by the Supreme Court, it is submitted, is summed up in the words : "When an agreement is predicated upon an agreed fact situation, if the latter ceases to exist the agreement to that effect becomes irrelevant or otiose". 65 Tarapore & Co. v. Cochin Ship Yard Ltd. (1984) 2 SCC 680 (715); AIR 1984 SC 1072.

( 4 ) In a building conlracl, the Appellant contractor contended that ihe work could not be

completed as stipulated because the site was not handed over lo him. The contractor claimed compensation and extension of lime. The Respondent - Union of India - denied the liability. The disputes were not referred lo the arbitrator by the Chief Engineer and ihe appellant took the matter lo the Engineer-in-Chief. His request was not acceded to. The relationship between the parties became strained. The Respondent asserted that the appellant had abandoned the work and committed breach of contract. Thereafter, the appellant called upon the Engineer-in-Chief to appoint an arbitrator. The officer who had

terminated the contract was accordingly appointed as the sole arbitrator. The litigation followed because the appellant refused to accept the appointment so made. Ultimately the Supreme Court of India appointed a former Judge of the Supreme Court as arbitrator. The arbitrator allowed certain claims including escalation in cost at 20% by way of compensation due to increase in cost of materials, labour, and transportation during the extended period. The award was challenged by the Union of India. The award of the arbitrator allowing compensation for losses suffered due to increased prices of materials and cost of labour, and transport, with interest was upheld by the Supreme Court of India.66 The Supreme Court upheld two basic propositions, it is submitted, namely : (a) Escalation is a norma] incident arising out of a gap of time in the inflationary age, while performing any contract. (b) Once it is found that the arbitrator has the jurisdiction to find that there was a delay in the execution of the contract, due to the default of the owner, the owner is liable for the consequences of the delay, namely, increase in prices. In the State of Kamataka v. R. N.Shetty & Co. the defendant contractors contended that they were entitled to compensation in respect of tendered items after the expiry of the original contract period, the delay being caused by the appellant State. The State contended diat there was little or no delay on the part of the State and no damages could be claimed. The dispute was referred to arbitrators. The arbitrators found that the claim of the contractors was justified and awarded damages calculated on the basis of the then prevailing rates of labour, machinery, spares, and petrol, oil, and lubricant for the extended period. The Karnataka High Court rejected the contention of the State that the finding of the arbitrators was contrary to law.67

(5)

(6) Where there was increase in the quantum of the work in excess of variation limit of plus /minus 25%, the claim for enhancement of rates by the arbitrator was upheld by the Supreme Court.68 In the said case it was observed that the power of the employer to vary the terms relating to the quantum of work cannot be unlimited. Even under the general law of contracts, once the contract is entered into, any clause giving absolute power to one 66

67 68

P.M. Paul v. Union of India AIR 1989, SC 1034; also see G. S. Kalra, Petitioner v. New Delhi Municipal Committee and another, AIR 1999 Del. 355; T. P. George, Appellant v. State of Kerala and another, AIR 2000 SC 816. State of Karnataka v. R. N.Shetty & Co, AIR 1991 Kant 96. National Fertilizers v. Puran Chand Nangia AIR 2001 SC 53= 2000 AIR SCW 3860.

party lo override or modify the terms of the contract at his sweet will or to cancel the contract even if the opposite party is not in breach, - will amount lo interfering with the integrity of the contract. There is thus good reason as to why, in modern works contract, a limitation up lo 20% (now 25%) has been put on this power of alteration, both plus and minus69. Reference was made to a three Judge Bench decision of the Supreme Court in S. Hareharan Singh v. Union of India70 In the said case it was held that the arbitrator could award higher rates on the analogy of clause 12-A of CPWD contracts for excess variations beyond 20% while construing the provisions of clause 12. (7) Claim 12 (i) for loss in connection with the price escalation under clause 32 of the original agreement and claim 12(k) for revision of rates were allowed by the arbitrator in a case where the original contract time for completion was fixed as 4th March, 1983 but due to fault of the employer the work could not be completed by that time. It was contended that the appellant contractor was forced to execute the Supplemental Agreement in a form as dictated by the respondent as otherwise the respondents were not clearing the pending bills of the appellant.

Building and Bnginrrring Contrails

There was a letter dated 6th October, 1983, addressed by the appellant to the Superintending Engineer wherein the appellant, before execution ol the Supplemental Agreement, has recorded that he was protesting execution of the Supplemental. Agreement and that he would be executing the Supplemental Agreement without prejudice to his claims. It was submitted that even before writing of this letter the appellant had already, by a letter dated 5th October 1983, made his claims. He pointed out that after the Supplemental Agreement dated 20th October, 1983 was executed the appellant addressed another letter dated 24th November, 1983 to the Chief Engineer, stating that the Supplemental Agreement was got executed under coercion and undue influence and that the same was executed without prejudice to his claims. One of the questions before the arbitrator was whether this Supplemental Agreement was binding on the appellant and/or whether he had been forced to sign the Agreement and/or whether the appellant was entitled to maintain his claims in view of the Supplemental Agreement. After hearing the parties and considering the submissions of the respondents the arbitrator had by a reasoned award sanctioned the claims In the Award the arbitrator had held that the delay was not due to the fault of the appellant and that the Supplemental Agreement was got executed from the appellant without prejudice to the claims which had already been made. The arbitrator held that the Supplemental Agreement did not debar the appellant from making or maintaining his claims. The High Court held that the Arbitrator had misconducted himself by awarding contrary to the Supplemental Agreement. In appeal it was held by the Supreme Court:71 "..It is to be seen that the question, whether the Supplemental Agreement dated 20th October, 1983 debarred the appellant from pursuing his claims, was before the arbitrator. Such a question having been referred to the arbitrator the view of the arbitrator would be binding if it is one which is possible. The arbitrator has taken note of the appellant letters dated 6th October, 1983 and 24th November, 1983 and come to a conclusion that the Supplemental Agreement had been got executed and that the same was executed without prejudice to the claims which had already been made. This is a possible view. 69 70 71

There is no reason why this proposition cannot be extended to the time limit. S. Hareharan Singh v. Union of India, (1990) 4 SCC 647 : (AIR 1991 SC 945). T. P. George v. State of Kerala, AIR 2001 SC816 = 2001 AIR SCW 616 .

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Remedies

far

H i eacii

n; ' i-

wra

fl w a s l'urllier held: "The High Court has nol at all considered the l e t t e r d a t e d 6 i h October, 1 9 X 3 and _ : 4 l t i November, 1983 nor dealt with ihe question a s lo wh e t h e r or nol i h e Supplemental Agreement was got executed. The High Court has not even considered 'he effect of the Supplemental Agreement having been executed without prejudice to the claims which had already been made. Even if the High Court had considered these aspects it could not have substituted its views for those of the arbitrator as it. could not be said that the view taken by the arbitrator is unreasonable or one which cannot be arrived at by a reasonable person. In this view of the matter the impugned judgment cannot be sustained and is set aside in

respect of claims under Items 12(i) and (k)." (8) The admitted position in a case was that though the rates in respect of certain items came to be revised by the Municipal Corporation in March 1996 in pursuance of a proposal put up by the Municipal Commissioner to the Standing Committee and a supplementary agreement was entered into, the rates of the 18 items which formed the subject matter of Claim No. 2

had not been revised. In respect of the aforesaid 18 items, the supplementary agreement of 13th March, 1996 continued the same rates which prevailed in the year 1989. The question which arose before the Arbitrator was whether as a result of the supplementary agreement, the contractor must be bound to complete the work at the same rates as had been prescribed in 1989 or whether a revision of the rates of those 18 items was called for. The original date for the completion of the work under the contract was 8th January, 1994. The reasons which led the Municipal Corporation to extend the time for the completion of the contract were contained in die proposal put up by the Municipal Commissioner for the approval of the Standing Committee. Each of those reasons amply demonstrated that the delay was not as a result of any failure, breach or neglect of the respondent. Some of those causes may have been outside the control of the petitioner itself, but nevertheless the fact remains that as a result the work under the contract was delayed beyond the original date of completion viz., 8th January, 1994. Under the original contract that was entered into between the petitioner and die respondent, parties contemplated that the work would be completed in January, 1994. This assumption was, however, belied by circumstances outside the control of the respondent. The question, therefore, was whether the respondent would be bound to complete the work without any revision in respect of 18 items winch formed the subject of Claim No. 2 and at the same rates which were adopted in the year 1989. The Arbitrator formed the view that the respondent was entitled to a revision in respect of those 18 items also. The contract does not contain any prohibition. In fact, the well settled position in law is that in such a case a contractor could not be expected to continue on the basis of the original rates for an indefinite period of time beyond the stipulated date of completion. The question as to whether the supplementary agreement that was entered into between the parties on 13th March, 1996 would exclude the respondent from the benefit of claiming a revision of those rates which were not revised at that stage was a dispute which lay within the jurisdiction of the Arbitrator. In holding that the respondent was entitled to a revision, it was held the Arbitrator did not act outside his jurisdiction. 12 (')) The appellant Company made a demand for payment at an enhanced rate of

42 1/2 per

cent

72 Municipal Corporation of Greater Mumbai v. Jyoti Construction Co., 2003 (3) Arb. LR 489 (Bombay).

over the basic rates stipulated under the original contract. This claim was made on five grounds'. 1.

That there was a "substantial deviation" in the nature of work of which the detailed work drawings were supplied to the appellant company after the date of the contract. The work involved was of a complex nature requiring highly skilled labojur, and that additional labour and materials not covered by the contract rates were required;

2.

That there was "great increase in the price of materials and labour on account of undue prolongation of the period of work";

3.

That there was increase in the cost of transportation on account of rise in the price of petrol and increase in railway freight; That the Government of India entered into other contracts incidental to the construction of the Sindri Factory at substantially higher rates which directly affected the cost of labour and materials of the appellant company who had to compete with the other contractors;

4.

5.

That additional work ordered to be done involved in many instances quantity of work several times the work set out in the contract.

The Additional Chief Engineer rejected the claim In September 1954 the disputes relating to the claim for rise in cost of material and.labour due to delay in supplying detailed work drawings, the claim arising from rise in price of petrol and for increase in the cost of material and labour due to other contractors working on the site, were referred to arbitration, but not the claims for revision of rates due to complex nature of the work and increase in the

quantity of work. The arbitrator rejected the claims of the Company in respect of the matters which were referred. Thereafter the appellant Company filed a suit on August 9, 1956, against the Union of India, for a decree for Rs. 3,62,674/- being the amount claimed at the rate of 42.5 per cent above the contract rate, in the alternative, a decree for Rs. 2,44,000 being the amount claimed at the rate of 28.1 per cent above the contract rate as recommended by the Executive Engineer, and in the further alternative, a decree for Rs. 1,36,222 at the rate of 18.17 per cent above the contract rate as certified by the Superintending Engineer. The Union of India contended, inter alia, that the claim was barred by the law of limitation. The Trial Court held that the claim was not barred by the law of limitation and decreed the claim for Rs. 1,36,222 as certified by the Superintending Engineer. Against the decree passed by the Trial Court the appellant Company as well as the Union of India appealed to the High Court. In the view of the High Court the claim was governed either by Art. 56 or by Art. 115 of the First Schedule to the Limitation Act, 1908, and the suit not having been filed within three years of the date, on which the work was done and in any event of the date on which the claim was rejected was barred. The appellant Company has appealed to the Supreme Court with certificate. The Supreme Court held: 73 Gannon Dunkerley and Co. Ltd. v. Union of India, AIR 1970 SC1433.

"The appellant Company had undertaken under the terms of the contract to do specific construction work at "basic rates". The Engineer-in-charge was by the terms of el. 12 of the agreement competent to give instructions for work not covered by the terms of the contract, and it was provided that remuneration shall be paid at the rate fixed by the Engineer-incharge for such additional work, and in case of dispute the decision of the Superintending Engineer shall be final. It is common ground that the claim made by the appellant Company was not covered by the arbitration agreement and on that account it was not referred to the arbitrator. The claim in suit related lo the revision of rales due to lhe complex nature of the work and due to increase in the quantity of work and also grant of contracts to other compeling parties at substantially higher rates and other related matters." It was further held

that the suit was not governed by Art. 56 or 115 but by Art. 120 and under Art. 120 the suit was not barred by limitation. (10) Claim to refund excess hire charges of machinery and payment towards losses suffered as a result of poor performance of department machinery and also direction for the future was allowed by the arbitrator and his decision was upheld by the High Court. The Supreme Court in appeal against the said decision held: "The Government was in terms of the contracts bound to compensate the Contractor for the excess higher charges paid as a result of the poor performance of the machinery supplied by the Government."74 In the above case the award in respect of four claims not payable under the contract including the Claim for escalation in labour charges otherwise than in terms of the formula prescribed by the contract but awarded by the umpire were set aside holding that the umpire traveled totally outside the permissible territory and thus exceeded his jurisdiction in making the award under those claims. The decisions of the Supreme Court in this case and Continental Construction Co. Ltd. v. the State of M.P.75 raise a doubt but cannot be said to upset the principles emerging from the above discussion. The main point in the latter case was that where an agreement expressly provided that no compensation would be payable in spite of rise in prices of materials and labour wages, whether a non-speaking award allowing relief on the same grounds is valid or not. The award was held 'bad' and set aside. In that case the contractor could not complete the work because of the alleged gross delay on the part of the State Government. The trial Court and the High Court held that the contractor was not entitled to claim the extra cost in view of the terms of the contract and that the arbitrator misconducted himself in awarding the relief. This decision was upheld by the Supreme Court.

After study of the said decisions it is the considered opinion of the author that in such a case a reasoned award is likely to be upheld. If, in the light of the facts and circumstances of a case, it can be shown that the exemption clauses would not apply, the Court, even if it comes to the. contrary conclusion, may not upset the award if the view expressed by the arbitrator is one possible view. This opinion of the author expressed in the forth edition finds support in the cases discussed above, under illustrations and more particularly illustrations at serial No.6, 7 and 8 it is respectfully submitted. 74 75

Associated Engineering Co. v. Government of Andhra Pradesh, AIR 1992 SC 232 = 1991 AIR SCW 2960. Continental Construction Co. Ltd. v. the State of M.P, AIR 1988 SC 1166.

12.12.1 The Quantum of increase The increase in Ihe cost of materials, labour, and plant, and equipment to which the contractor would be entitled in the even! of a breach of contract by the owner resulting in delayed completion of the work is a question of fact and has to be properly pleaded and proved. Many a contract stipulate thai the conlraclor shall furnish periodical reporls of labour employment as also the machinery and equipment deployed at the site. Such a record, if maintained, can be useful as evidence if need arises. Vouchers showing ihe rates at which materials, etc. were in fact procured need lo be exhibited and proved. Where the enhancement sought is on the basis of "mutual agreement" in respect of totally new rates for the extended period, the contractor may not be entitled to damages for overheads and profit for the extended period as the same would merge in the new agreed rates. Where, however, in a litigation he is being awarded revised rates by way of damages on the basis of increase in the cost of "materials and labour, there is no duplication, if the compensation is awarded separately under the head loss of "overheads and profit". Even in^

non-speaking award of an arbitrator, it is advisable to mention that the quantum |; awarded under revision of rates is over and above the damages for continuing loss on account of overheads, and profit, separately awarded, if both these claims are referred to arbitration and deserve to be awarded.

12.13 ALTERNATIVE REMEDY TO DAMAGES - QUANTUM MERUIT "Quantum Meruit" is a right to be paid a reasonable remuneration for work done or goods supplied. The Supreme Court has observed76:"that a claim for quantum meruit is a claim for damages for breach of contract...". In cases where the work is partly carried out and the contract is repudiated by the owner, the contractor would get an option either to sue for damages for breach of contract or bring an action in quantum meruit for the work done by him. If the contractor's tendered rates are highly profitable, his best option would be to claim damages for breach of contract. If not, and if a substantial part of the work is carried out, his claim for a reasonable price for the work done will be more advantageous to him. It is to be noted that 'quantum meruit' arises in a number of situations where for one reason

or another no contract exists, either originally or subsequently, for example,, a contract voided by mistake, by operation of the doctrine of frustration or similar cases where the law has set aside an apparent contract or declared it unenforceable. In such an eventuality, an arbitration clause in the agreement would also be unenforceable and, therefore, an arbitrator appointed under it will have no power to grant relief by way of quantum meruit which a Court of law will have under Section 65 of the Indian Contract Act. As to what is a reasonable price for the work done, it will be a question of fact to be proved in each case. It is suggested that prevailing market rates, assessed on the basis of schedule of rates prepared by the public works departments or on the basis of rates tendered by the contractor's in competition for similar works, in the vicinity, at the relevant time, may be useful in deciding the 'reasonable price'. 76 Madras State v. G. Dunkerley & Co. AIR 1958 SC 560 (577).

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Remedies for Rreuch o f Conn act

12.14' BREACH OF CONTRACT BY THE CONTRACTOR A s already stated breaches of contract by a contractor entitling the owner to seek

compensation may be many. Some important breaches are considered below with a view to point out remedies available against each breach. For illustrations reference may be made to Chapter 11.

12.14.1 Abandonment or Total Failure to Complete The basic principles in ascertaining the damages due to breach of contract already outlined in Art. 12.7 are applicable to a breach of contract by the contractor. In cases, therefore, where the work has been left incomplete, whether by abandonment, termination or otherwise, the direct measure of damage will be the difference between the reasonable cost to the owner of completing the work, together with any sums paid by or due from him under the contract and the sums which would have been payable by the owner to the contractor, if the contract

had been properly carried out. In case final cost to the owner to complete the work does not exceed the contract sum only nominal damages would be recoverable.77 The reasonable cost of completion usually means the cost of completion of the work substantially, as it was originally intended and in a reasonable manner. ILLUSTRATION In a case involving construction of a tunnel for the city, the contract provided that in case of default by the contractor, the city should be entitled to complete the work at the contractor's

expense. On the contractor's default the city constructed a tunnel which was essentially different in plan and cost of construction from that contemplated by the contract, ft was held that the city was not entitled to recover damages from the contractor.73 12.14.2 Defective Work The measure of damage for defective work will be the reasonable cost to the owner of repairing the defects. Such damages are recoverable under Section 73 as naturally arising in the usual course of things. ILLUSTRATION In a case, a builder substantially departed from the specification in relation to the foundation of a house, which was consequently unstable. It was held that the measure of damage was not the difference between the value of the building as built and the value if built in accordance with the contract; but the cost, in excess of any amount of the contract price (unpaid), of reasonable and necessary work required to be undertaken to conform to the contract.79 77 78 79

T.N.W.S.& D.B. v. Satyanarayana Brothers Pvt. Ltd. 2002(1) Arb. LR 444 (Madras) (DB). Milwaukee City v. Shailer (1898) 84 Fed. Rep. 106 Hudson's B. C. IOth Ed., Page 587. Bellgrove v. Eldridge (1954) ALR 929 Vol. 90 CLR 613 (Australia).

The Rule Of "Difference In Value" If there is a breach of the contract, on the part of the contractor, the owner is entitled to receive, generally, the market price of completing or correcting the contractor's performance. However, if the cost of completion or correction is grossly and unfairly out of proportion lo the good to be attained, the measure of damages will be the "difference in value". In short this rule means that the measure of damages would be the difference

(liaptrr-lz

Remedies for Rreuch o f Conn act

between the value of the defective structure and that of the structure as il should have been completed. In case of substantial performance this difference in value may work out to be either nominal, or nothing.

ILLUSTRATION In a case the contractor had failed to use the prescribed brand of pipe for the plumbing work. It was found by the Court that the omission was neither fraudulent nor wilful and that the pipe as furnished was substantially the same in quality, weight, service, ability, appearance and market price. Most of the plumbing was encased within the walls. The replacement of pipes would have required demolition at a great expense, of substantial parts of the completed structure. "In the circumstances of this case.", the Court held:80 "..we think the measure of the allowance is not the cost of replacement which would be great, but the difference in value, which would be either nominal or nothing". When, however, a contractor substantially defaults in the contract performance so as to render the finished structure partially unusable or unsafe, the measure of damage would be "the market price of correcting or completing the performance" and not the difference in value. 8 '

ILLUSTRATION In a case, the foundation of a house built on a concrete raft failed. The only remedy was to rebuild it, using the "pier and beam system" which would cost more than the original house. It was held that the disparity between the original cost of the house and the new foundations

was not the reason for departing from the normal rule, but that from the cost of repair should be deducted a sum to take account of the fact that the new foundations would eliminate all danger of sinking, whereas some sinking on an even plane was expected with the original house. Against the claim of £ 2,200. for the cost of the new type of foundation and £ 500 for depreciation in value, damages were restricted to £2000.82

12.14.3 Delay in Completion The measure of damage to the owner in the event of delay in completion by the contractor will be largely governed by the nature of the contract work. If the work involves a commercial building, such as a factory or shop, it is obvious that the delay in completion will affect the profits that the owner is likely to earn from use of the building. In the case 80 81 82

Jacobs v. Kent, 230, N.Y. 239, 129, N.E. 889 (N.Y. 1921). Bellizi v. Huntley Estates 3. N.Y. 2d, 1 12 143 NE 2d. 802 (N.-Y. 1957). Cooke v. Rowe (1950) N.Z.L.R. 410 (New Zealand) also see: Hudson's 10th ed. Page 586.

Chapter12

561

Remedies (or Breach of Contract

of a block of flats or a boarding house, the owner's profit from his rents are likely to be affected. In the case of a dwelling house, the claim for loss of profits from letting will be recoverable only if the fact that the owner intends to let out the house was made known to the contractor at the time of agreement,. Otherwise, the reasonable cost of living accommodation or living elsewhere and storing furniture, etc, if in fact expenses of this kind were incurred, would be the measure of damages. 83 In cases of public works such as dams, bridges, roads, canals, etc. the actual loss due to delay in completion is difficult to assess and. therefore, such contracts provide for

546

Hidlding and Engineering Contracts

liquidated damages to be recovered for delay. This aspect is considered separately in Chapter 7.

12.15

DAMAGES DIFFICULT TO ESTIMATE - NO GROUND TO AWARD NOMINAL DAMAGES

The fact that damages are difficult to estimate and cannot be assessed with certainty or precision does not relieve the wrong-doer of the necessity of paying damages for his breach of duty, and is no ground for awarding only nominal damages. A distinction must be drawn,

however, between cases where the difficulties are due to uncertainty as to the causation of damage, where questions of remoteness arise, and cases where they are due to the fact that assessment of damages cannot be made with any mathematical accuracy. Lack of relevant evidence may make it impossible to assess damages at all, as where the extent of the loss is dependent upon too many contingencies, and in such cases, where the liability is established, nominal damages only may be awarded. Where it is established, however, that damage has been incurred for which a defendant should be held liable, the plaintiff may be accorded the benefit of every reasonable presumption as to the loss suffered. Thus the Court, or a jury doing the best that can be done with insufficient material evidence, may have to form conclusions on matters on which there is no evidence, and to make allowance for contingencies even to the extent of making a pure guess; this is of common occurrence in a claim made for example, in respect or pain and suffering, loss of expectation of life, and the loss of a chance of winning a prize.84

12.16

SPECIFIC PERFORMANCE - INJUNCTION TO RESTRAIN BREACH

In building and engineering contracts payment Of compensation by the defaulting party to the injured party affords adequate remedy and also, superintending the performance of such contracts by the Court is difficult. For these reasons the remedy of specific performance is not available. For the same reasons the Court would be reluctant to issue an injunction to restrain a party from committing a breach of contract.

12.17

LIEN / VESTING CLAUSES

Many a old standard form building contracts contain provisions vesting in the owner, property in unfixed materials as also the contractor's plant, machinery and equipment during 83 84

Lindberg v. Brandt et al 1 12, N.E. 2d, 746, Appellate Court of Illinois 1953. Gambhirmul vs. Indian Bank Ltd., AIR 1963, Cal. 163.

die currency of the contract. FIDIC 1999 Edition, however, provides that the employer after termination of the contract shall give notice to the contractor and release the contractor's Equipments and temporary works at or near the site. The Government of India MoS&Pl Standard Form 2001 in Clause 61.1 provides as follows:

"All materials on the Site, Plant, Equipment, Temporary Works and Works for which payment has been made to the contractor by the Employer, are deemed to be the property of the Employer, if the Contract is terminated because of a Contractor's default." The validity and effect of such provisions can be studied along with the law relating to lien and express provisions made in the Indian Contract Act. Lien Defined Black's Dictionary gives the meaning of lien as follows85 :

"A claim, encumbrance, or charge on property for payment of some debt, obligation or duty. Qualified right of property which a creditor has in or over specific property of his debtor, as security for the debt or charge or for performance - -. Right or claim against some interest in property created by law as an incident of contract." Where the law itself, without the stipulation of the parties, raises a lien, as an implication or legal consequence from the relation of the parties or the circumstances of their dealings it is lien by operation of the law; for example, a mechanic's lien. Mechanic's Lien According to the Black's dictionary, a mechanic's lien is a claim created by State Statutes for the purpose of securing priority of payment of the price or value of work performed and materials furnished in erecting, improving, or repairing a building or other structure, and as such attaches to the land as well as buildings and improvements erected thereon. Such lien covers materialmen, tradesmen, suppliers, and the like, who furnish services, labour or materials on the construction or improvement of property.

Stop Notice Statute Stop notice statute is an alternative to the mechanic's lien remedy that allows contractors, suppliers, workers, to make and enforce a claim against the construction lender, and in some instances, the owner, for a portion of the undisturbed construction loan proceeds.86 Chapter85 86

Remedies for Breach of Contract

563

6th Ed. Page 922. 6th Ed. Page 1420.

J2

General And Particular Lien The Lien can be (i) particular or (ii) general. The former is dealt with in Section 170 and the latter in Section 171 of the Indian Contract Act. To understand the same, Section 148 needs lo be perused : The said Section reads : Section 148: "Bailment" "bailor", and "bailee" defined A "bailment" is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them The person delivering the goods is called the "bailor". The person to whom they are delivered is called the "bailee". Explanation - If a person already in possession of the goods of another contracts to hold them as a bailee, he thereby becomes the bailee, and the owner becomes the bailor of such goods although they may not have been delivered by way of bailment. Section 170: Bailee's particular lien - "Where the bailee has, in accordance with purpose of the bailment, rendered any service involving the exercise of labour or skill in respect of the goods bailed, he has, in the absence of a contract to the contrary, a right to retain such goods until he receives due remuneration for the services he has rendered in respect of them. Illustrations (a) A delivers a rough diamond to B, a jeweller, to be cut and polished, which is accordingly done. B is entided to retain the stone till he is paid for the services he has rendered.

548

Hidlding and Engineering Contracts

(b) A gives cloth to B, a tailor, to make into a coat. B promises A to deliver the coat as soon as it is finished, and to give A three month's credit for the price. B is not entitled to retain the coat until he is paid."

Section 171: - General lien of bankers, factors, wharfingers, attorneys and policybrokers. "Bankers, factors, wharfingers, attorneys of a High Court and policy-brokers may, in the absence of a contract to the contrary, retain as a security for a general balance of account, any goods bailed to them; but no other persons have a right to retain, as a security for such balance, goods bailed to them, unless there is an express contract to that effect". It is clear from the above provisions that the lien dealt with in Section 170 relates to services done in respect of the very goods retained. The general lien, the subject matter of Section 171 is for a general balance of account and operates in the absence of the contract to the contrary, which may either be express or implied.87 The following important points need to be noted : (1) The essential requisite of lien is possession obtained previously. The word retain implies this meaning. The possession must have been lawfully acquired and the lien subjects only as long as possession lasts. 87 Lalchand v. Pyare 1971 MPLJ 672; 1971 Jao L.J. 601.

( 2 ) The lien consists only in Ihe right lo retain and does not extend to a right to sale.

88

(3) It is subject to a contract lo Ihe contrary or on giving possession, or by waiver of Ihe lien, as, for example, by making a conlracl inconsistent with Ihe existence of Ihe lien. (4) Apart from the persons mentioned in Section 171, no other person has the right to retain as securily goods bailed to them, unless there is an express contract to that effect.

In view of the above the right of lien available both to the owner or the contractor will depend upon the express terms of the contract. In the public works contracts most standard forms provide89: "The Government shall also be at liberty to use the materials, tackle, machinery and other stores on the site of the contractor —The Government shall also be at liberty to hold and retain in their hands materials, tackle, machinery and stores of all kinds on site, as they may think proper and may at any time sell any of the said materials, tackle, machinery, and stores, and apply the proceeds of sale in or towards the satisfaction of any loss which may arise from the cancellation of the contract—". On the other hand there is no provision in the law of contract or in the standard form contracts, either express or implied, under which a contractor can have a mechanic's lien on the structure or work done. Section 170 deals with bailee's particular lien and Section 171 does not include a contractor amongst the persons having general lien. On proper construction of the contract law and the terms, it can be said that no lien can arise from a building contract, whether by operation of law or under the terms of the contract. The contract provisions such as the above, however, may confer contractual rights over materials or plant having some or all of the characteristics of a lien. An illustration will help clarify this point. ILLUSTRATION A main contractor sub-contracted the roofing work of erection of a school ; the subcontract provided that 'the sub-contractor shall be deemed to have knowledge of all the provisions of the main contract'. The main contract contained a provision which read as follows : "Any unfixed materials and goods delivered to, and placed on, or into the works, shall not be removed except for use upon the works, unless consent in writing be given, and when the

value of the goods has been included in any interim certificate under which the contractor has received payment, such material and goods shall become the employer's property". The sub-contractor delivered 16 tons of slates to the site for which the main contractor received payment in an interim certificate. The main contractor did not pay the subcontractor and subsequently became insolvent. The sub-contractor was refused permission to take away the slates. The sub-contractor sued for the return of the slates, and damages or the value of the slates. . % 88 89

Mulliver v. Florence (1878), 3 Q.B. D. 484. See Clause 4 of P.W.D. / C.P.W.D., Clause 53 and 54 of M.E.S. Dept. form, Clause 62 of the Railway Dept. form.

I I was held'" : The clause in the main contract presuppose there is privity of contract between the owner and the subcontractor which there is not, or the main contractor has good title to the materials and goods. The clause in the main contract has force only if the title has passed lo the main contractor. The owner was not entitled to retain the property.

12.18

FORFEITURE

To forfiet is to incur the loss through some fault, omission, error or offence. Forfeiture is the act of forfeiting. If there is no provision authorizing forfeiture, security cannot be forfeited.91 Most construction contracts include express provisions empowering the owner, in certain specified events to determine the contract and to take possession of the works, materials, tools and plant of the contractor and complete the works himself. Such provisions include the right of the owner to forfeit earnest money or security deposit without prejudice to any other remedy or remedies under the contract. It is very common these days that the security deposit for proper performance of the contract is given by the contractor to the owner in the form of a bank guarantee. When an event entitling the owner to forfeit occurs, a demand is made on the bank which gave the bank guarantee. Invariably the question arises if the demand is legal and justified, when the contractor challenges the demand. What is the duty of the bank in such cases. All these aspects are considered in the remainder of this Chapter, starting with the provisions of the Indian Contract Act applicable to the forfeiture. 12.19

APPLICABILITY OF SECTION 74 TO SECURITY DEPOSIT AND OTHER PENAL STIPULATION

Section 74 is reproduced in Art 7.3 and applies to those provisions in the contract which give the injured party the right to recover liquidated damages. Can it be said that it also applies to cases covering the right to forfeit what has already been received by the party aggrieved? In some old cases decided by the High Courts in India92 it was held that Section 74 applies where a sum is named as penalty to be paid in future in case of breach, and not to cases where a sum is already paid, and by a covenant in the contract it is liable to forfeiture. This view, it is respectfully submitted, was rightly negated by the Supreme Court of India as early as in 1963 in these words93 : "There is however no warrant for the assumption made by some of the High Courts in India that Section 74 applies only to cases where the aggrieved party is seeking to receive some amount on breach of contract and not to cases whereupon breach of contract an amount received under the contract is sought to.be forfeited. In our judgment the expression "the contract contains any oilier stipulation by way of penalty" comprehensively applies to 90 91 92

93

Dawber Williamson Roofing Ltd. v. Humberside County Council, Q.B.D. (1979) 14 BLR 70. Sushil Kumar Karan v. State of Bihar, AIR 2001 Pat. 221. Abdul Gani & Co. v. Trustees of the Port of Bombay, AIR 1952 Born. 310(ILR 1952) Bom. 747; NatesaAiyarv. Apparu, Padayachi ILR 38 Mad. 178 AIR 1915 Mad. 896 (FB), M/s. Shyam Bin Works Pvt. Ltd. v. UP. Forest Corpn., AIR 1990 All. 205 FatechChand v. BalkishanDass., A.I.R. 1963 S.C. 1405.

every covenant involving a penalty whether it is for payment on breach of contract of

550

Hidlding and Engineering Contracts

money or delivery of property in future, or for forfeiture of right to money or other property already delivered." This' was confirmed subsequently in 1971 wherein it was held 94 by the Supreme Court :

"Duty not to enforce the penalty clause but only to award reasonable compensation is statutorily imposed upon courts by Section 74 of the Indian Contract Act. In all cases, therefore, where there is a stipulation in the nature of penalty for forfeiture of an amount deposited pursuant to the terms of a contract which expressly provides for forfeiture the court has jurisdiction to award such sum only as it considers reasonable, but not exceeding the amount specified in the contract as liable to forfeiture. The same principles, in our judgement would apply in the case in which there is a stipulation in the contract by way of a penalty, and the damages awarded to the party complaining of the breach will not in any case exceed the loss suffered by the complainant party." 12.20

PROVISIONS MADE IN CONSTRUCTION CONTRACTS -FORFEITURE OF EARNEST MONEY/SECURITY DEPOSIT

A typical standard form contract, in use by various State Public Works departments and public undertakings, include the following provisions : (1) Payment of earnest money along with the tenders which shall be forfeited if the contractor fails to : (a) abide by the stipulation to keep the offer open for the period mentioned in the tender notice ; (b) sign and complete the contract documents as required by the Engineer and furnish the security deposit as specified in the tender notice. (c) The provisions further stipulate that upon signing of the agreement, the earnest money shall stand converted into security deposit ; (2) Payment of Security deposit in cash, or Government securities endorsed to the Engineer-in-charge, and permit the GovemmejiLaJJJ2£_time of making^rypayment to the contractor to retain such a sum as will make good the full security deposit. In the alternatiye_the jContraclor is permitted to furnisn^anlTg^ suc h terms as may be specified in lieu of the security deposit. This security deposit shall stand forfeited in the following cases : (a) Rescission of the contract by the Engineer under C 1,3.cf. fhej3eneral Conditions of Contract; " (b) Assigning or sub-letung ttiejantract without the written approval ofjfhe Engineer m-Charge, . ' ~~" FIDIC 1999 Edition contains Clause 4.2 which provides for furnishing of performance security by (he contractor, within 28 days after receipt of letter of acceptance and to keep it valid and enforceable until completion of the work and remedied any defects. It further 94 N. C. Sanyal v. Calcutta Stock Exchange Assn. AIR 1971 SC 422 (428).

provides that the employer shall not make a claim under the performance security except lor amounts to which the employer is entitled under the...cjantra^ listed therein including termination of the contract by the employer.

The Government of India Form 2001, in Clause 52 provides for security deposit in two parts (i) performance security, 5% of the contract amount, to be submitted at the time of award of the work within 28 days after receipt of letter of acceptance and (ii) retention money to be

recovered from running bills. It is to remain valid until a date 14 days from the day of expiry of taking over certificate.

12.20.1 Distinction between Earnest Money and Security Deposit "Earnest Money" is the term commonly used in a contract of sale where it is considered as "part of the purchase price when the transaction goes forward. It is forfeited when the transaction falls through by reason of the fault or failure of the vendee".95 Further it is not merely a part payment, but is then also an earnest to bind the bargain so entered into, and creates by the fear of its forfeiture a motive in the payer to perform the rest of the contract. The phrases "give something in earnest" or "in part payment," are often treated as meaning the same thing, although the language clearly intimates that the earnest is "something to bind the bargain, or ,the contract", whereas it is manifest that there can be no part payment till after the bargain has been bound, or closed.96 The author further states that there are two distinct alternatives, viz., a buyer may give the seller money or a present as a token or evidence of the bargain quite apart .from the price, i.e., earnest, or he may give him part of the agreed price to be set off against the money to be finally paid, i.e., part payment and that if the buyer fails to carry out the contract and it is rescinded, cannot recover the earnest, but he may recover the part payment. But this does not affect the seller's right to recover damages for....hreach of contract unless it was by way of deposit or guarantee in which .case it-is forfeited. It is further stated that ah earnest does hot lose its character because the same thing might also avail as a part "payment. A 'deposit', on the other hand is not recoverable by the buyer, for a deposit is a guarantee that the buyer shall perform his contract and is forfeited on his failure to do so and if a contract distinguishes between the deposit and installments of price and the buyer is in default, the deposit is forfeited. Part of the price may be payable as a deposit. As part payment is to be distinguished from a deposit or earnest.97 "The deposit serves two purposes - if the purchase is carried out it goes against the purchase-money-but its primary" purpose is this , it is a guarantee that the purchaser means, business; and 95 96 97

Chiraiijit Singh v. Harswarup, AIR 1926 PC 1. Benjamin.in his book on 'Sale'8th Edition, , at p.219. Halsbury, in "Laws of England", Vol.34 III Edition, in paragraph 189 at p. 118.

if there is a case in which a deposit is rightly and properly forfeited il is, f think, when a man enters into a contract to buy real property without taking the trouble lo consider 98 whether he can pay for it or not. The Supreme Court of India after a review of a number of decisions including those cited above observed that the following principles emerge regarding "earnest": 99

(1) It must be given at the moment at which the contract is concluded. (2) It represents a guarantee that the contract will be fulfilled or, in other words, "earnest" is given to bind the contract. (3) It is part of the purchase price when the transaction is carried out. (4) It is forfeited when the transaction falls through by reason of the default or failure of the purchaser. (5) Unless there is anything to the contrary in the terms of the contract, on default committed by the buyer, the Seller is entitled to forfeit the earnest. From the above discussion it follows that the deposit is a guarantee for the performance of the contract. The moment the contract is performed it becomes a part of the price or purchase money. But in a construction contract, it is the contractor who is entitled to receive money

552

Building and Engineering Contracts

consideration for the work done or services rendered. As such earnest money cannot be said to be "a part of consideration" payable to the owner. It is, therefore essentially a security deposit showing an earnestness, that it is an ardent desire, on the part of the contractor to go forward with the contract. In that sense it is a security deposit for performance of the contract and indeed the terms of the contract stipulate, that it will be converted into security deposit on signing of the contract by the contractor. By this analysis when it comes to forfeiture of it, it is submitted, there can be no difference betweenjtoe- -two: whether it is earnest money or security deposit. The term in an invitation of tender, the right to forfeit the earnest money for failure of the contractor to keep the offer open, is clearly without consideration and not enforceable. The forfeiture of e^mjestJnoneyjpanjDe^^ only afterjhej^d^js_jccerjted and the contractor refus.es_.tQ..sign the agreement or perform it, for in that case, the^ceptance_.of tender converts it into a legally binding agreement and thej;ontiactoj^becimaesJiabIeJbr breach _of. it. Even in such cases the owner may not be able to automatically forfeit the earnest money. When there is no concluded contract, the party paying security deposit js^ntitled to refund of security deposit.100 j 98

Soper v. Arnold, (1889) 14 AC 429(435).

99

H.C. Mills v. Tata Aircraft, AIR 1970 SC 1986(1991-1994).

100

Rajasthan State Electricity Board and others, v. M/s. Dayal Wood Works, AIR 1998 AP 381; Also see E. Bhagwan Das and others, v. Dilip Kumar and another, AIR 1998 AP 374; State of Tripura v. M/s Bhowmik & Company, AIR 2004 Gau. 19 relying on Firm Vijay Nipani Tobacco House v. Sarwan Kumar, AIR 1974 Pat.117; Sardar Surjeet Singh, v. State of U. P. and others, AIR 1995 A11.146; AIR 1984 Kant 122, Followed. A. Murali and Co., v. State Trading Corporation of India Ltd, AIR 2001 Mad. 271; P.K.Abdulla v. State of Kerala, AIR 2002 Ker.108. Also see: Baldev Steel Ltd. v. Empire Dyeing and Manufacturing Co. Ltd. AIR 2001 Del.391.

ILLUSTRATION

According to a tender notice, the tenders were lo be opened at 3 p.m. on 31-10-1996 by opening the tender box. After opening of the box the tender forms are to be scrutinized as lo whether they arc valid tenders and find out who is ihe successful bidder. That process admittedly, was not gone through and even according to the respondent the sealed covers were not opened on the given dale and were kepi back in the box. The opening of tenders by removing the seals and scrutinizing the tender forms was postponed because of ihe interim orders of the Court. Before the actual process started, the petitioner had asked for return of the E.M.D. It was observed: "Though the request of the petitioner did not specifically refer to withdrawal of the tender, still no one will ask for return of the E.M.D. unless there is an intention not to participate in the tender. The respondent had also understood this because in the reply dated 14-11-1996 the respondent had clearly slated that the petitioner should participate in the opening of the tenders to which date it was postponed i.e. 16-11-1996 and expressed the inability to return the E.M.D. referring to Clause (12) of the tender notification." It was held that clause comes into operation only after the tenders are opened and the highest bidder is declared and such a declaration can come only after scrutinizing the tenders. In the present case, that did not take place till 16-11-1996 and^th^peuuonefTiad asked for return of E.M.D. second time on 15-11-1996 stating that'he has no interest 7h participating in the opening of the tenders. The petition was allowed. J.01 Where promise to keep offer open till stipulated period was not shown to be supported by consideration the condition that tender could not be withdrawn before it was accepted was held invalid.102

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553

The above well settled position in law prima facie appears to have been changed by the decision of the Supreme Court of India which needs to be considered at length.103: In the impugned judgement the High Court had held that the offer was withdrawn before it was accepted and thus no completed contract had come into existence. The High Court held that in law it is always-open to a party to withdraw itsjaffer before hs^aceeplance. The SurjrejneJ^ "TrMhis proposition there can be no quarrel. We, therefore, did not permit Mr. Dave to cite" authorities for the proposition that an offer can be withdrawn before itTs~accepted." The Supreme Court found fault with the following observations of the High Court: "The statutory right having been so exercised, the fetter imposed by the clause to the contrary in the tender documents and the Bank guarantee could not override the provisions of the Indian Contract Act. Any clause insofar as it is contrary or comes in conflJcLvjilh^ the provisions of the Indian Conu^a^TA9t4s4iT^iel^urve andvoid and cannot be enforced. To have an enforceable contract there must be an offer and unconditional acceptance. A 101 102 103

Aditya Mass Communicated Pvt. Ltd., v. A.P. State Road Transport Corporation, Hyderabad, AIR 1998 AP 125. M/s. Krishnaveni Constructions, Petitioner v. The Executive Engineer, Panchayat Raj, Darsi and others, AIR 1995 AP 362. National Highways Authority of India, y. M/s. Ganga Enterprises and another, AIR 2003 SC 3823.

person who makes an offer lias the right of withdrawing it before acceptance. Until the offer is accepted unconditionally it creates no legal right and the bid can be withdrawn at any time. Once it is held that there is no completed contract between the parties no further question can arise. There can be no breach'of contract. There is no statutory rule or an act whereunder the security deposit in the form of a Bank guarantee could be claimed by the respondent No. 2. The position may, however, be different if there is a statutory rule having force of law precluding withdrawal of a bid before its acceptance. The petitioner was entitled to withdraw the bid because the prohibition against withdrawal does not have the force of law and there was no consideration to bind him down to the condition. In the present case there was no acceptance by respondent No. 2 on the date of withdrawal of the bid by the petitioner. In the circumstances the invocation and encashment of the Bank guarantee is illegal and void and is liable to be set aside." The Supreme Court observed: "The Indian Contract Act merely provides that a person can withdraw his offer before its acceptance. But withdrawal of an offer, before it is accepted, is a completely different asjjeci. from.forfeiture of .earnest/security money which has been given for a par^icularj)u^^ A-person may have a right to withdraw his offer but if he has made JnsjrfferjDnj.j;ojidiUcifl_tfi.aX.some_earnest money will be forfeited for not entering into .conIracI.Dr if some...act is not,performed, then even though he may have a right to wUhdrawJiis-efTerr-he has no right to claim that the earnest/security be; refumed. toEiBiForfeiture of such earnest/security, in no way, affects any statutory right under the Indian Contract Act, Such earnest/security is given and taken to ensure that a contract comes into existence. It would be an.anomalous situation that a person who, by his own conduct^jyedudes the corning intq^ existence .of the_cjmtract is Jhen^jgiyen advantage or benefit of his own wrong by not allowing forfeiture! It must be remembered .that, particularly in Government contracts, such a term is always included in order to

554

Building and Engineering Contracts

^ensjure_that only a genuine party makes a bid. If such a term was not there; eyerua person who^ or a person, who.has.nojntentipn of entering into the contract will^make,.a bid.. The^whole purpose of such_a clause i.e. to see that only genuine bids are received would be lost if forfeiture was not permitted. It was further observed: " There is another reason why the impugned judgment cannot be sustained. It is settled law that a contract of guarantee is a complete and separate contract by itself. The law regarding enforcement of an "on demand Bank guarantee" is very clear. ^If the_ enforcement is in terms of the guarantee, then Courts must not interfere wjjhjhe| ejnforcement of Bank guarantee!The Court can only interfere if the invocation is agaiiisj terms_ofjhe guarantee or.if there■ is -aayjrau^^ an "on demand^puar^ptee'liiri ar.mrrianr.p. with its terms by looking at terms.of Jiejynd^rlying contract) The existence of non-existence of an underlying cojitracj^ the invocation is in terms of the Bank guarantee. The Bankguarantee stipulated that if the bid was withdrawn within 120 days or if the performance security was not given or if an agreement was not signed, the guarantee could be enforced. The Bank guarantee was enforced before the bid was withdrawn within 120 days. Therefore, it could not be said lhal lhe invocation of lhe Bank guarantee was against the terms of the Bank guarantee. If il was in terms of lhe Bank guarantee, one fails to understand as lo how the High Court could say that the guarantee could nol have been invoked. If the guarantee was rightly invoked, there was no question of directing refund as has been done by the High Court." The author witli great respect states that the view expressed by the High Court in the above case is the correct view. The Supreme Court, having accepted the proposition of the right of a party to withdraw its offer before its acceptance, cannot negate the enforcement of the very said right unless there is a separate and distinct consideration for holding the offer open for acceptance for a definite period of time. It is a possible view that the existence or nonexistence of an underlying contract becomes irrelevant when the invocation of a bank guarantee is in terms of the Bank guarantee and as such the writ Court may not exercise its discretion. However, applying the principle of avoiding multiplicity of proceedings, the author with respect reiterates that the view expressed by the High Court and judgement pronounced is the correct position in law.

12.20.2 To justify forfeiture the terms of contract should be sufficiently explicit To justify forfeiture of advance deposit, being a part of price as 'earnest,' the terms of contract should be sufficiently explicit and made known to the party making the deposit. ILLUSTRATIONS (1) In a case concerning an auction sale, terms of the auction were neither advertised in writing nor supplied at. the time of auction. What was stated was that the terms were orally intimated on the date of the auction. One such term intimated orally was that on nondeposit of 3/4th bid-money l/4th advance deposit would be forfeited as earnest. The applicant in the High Court had sought recovery of the 1/4 th advance deposit that was forfeited. It was held by the Madhya Pradesh High Court:104 "Without proof of any loss to the auctioning authority the forfeiture of 1/ 4th deposit, therefore, cannot be supported by provisions of S.74 of the Contract Act."

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555

(2) A Society deposited fixed earnest money and formally applied for allotment of land. On acceptance of offer formal allotment was made by the Authority. The Authority, however, before delivery of possession communicated enhancement of premium of land. - The allottee society failed to make payment within the time extended by the High Court. It was held that forfeiture of earnest money by the Authority was not illegal as communication by the Authority as to enhancement was in continuation of earlier offer and society had accepted offer contained in the said conmiunication. 105 104 105

Bhanwarlas v. Babulal, AIR 1992 M.P.6 (12). Delhi Development Authority, v. Grihsthapana Co-operative Group Housing Society Ltd., AIR 1995SC 1312. G. Ram, v. Delhi Development Authority, AIR 2003 Del. 120. Also see: Narendrakumar Nakhat, Petitioner v. M/s. Nandi Hasbi Textile Mills Ltd. and others, Respondents, ADR. 1997 Kant. 185.

12.20.3 Writ for refund of Earnest Money may be maintainable Order of forfeiture passed by an authority, other than the one authorized to do so is not valid.106 In case the amount is wrongly retained by public authority, writ for refund may be maintainable.107 However, in a case die Supreme Court held: "It is settled law that disputes relating to contracts cannot be agitated under Article 226 of the Constitution of India. It has been so held in the cases ..."l08. The dispute in this case was regarding the terms of offer. They were thus contractual disputes in respect of which a Writ Court was not the proper forum109 Wrongful forfeiture of earnest money is generally when there exists no contract and as such, the author with respect states that the earlier view allowing writ is the correct view, when there is no contract between the parties. 12.21

FORFEITURE OF SECURITY DEPOSIT — LOSS MUST BE PROVED

In view of the decisions of the Supreme Court__djscusjed_aboye in.Art.l2J9tJhe_legal position is very well settled that forfeiture of security deposit as also other stipulations jike recovery of costs" ^excess rement / steel consumption at penal, rate would1 attractjhe provisions.of_Sectign_ 74 and_Jo5§.hasjtq bejM^y^. Similarly if the provision is unreasonable it may be invalid. For example, the conditions in a kundry receipt restrictingjjjunjiere^ liability for loss to twenty times laundering charges or half of value of un-returned clothes .whichever was lgss_was held unreasonabjg^jjrta^ to public policy and hence _;yi)idJ10 In a number of cases, the Supreme Court of India has made it plain that a provision naming a fixed sum to be paid or amount fixed to be forfeUed_only gives to the aggrieved party a right to sue111 and it, fiierefofe, lollows that lTup^nforfeiture of Security Deposit, the contractor is to file a suit for recovery of it, the aggrieved party will have to prove that (i) the contractor committed breach of contract and further that.(iiXas a consequence_of such bre3ch4he-aggrjeved party, in fact, juffered^the^^ than the amount forfeited^ Section 74 of the Indian Contract Act deals with the measure of damages in two classes of casesjTxyyherj^the contract names a sum to be paid in case of breach andCif) where the contract contains~^nyi3mTT"'STip1Brafm by way oTpenalty. Jurisdictionof the Court to award comp^

556

Building and Engineering Contracts

maximum stipulate^ 106 107 108

109 110 111

the

State of Orissa and others, Appellants v. Ganeswar Jena, AIR 1994 Ori 94. Aditya Mass Communications Pvt. Ltd., v. A.P. State Road Transport Corporation, Hyderabad, AIR 1998 AP 125; also see: M/s Shyam Biri Works Pvt. Ltd. v. UP. Forest Corpn., AIR 1990 A11.205. Reference was made to:Kerala State Electricity Board v. Knrien E. Kalathil, reported in (2000) 6 SCC 293, State of U. P. v. Bridge and Roof Co.' (India) Ltd., reported in (1996) 6 SCC 22 and B. D. A. v. Ajai Pal Singh, reported in (1989) 2 SCC 116. National Highways Authority of India v. M/s. Ganga Enterprises, AIR 2003 SC 3823. RS. Deboo, v. Dr. M.V. Hindlekar and another, AIR 1995 Bom.68. See Chapter 7, Art.7.9.

Court a duly lo award compensation according lo settled principles. The Section undoubtedly says lhal the aggrieved party is entitled lo receive compensation from the parly who has brokenlhe contract whether or not actual damages or loss is proved lo have been caused by the breach. Thereby it merely dispenses with proof of "actual loss or damages," il does not justify" the "award of compensation when in consequence of the breach no legal injury at all has resulted because compensation for breach of contract can be awarded to make good loss or damage which naturally arose in the usual course of things, or which the parties knew when they made the contract, to be likely lo result from the breach. This position was well settled By the Constitution Bench Decision of the Supreme Courl of India.113 Therefore, the party to a contract taking security deposit from the other party to ensure due performance is not entitled to forfeit trie deposit on the ground of default wherTnoToss is caused to him on consequence of such default."4

ILLUSTRATIONS (1) Clause 42 of the Agreement in a case stipulated that the contractor was to see that only the required quantities of materials are issued. It was further the term of die Agreement that the difference in quantity of cement actually issued to the contractor and the theoretical quantity including the authorized violation, if not returned by the contractor, shall be recovered at twice the issue rate without prejudice to the provision of the relevant conditions regarding return of materials governing the contract. The difference between the actual consumption and theoretical_as pointed out. under Clause 42 had been gone into by the arbitrator.) Hejound matJJak_aj^uaLIc^ka^ the arbitrator, on the basis of the record provided before him, was not satisfied with the calculations arrived at by the Department and, therefore, disallowed the double recovery. The arbitrator has given reasons for not accepting the double recovery as the D.D.A. failed to prove the loss. The Delhi High Court upheld the award. 115 (2) The two-Judge Bench Judgement of the Supreme Court of India held:"6 "...when parties have expressly agreed that recovery from the contractor for breach of the contract is pre-estimated genuine liquidated damages and is not by way ofpenalty duly agreedby the parties^ there was no justifiable reason for the arbitral tribunal to arrive at a conclusion that still the purchaser should prove loss suffered by it because of delay in supply of goods." \This decision, it is stated with utmost respect, being contrary to the decision of the Constitution Bench in Fateh Chand's case, has not laid down a good law. It relies on the age old distinction in the English law between the penalty and liquidated damages, which distinction was clearly eliminated by the express provisions of Section 74 which treat both the stipulations at par in so far as giving effect to them. Until the position changes by a subsequent decision, this case can be distinguished on the basis of peculiar facts which were stated as follows: 113

Fateh Chand, v. Balkishan Dass, AIR 1963 SC 1405.

114

Besides Fateh Chand also see Mania Bux v. Union of India, AIR 1970 SC 1955, Union of India v. Rampur Distillery and Chemicals Limited, AIR 1973 SC 1089, AIR 1989 M.P. 7 (18).

115

M/s. Jagan Nath Ashok Kumar v. Delhi Development Authority, AIR 1995 Del. 87.

116

Oil and Natural Gas Corporation Ltd., v. SAW Pipes Ltd., AIR 2003 SC 2629.

Chapter-12

Remedies far Breach o f Conlracl

557

"The agreement between the parties specifically provides that without prejudice to any other right or remedy if the contractor fails to deliver the stores within the stipulated time, appellant will be entitled to recover from the contractor, as agreed, liquidated damages equivalent to 1% of the contract price of the whole unit per week for such delay. Such recovery of liquidated damage could be at the most up to 10% of the contract price of whole unit of stores. Not only this, it was also agreed that: (a) liquidated damages for delay in supplies will be recovered by paying authority from the bill for payment of cost of material submitted by the contractor; (b) liquidated damages were not by way of penalty and it was agreed to be genuine, preestimate of damages duly agreed by the parties; (c) this pre-estimate of liquidated damages is not assailed by the respondent as unreasonable assessment of damages by the parties. (d) ".. Further, at the time when respondent sought extension of time for supply of goods, time was extended by letter dated 4-12-1996 with a specific demand that the clause for liquidated damages would be invoked and appellant would recover the same for such delay. Despite this specific letter written by the appellant, respondent had supplied the goods which would indicate that even at that stage, respondent was agreeable to pay liquidated damages."

12.21.1 Forfeiture of Security Deposit in Addition to Recovery of Excess Cost Illegal Age-old P.W.D. Standard form contracts included provisions empowering the authority to forfeit security deposit and also recover the excess expenditure incurred in getting the balance work executed by another agency. This would result in conferring double benefit to the State. The amount deposited by way of security for guaranteeing the due performance of the contract could not be regarded as earnest money as already stated. Under Section 74 only a reasonable amount can be forfeited if a contract is not performed.116 The law'is well settled that the party to a contract taking security deposit from the other partyjo ensure,jue^3erfrjnrjance_of the contract is not entitled toJprfeiLthe. s~ecurity_iieposit,on ^ jimmd-of-4efault,..when the loss caused to him is made good in consequence of such default. \ The following observations of the Supreme Court of India are worth noting in this connection, it is submitted:117 "We find that there is no term in the agreement between the parties enabling the appellant to forfeit the security deposit. TJie_only_righJ^gi^ thejsecurUyjler^ amount of loss incurred by_ thejppellant which was causedjo themj^ reason of non-completion of the work by the respondent in time and to recoyej 116

117

State of U.P. v. Chandra Gupta & Co., AIR 1977 A11.28; also see: Maula Bux v. Union of India, AIR 1970 SC 1955; Union of India v. Rampur Distillery and Chemicals Limited, AIR 1973 SC 1908; M/s. Macbrite Engineers, v. Tamil Nadu Sugar Corporation Ltd., .AIR 2002 Mad 429; State of A. P. and others, v. Singam Setty Yellananda, AIR 2003 AP 182. State of Rajasthan v. Bootamal Sachdeva, AIR 1989 SC 1811.

ihe extra cost of the work which had lo be completed by ihe appellant departmental ly on account of default of the respondent, subject to certain limits. The appellant has neither proved the amount of damage incurred by il nor ..has il proved the exlra amount of cosl incurred by il for gelting the incomplete work done deparlmentally. Thus, the argument that the appellant was entitled to forfeit the security deposit or any part of Ihe same, must fail."

('hapler-12

12.21.2

Remedies jar Breach o f Contract

Events Justifying Forfeiture

In modern standard form contracts the commonest contingencies upon which the right lo forfeit is made dependent include breach of the contract by the contractor, by : : i) failure to sign the agreement and commence work;

ii) making himself liable to pay the full amount of penalty/liquidated damages;! iii) committing breach of any condition of the contract such as providing remedy?" for defective work. iv) declaring bankruptcy or winding up of the company. 118

-J

Invariably the question of deciding whether the event upon which a power of forfeiture may be exercised has occurred or not, is left for determination by the engineer or architect and special provisions of each contract need to be referred to in order to ascertain the event. The drafters of such clauses expect the engineer or architect to be third personindependent of the two parties to the contract, which may be true in private works, but not in the case of public works. Thus,"in the case of public works, not quite infrequently, the engineer becomes me judge 6fTuV"own~causeAvhich permits a large number of grave injustices ahd'anomaTies. IhvlmbTy'"^ in arbitration or Court. IUs .to-be noted that an arbitrator^Uie Court will strictly construe the forfeiture clauses in order to determine whether the operative event has occurred or not.

12.21.3

Waiver and Estoppel

The owner may find himself precluded from enforcing the forfeiture, although the circumstance may have occurred justifying exercise of such right either because he has waived his right or he is estopped from exercising it. The right must be exercised within a reasonable time after the breach unless the breach is a continuing one.

12.21.4 Forfeiture of any Money due to the Contractor Besides forfeiture of earnest money and security deposit which are common provisions in India in the Standard form contracts for public works considered, above, forfeiture clauses, if any, empowering the owner to forfeit any money due to the contractor at the time of forfeiture, generally, operate as penalties and as such subject to actual proof of damage. Section 74 of the Indian Contract Act applies to such provisions of the agreement. One such provision is considered below.

12.21.5

Right to Recover Sum from Other Contracts

Standard form contracts for building and engineering contracts in use by the Government departments, generally include a provision such as the one embodied in Clause 29 of the General Conditions of Contract used by the C.RW.D. which reads as follows : 118 These aspects of breaches have been explained in Chapters 10 and 11.

"CLAUSE 29 (1) Whenever any claim against the contractor for the payment of a sum or money arises out of or under the contract, the Government shall be entitled lo recover such sum by appropriating in part or whole, ihe security deposit of the contractor, and lo sell any Government promissory notes, etc. forming the whole or part of such security. In the event of the security being insufficient or if no Security has been taken from ihe contractor, then Ihe balance or the total sum recoverable as the case may be, shall be deducted from any sum then due or which at any time thereafter may become due to the contractor under this or any other contract with the Government. Should this sum be nol sufficient to cover the full amount

recoverable, the contractor shall pay to the Government on demand the balance remaining due." (Emphasis added) A similarly worded CI.18 of the General Conditions of Contracts contained in the standard

Form of Contract No. D.G.S. & D. 68 was considered by the Supreme Court of India on two

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Remedies jar Breach o f Contract

occasions. In the first case the Union of India v. Raman Iron Foundry119 it was held: "A claim for damages for breach of contract, is, therefore, not a claim for a sum presently due and payable, and the purchaser is not entitled, in exercise of right conferred upon it under Clause 18 to recover the amount of such claim by appropriating other sums due to the contractor." However, in the second case120 the above decision was reconsidered by the Supreme Court. It was held 120: "We are clearly of the view that an injunction order restraining the respondents from withholding the amount due under other pending bills to the contractor virtually amounts to a direction to pay the amount to the contractor-appellant. Such an order was cleat ly beyond the purview of clause (b) of Section 41 of the Arbitration Act. The Union of India has no objection to the grant of an injunction restraining from recovering or appropriating the amount lying with it in respect of other claims of the contractor towards its claim for damages. But certainly Clause 18 of the standard contract confers amplejjower upon the Union of_mdiata"wiflffio^ could be passed restraining the Union of India from^wiLhholding me amount." There is no doubt, that the law as laid down in the 'later decision of the Supreme Court will be applicable to such cases. As a result thereof it is permissible for the competent Court to grant an injunction restraining the Government from recovering or appropriating any damages claimed by it from other pending bills of the contractor but no such order can be issued restraining the Government from "withholding" the payments due to the contractor under other pending bills. Clause 18 as well as clause 29 referred to ..above empower the Government to recover the amount or appropriate anysum due and payable n rac 7/J^?LO^rl^ l t and not to withhold it. Aninjunction will restrain the Government from_both, ''recovenggjuidj^ spite of such an mjuncjipn, if the amount is "withheld" by the GpxemmejU.foe,.c^ that there is a breach of term oTpayment of fce.cpn|r^t JBU^cb,.the amount .j&jargngfully and illegally withheld

12.22 WRONGFUL FORFEITURE In conclusion of the discussion in respect of forfeiture, it can be said that the exercise of power to forfeit may be invalidated on any one or more of the following grounds: 119 120

Union of India v. Raman Iron Foundry, AIR 1974 SC 1265. H.M.Kamaluddin Ansari and Co.v.Union of India AIR 1984 SC 29; (1983) 4S CC, 430.

(i) None of the events upon which it is conditioned has occurred; (ii) Although such an event has happened, it was caused by the act of the party seeking to exercise it , or by his agents; (iii) The notice required to be given in terms of the contract was not given; (iv) There has been delay or other conduct recognizing the continued existence of the contract after knowledge of the breach, if the breach is not a continuing one. The exercise of the power to forfeit under the above circumstances may amount to wrongful forfeiture. It has to be noted that a wrongful forfeiture cannot be justified by reference to a subsequent event which would have justified it. A wrongful forfeiture and termination of the contract if accepted by the contractor and in turn he rescinds the contract, the owner is liable for the possible heavy damages attendant upon wrongful and illegal termination. It is to be noted that if he discovers his mistake, he cannot restore the contract and the status quo ante without the consent of the contractor.

12.22.1 Silence for long time amounts to refusal to pay back security Conduct by the owner maintaining silence about refund of security 'deposit may amount to refusal to refund and give rise to a dispute.

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ILLUSTRATION By an agreement dated 24.1.1979, the appellant had undertaken the work of construction of the spillway of right head regulator of Talsara Irrigation Project. The stipulated date for completion of the work as per the agreement was 23.7.1980. The appellant abandoned the work on 31.3.1980 and prayed for closure of the agreement. After waiting for three years the appellant made a reference in 1983 to Arbitration Tribunal. In respect of the refund of security deposit claim, the Tribunal came to the conclusion that the claim was premature as no order had been passed on prayer.of the appellant by the State. The Orissa High Court held:122 "Three years after notice of abandonment, reference was made to Tribunal. ..Silence for such a long period amounts to refusal to pay back the security. Even if no decision was . taken on receipt of notice of arbitration, respondent could have brought all facts why the security had not been refunded. In such a circumstance, terms of agreement by finding ( that it is premature is an error of law apparent on the face of the award. No further material / is necessary to be considered to come to this conclusion." Award to that extent was setj aside.

j

12.23

ENFORCEMENT OF BANK GUARANTEE

In most construction contracts, especially for big projects, the practice of accepting bank guarantee in place of cash security is followed. The system has an advantage of the working capital of the contractor not getting locked up and as a result, thereby, the owner 122 M/s Vibgyer Structural Construction Pvt Ltd. v. State, AIR 1991 Ori.323.

also gets a benefit of lower rates than the rales which the contractor would have tendered if he were lo keep cash security deposit. More often than nol when a demand is made for the encashment of a bank guarantee, the Court is approached with a view to get an injunction restraining Hie bank from making payment under the bank guarantee. The question in such cases is also similar to the question of forfeiture of security deposit. Legal aspects of encashment of bank guarantees need to be considered here because it involves besides the two parties to a contract, the bank as third party, j

12.23.1 Liability Under Bank Guarantee Whether Absolute A Bank Guarantee is the common mode of securing payment of money in commercial dealings as the beneficiary, under the Guarantee, is entitled to realise the whole of the amount under that Guarantee in terms thereof irrespective of any pending dispute between the person on whose behalf the ^GuaranTee was given to the beneficiary. In contracts awarded to private individuals by the Government, which involve huge expenditure, as for example^ coh^trucfion contracts, Bank Guarantees are usually required to be furnished in favour of the Government to secure payments made to the contractor as "Advance" from time to time during the course of the j^ontracj. as_also jo _secure performance of the work entrusted under the contract. Such Guaran.tee_s.are encashable in terms thereof on the lapse of the contractor either in the performance of the work or in paying back to the Government Advance; the Guarantee is invoked and the amount is recovered from the Bank. It is for this reason that the Courts, are reluctant in granting an injunction against the invocation of Bank Guarantee, except in the case of fraud, which should be as established fraud, or where irretrievable injury was likely to be caused to the Guarantor. This is the principle laid down by the Supreme Court in various decisions123. /

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What is important, therefore, is that the Bank Guarantee should be in unequivocal terms, unconditional and recite that the amount would be paid without demur or objection 123 In U. P. Co-operative Federation Ltd. v. Singh Consultants and Engineers Pvt. Ltd., (1988) 1 SCC 174, the law laid down in Bolivinter Oil SA v. Chase Manhattan Bank, (1984) 1 All ER 351 was approved and it was held that an unconditional Bank Guarantee could be invoked in terms thereof by the person in whose favour the Bank Guarantee was given and the Courts would not grant any injunction restraining the invocation except in the case of fraud or irretrievable injury. Also see: Svenska Handelsbanken v. Indian Charge Chrome, (1994) 1 SCC 502 / (1993 AIR SCW 4002 : AIR 1994 SC 626); Larsen and Toubro Ltd. v. Maharashtra State Electricity Board, (1995) 6 SCC 68 : (1995 AIR SCW 4134 : AIR 1996 SC 334); Hindustan Steel Works Construction Ltd,, v. G. S. Atwal and Co. (Engineers) (P) Ltd., (1995) 6 SCC 76 : (1995 AIR SCW 3821 : AIR 1996 SC 131); National Thermal Power Corporation Ltd. v. Flowmore (P) Ltd., (1995) 4 SCC 515 : (1995 AIR SCW 430 : AIR 1996 SC 445); State of Maharashtra* v. National Construction Co., (1996) 1 SCC 735 : (1996 AIR SCW 895 : AIR 1996 SC 2367); Hindustan Steel Works Construction Ltd. v. Tarapore and Co., (1996) 5 SCC 34 : (1996 AIR SCW 2861 : AIR 1996 SC 2268) as also in U.P. State Sugar Corporation v. Sumac International Ltd., (1997) 1 SCC 568 : (1997 AIR SCW 694 : AIR 1997 SC 1644 : 1997 All LT 638), Dwarikesh Sugar Industries Ltd., Appellant v. Prem Heavy Engineering Works (P) Ltd., and another, AIR 199Z SC 2477 Fenner (India) Ltd., Appellant v. Punjab and Sind Bank, AIR 1997 SC 3450; Larsen and Toubro Limited, Appellant v. Maharashtra State Electricity Board and others, AIR 1996 SC 334; National Thermal Power Corporation Ltd., Appellant v. M/s. Flowmore Private Ltd. and another, AIR 1996 SC 445; Federal Bank Ltd., Appellant v. V. M. Jog Engineering Ltd. and others, 2001 (Suppl.) Arb LR 572 (SC) the same principle has been laid down and reiterated.

andirrespective

of any dispute that might have cropped up or might have been pending

between the beneficiary under the Bank Guarantee or the person on whose behalf the Guarantee was furnished. The terms of the Bank Guarantee are, therefore, extremely material. Since the Bank Guarantee represents an independent contract between the Bank and the beneficiary, both the parties would be bound by the terms thereof.

The

invocation, therefore,

will have to be in accordance with the terms of the Bank Guarantee; or else the invocation itself would be bad.

amount payable "on his first demand without whatsoever our part and without his first claim to the contractor, in the amount not exceeding Rs. 10,00,000/- (Rupees Ten lakhs only) in the event that the obligations expressed in the said clause of the above mentioned contract have not been fulfilled by the contractor giving the right of claim to the employer for recovery of the whole or part of the Advance Mobilization Loan from the contractor under the contract," the Supreme Court held1: Where a bank guarantee made right of objection on

"This condition clearly refers to the original contract between the HCCL and the defendants and postulates that if the obligations, expressed in the contract, are not fulfilled by HCCL giving to the defendants the right to claim recovery of the whole or part of the "Advance Mobilization Loan", then the Bank would pay the amount due under the Guarantee to the Executive Engineer. By referring specifically to said Clause 9, the Bank has qualified its liability to pay the amount covered by the Guarantee relating to "Advance Mobilization Loan" to the Executive Engineer only if the obligations under the contract were not fulfilled by HCCL or the HCCL has misappropriated any portion of the "Advance Mobilisation Loan". It is in these circumstances that the aforesaid clause would operate and the whole of the amount covered by the "Mobilisation Advance" would become payable on demand. The Bank Guarantee thus could be invoked only in the circumstances referred to in Clause 9 whenever the amount would become payable only if the obligations are not fulfilled or there is misappropriation. That being so, the Bank Guarantee could not be said to be unconditional or unequivocal in terms so that the

Hindustan Construction Co. Ltd., v. State of Bihar AIR 1999 SC 3710.

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defendants could be said to have had an unfettered right to invoke that Guarantee and demand immediate payment thereof from the Bank." No distinction can be drawn between the guarantee for due performance of works contract or towards security deposit. The obligation of Bank remains the same and has to be discharged in a manner provided in Bank guarantee.2 The general rule of law is that liability arising out of the unilateral contracts of commercial credits such as letters of credits, performance bonds or bank guarantees, is absolute. An irrevocable letter of credit has a definite implication. It is a mechanism of great importance in international trade. Any interference with that mechanism is bound to have serious repercussions on the international trade of a country. Except under very 124 125

exceptionalcircumstances the Courts do not interfere with that mechanism.3 The letter of credit is independent of and unqualified by the contract or sale or underlying transaction. The autonomy of an irrevocable letter of credit is entitled to protection.4 A bank guarantee is very much like a letter of credit. The Courts will do the utmost to enforce it according to its terms.5 The forms in use for bank guarantees in construction contracts usually stipulate that the bank shall pay the sum guaranteed "on demand and without demur". A typical illustration and true legal position in such cases is to be found in the case of N.P.C.C. Ltd. v. M/s G. Rajan6 it is submitted. ILLUSTRATION The brief facts of the case were that the N.RC.C. Ltd., entrusted a construction contract to a firm. The contract provided for giving of mobilisation advance by the N.RC. C. Ltd. to the firm and the recovery thereof guaranteed by a bank guarantee. The firm having failed to adhere to the agreed work schedule, the N.RC.C. Ltd. "had no other alternative but to rescind the contract," it was alleged. The firm was directed by a letter to deposit unrecovered advance within 7 days failing which the demand on the bank for encashment of bank guarantees would be made. On receipt of the letter, the firm filed a suit under Section 20 of the Arbitration Act for reference of disputes to an arbitrator and during pendency of the said suit prayed for an order of injunction under Section 41 of the Arbitration Act restraining the N.RC.C. Ltd from taking any steps to enforce the bank guarantee. The firm contended that the petitioner had rescinded the contract illegally and wrongfully, and that the firm had a claim of Rs, 19,00,000/- and that in the event of the N.P.C.C. Ltd. succeeding ultimately in establishing its claim before the Arbitrator, the said amount could be easily realized from the Bank which was fully secured by the Bank guarantee. The trial Court granted the injunction order taking the view that if the N.P.C.C. Ltd. is not allowed to encash the Bank guarantee till final adjudication of the matter, no harm or inconvenience would be caused to it. On the other hand, the enforcement of the Bank Guarantee at that stage would result in irreparable loss and injury to the firm particularly if the dispute was ultimately decided in its favour and that there would also be a multiplicity of proceedings if the prayer for injunction was not allowed. Hidnustan Steel Works Construction Ltd. Appellant v. Tarpore and Co. and another, AIR 1996 SC 2268. 3 Tarapore & Co. Madras v. Tractoroexport, Mascow, AIR 1970 SC 891; Syndicate Bank v. Vijay Kumar, AIR 1992 SC 1066. reversing the decision of the Delhi High Court, and authorities listed in an opinion case National Aluminium Co, Ltd. v. M/s. R.S. Builders (India) Ltd.. AIR 1991. Orissa 314. 4 United Commercial Bank v. Bank of India, AIR 1981 SC 1426. 5 Elur v. Matsar (1966) 2 LILR d95. 6 N.P.C.C. Ltd. v. M/s O. Rajan, AIR 1985 Cal. 23.

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The N.P.C.C. Ltd. filed a revision petition against the said order of injunction passed by the trial Court. It was held : "The decision of the Supreme Court in MSEB v. Official Liquidator (AIR 1982 SC 1497) (Supra) makes it clear that the Bank guarantee executed by the Bank in favour of the petitioner stands independent of the other connected transactions, namely, the contract between the petitioner and the opposite party and the document under which the opposite parly had given security to the Bank Tor executing the letter of guarantee. It also stands independent of any claim or counter-claim arising out of the contract between the petitioner and the opposite party, that being so, there is prima facie no reason according to us, why the Bank guarantee cannot be enforced by the petitioner subject, of course, to the fulfillment of the conditions as laid down therein."

A number of authorities, about 48, were examined during the course of Judgment. There are a number of authorities to support the proposition that the liability under a bank guarantee is absolute and the law is well established.7 As every rule has few exceptions, the rule of law in respect of the bank guarantee too has a couple of exceptions.

12.23.2 Exceptions to the General Rule "General propositions do not solve concrete cases". Justice Holmes has said. While the law generally stated is that liability arising out of the unilateral contracts of commercial credits, such as letters of credit, bank guarantees and performance bonds is absolute, the intention of the parties as gathered from a reasonable construction of the language of the particular contract must ultimately govern the decision of the Court as to the arising of the liability thereunder. The terms of a particular document may even constitute an exception to the general rule.8

(1) Suppression of Material Facts by Beneficiary The duty of the appellant in making the demand on the bank is like the duty of the plaintiff to disclose the cause of action in the plaint. Just as a plaint is liable to be rejected for nondisclosure of the cause of action, a demand by the beneficiary of the bank guarantee is liable to be rejected by the bank if it does not state the facts showing that the conditions of the bank guarantee have been fulfilled. Enforcement of bank guarantee can be prevented in case equity is in favour of a person who has given the guarantee as also when the invocation letter is not in terms with the agreement. The bank guarantee and the letter of invocation must be read together to find out whether invocation has been made in accordance with the terms of the bank guarantee or not. If not, the bank is not liable to pay. Unless the loss or damage is quantified as required by the bank guarantee - there would be no debt payable by the bank as held in Union of India v. Raman Iron Factory AIR 1974 SC 1265. If the damage is not assessed, it remains a claim for unliquidated damage. ...'9 ILLUSTRATION

In a case decided by the Calcutta High Court the petitioner had instructed his bank to issue a bank guarantee against mobilization advance to be received from the beneficiary. The bank negligently issued a guarantee in a form used for a performance guarantee without striking out unnecessary and inapplicable clauses contained therein. The petitioner was not a party to this document, and, therefore, could not detect Lhe mistake on the part of the bank. The guarantee

7 Daewoo Motors India Ltd., Appellant v. Union of India and others, AIR 2003 SC 1786; National Highway Authority of India, Appellant v. M/s. Ganga Enterprises and another.AIR 2003 3 823; AIR 1982 SC 1497; AIR 1981 SC 1426; AIR 1979 Cal. 44; AIR 1979 Cal 370; (1973) 2 Lloyds Rep. 437; (1973) 117S.J 483 (C.A.); Bache & Co. v. Banque Vemes. (1970) 74 Cal. W. N. 991; (1966) 2 Lloyds Rep. 495 (CA) Elian v. Master.; Also see : Centax (India) Ltd.V.Vinmar Impex Ltd. AIR 1986 SC 1924 (upholds AIR 1986 Cal. 356); also see Allied Resins & Chemicals Ltd. v Mineral & Metal Trading Corpn. of India Ltd. AIR 1986 Cal. 346; M/s Triveni Engineering Work Ltd. v. M/s.Belganga S..S.K. Ltd., AIR 1992 Del. 164 etc. 8 Harprashad & Co. v. Sudarshan Steel Mills AIR 1980 Del. 175; Also see AIR 1982 Del 357. 9 Banerjee & Banerjee, AIR 1986 Cal. 374.

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was accepted by the respondent. It was held that the respondent was not entitled to invoke mobilization advance guarantee for the recovery of loss and damage. 10 (2) A Wrongful and Fraudulent Enforcement of Bank Guarantee If the guarantee is enforced by fraud, misrepresentation, deliberate suppression of material facts, or the like, that will give rise to special equity in favour of the contractor who will then have the right to stop its enforcement by obtaining an order from the Court. For obtaining an order from the Court, a very strong prima facie case must be made out. The Courts will not interfere with the enforcement of conditional or unconditional bank guarantees or Letters of Credit on mere allegation of fraud or special equity, without any prima facie proof. The facts were as follows.: ILLUSTRATIONS (1) Seven bank guarantees were given by the petitioner in favour of the respondents, pursuant to the express term of a contract dated 12.5.1984 entered into between the petitioner and the respondent for construction work. Out of the seven guarantees, two were in lieu of security deposit and five were fo securing mobilization advance made by the respondent to the petitioner. The two guarantees for security deposit could be enforced by the respondent by making a written demand stating that the petitioner had committed a breach of any of the terms of the contract and the extent or quantum of loss or damages suffered. The decision of the respondent was final and could not be questioned by the bank as regards the quantum of damage. The remaining five guarantees could be enforced if the petitioner failed to utilize the mobilization advance for the purpose of the contract or the respondent failed to fully recover the said sum with interest in accordance with the stipulation in the contract. The respondent had already recovered certain amounts towards the mobilization advance and security deposit. The respondent suppressed the facts of recoveries already made. The respondent also failed to discharge its duty as the sole judge, under the terms of the Guarantee, to quantify the damages and to mention the extent of recoveries made by it, although it was within its special knowledge. The demand letters, must be in accordance with the bank guarantees. By suppressing the material fact of recoveries already made by the respondent to the extent of Rs.3.5 lakhs, the respondent attempted to recover the entire sum of Rs. 11.5 lakhs under the seven guarantees. The High Court heldi:u "...The suppression of this material fact in the demand letters has given rise to a special equity in favour of the petitioner to stop payment by the bank on the basis of these demand letters. Although in the petition, there is no allegation of fraud,... this willful false representation by the beneficiary... is a factor, which must be treated on the same footing as 'fraud' giving rise to special equity and must be treated as an exception to the general rule that the Court should not interfere in these matters. ... The respondent... must wait until the disputes are resolved by the arbitrator." (2) In a case the tender submitted by the appellant was accompanied by a bank guarantee

for Rs. 4.00.000/-. After the tenders were opened, the appellant discovered that they had quoted the price for only one unit by mistake while the NIT specified supply of two units. As soon as the error was discovered, the appellant wrote to the respondent explaining the same and revising the bid. The respondents contended that the price could not be increased after the tenders were opened and sought to enforce the bank guarantee. The

10M/s. G.S. Atwal & Co. Engineers Pvt Ltd. v. H.S.W.C. Ltd.. AIR 1989 Cal. 1 84; Also see M/s. Escort Limited v. M/s. Modem Insulators Ltd., AIR 1988 Del. 345. M/s Synthetic Foams Ltd.v. Simplex C. CP. (India) Pvt. Ltd. AIR 1988 Del. 207.

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application for injunction to restrain the respondents from encashing the guarantee was dismissed. The appellant approached the Bombay High Court. The Respondents had not taken any steps to their detriment because of the tender submitted by the appellants and, therefore, the theory of promissory estoppel was held to be not applicable to the case. The High Court observed that there was no contract between the parties to keep die tender open and, therefore, the appellants could revoke their bid before it was accepted, as was in fact done. The guarantee could be invoked only if the contract were to be awarded to the appellants and they failed to pay the amount or to perform their part, which stage was held not to have arisen. The bank was, therefore, restrained from making payment under the guarantees.11 (3) The Karnataka High Court has laid down the principle that in every case of guarantee

given, the bank is not bound to pay the money to the beneficiary notwithstanding any dispute or litigation subsisting between them. If the terms mentioned in the contract do not amount to an unconditional or irrevocable contract and if it does not contain any undertaking to pay on demand, the person concerned has no right to insist on the bank making the payment as mentioned in the guarantee. Where the guarantee amounts to a contract of indemnity, as was the case before the High Court, the beneficiary must show the loss or damage caused to it. It can be enforced only after the amount of loss caused to the beneficiary is determined.12 (4) The Delhi High Court has held that normally the Court would refrain form granting an injunction to restrain the Bank from performing the contractual obligation except on the ground of fraud. It was further held that misrepresentation or suppression of material facts or violation of the guarantee can be treated as species of the.same genus as fraud. In sucha case there exists special equity in favour of the plaintiff for grant of injunction. In that case the 134 M/s.Banerjee & Banerjee v. Hindustan Steel Works Construction Ltd., AIR 1986 Cal. 374; (382); M/s.G.S. Atwal & Co. (Engineers) Pvt. Ltd.v. N.P.C.C. Ltd., AIR 1988 Del. 243; AIR 1986 Mad.161

defendant had not disclosed that: (a) the contract was cancelled without any fault or mistake on the part of the claimant; (b) the fact of withholding a sum of money (c) some amount of advance had already been recovered; and (d) that the plaintiff had been all along ready and willing to perform his part of the

contract. It was held that the above facts gave rise to special equity in favour of the plaintiff.13

12.23.3 Suspension of Main Contract by Statute Bank GuaranteeNot Suspended ? In quite a few matters the question arises as to whether the liability of a guarantor is automatically suspended when the liability of the principal debtor is suspended under some Statutory provision. The law in this respect seems to be settled by a couple of Supreme Court decisions in which it was held14 : 1) The contract of guarantee is an independent contract between the guarantor and the guarantee, and hence

11 Kirloskar Pneumatics Co.Ltd.v.N.T.P. Com. Ltd., AIR 1987 Bom.308. 12 Kudremukh Iron Ore Co. Ltd. Konila Rubber Co.Pvt.Ltd.,AIR 1987 Kant. 139. 13 M/s Synthetic Foams Ltd.v. Simplex C. CP. (India) Pvt. Ltd. AIR 1988 Del. 207. 14 M.S.B.B., Bombay v. Official Liquidator, H .C. Emakulam, AIR 1982 SC 1497; and State Bank of India v. M/s. Saksaria Sugar Mills Ltd., AIR 1986 SC 868.

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2) The remedy against the guarantor is not suspended merely because the liability of the principal debtor is suspended. ILLUSTRATION The plaintiff, in a case before the Bombay High Court, was engaged as a subcontractor for carrying out the work of erection, testing and commissioning of L.P. Pipe Work and tube-oil unloading system at the Riband Super Thermal Power Station for a sum of over one crore of rupees. The Bank undertook to pay on demand "any or all moneys payable by the contractor to the extent of Rs.10,72,806/- at any time up to 30/06/1989 without any demur, reservation, contest, recourse of protest and/or without any reference to the Contractor." It further stated: "Any such demand made by NPIL (Defendant No.2) on the Bank shall be conclusive and binding notwithstanding any difference between NPIL and the contractor or any dispute pending before any Court, tribunal, arbitrator." The Government of West Bengal declared the plaintiff SQL (India) Ltd. as an unemployment relief undertaking under the West Bengal Act XIII of 1972, with effect from 11th May, 1990. Under the notification issued, all contracts between the plaintiff and the third parties and all the rights, obligation and liabilities arising there from were suspended except in respect of certain contract specified in the notification. The main contractor stated that huge losses were suffered by reason of the default committed by the plaintiff. The Bank guarantee was, therefore, sought to be encashed. The main contention of the plaintiff was that the sub-contract stood suspended and the contract of bank guarantee being ancillary to the sub-contract is liable to be treated as suspended. It was held140: The contract of Bank guarantee in question is a contract between the 1st defendant Bank and the second defendant beneficiary and the said contract is independent of the sub-contract dated 31st March 1987.

12.23.4 Bank Guarantee not enforceable after its validity period The terms of the bank guarantee are generally explicit. The bank guarantee in construction contracts is to remain in force and effect only up to the date stated therein or any extended date and it is to be enforceable for a specified period thereafter. The bank guarantee states that unless a suit or action to enforce the claim under it is filed within the said period from the date of its expiry all the rights under the bank guarantee would stand forfeited and the bank would be released and discharged from all liabilities thereunder. The rights and obligations of the contractor at whose instance the bank guarantee is issued do not become the rights and obligation of the bank. There was, therefore, no way in law in which it could be declared that the bank guarantee would remain effective and enforceable for so long as the work under the contract was successfully commissioned or the amounts due under the bank guarantee were paid or an injunction could issue to the bank to so renew the period of the bank guarantee. It needs to be remembered that a bank guarantee is issued by a bank after the party at whose instance it is issued has put the banks in funds. No bank can be compelled to furnish a bank guarantee without adequate funds to fall back upon should the bank guarantee have to be honoured. The question is what is its remedy against the contractor when the contractor failed to furnish the security deposit in cash or, in lieu thereof, by a bank guarantee. The State cannot file a suit requiring the contractor to do these things for it would have been tantamount to asking for a decree of specific performance, a decree which would have been incapable of enforcement if the contractor was unable or unwilling to pay out the mone;y or put a bank in funds to provide a bank guarantee. When the contractor declines to extend the terms of the bank guarantee, the proper course for the State is to terminate the contract on the ground of breach of the terms

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thereof, make a claim for damages and recover on the bank guarantee, if necessary by filing a suit.141

♦♦+

140 141

SCIL India Ltd. v. Indian Bank, AIR 1992 Bom. 131. Makharia Brothers, Appellant v. State of Nagaland and others, AIR 1999 SC3466.

Chapter 13

Subcontracts 13.0 INTRODUCTION A subcontract is a contract between a contractor and his subcontractor. Thus, essentially the relationship between the contractor and his subcontractor is no different from the relationship between the owner/employer and the contractor. Therefore, the points governing the relationship between the owner and the contractor, discussed in earlier Chapters are equally applicable to the relationship between two or more contractors. The use of norninated subcontractors is extensive in modem forms evolved for building and engineering contracts. Generally the selection of the subcontractor rests with the contractor. He may have an agreement with him prior to tendering for the main work or he may enter into an agreement after securing the main contract. Where, however, the contract stipulates nominated subcontractor(s), the freedom to choose the subcontractor is not available with the main contractor. The owner, prior to inviting tenders, gets the quotation from the subcontractor of his choice and nominates him as a subcontractor in the main contract. The main contractor has to submit his tender based on the offer of the subcontractor for a part of the work for which he is nominated. This practice occasionally creates problems and the terms of the main contract need to be carefully drafted to avoid . difficulties likely to arise.

13.1 PROVISIONS OF THE STANDARD FORM CONTRACTS. Form

(1) PWD, CPWD (2) M.E.S Department (3) Railways (4) FIDIC 1992 Amended: (5) FIDIC 1999 Edition (6) MOS&PI, GOI-2001

Provisions

: : : :

Clause 21 Clause 5, 6, 18 Clause 7 Clause 59.1 to 59.5 Clause 4.4 and 4.5 Clause 8.

13.2 WRITTEN PERMISSION TO SUBLET OR ASSIGN WHEN NECESSARY Unlike a personal contract, a construction contract is considered to be assignable. It can therefore be said that except where the contract stipulates actual performance by the

contractor himself he is free to sublet. However, the owner would naturally like the contractor to perform a substantial part of the actual work himself. Thus, to prohibit the contractor from subletting whole of the work to one or more subcontractors and assuming only the overall control and general superintendence, the conditions of the contractusually prohibit subletting of.the work, without the written permission of the owner or his engineer/architect. If the contractor who has agreed to this condition in fact sublets the work without obtaining necessary permission, he commits a breach of a term, which may entitle the owner/employer to cancel the contract and/or claim damages.

Invariably the construction contracts also contain clauses against assignment. Prohibition to sublet is obviously incoquoraled to let the owner retain control of who does the work. Closely associated with this right of the owner, is the right at the end to balance claims for money due against the counter-claims, for example, for bad workmanship. The contractor may say that such a counter-claim may be made against the assignee. The owner may not like to deal with unknown people for recovery of such counter-claims. Where, therefore, the contract contains provision to the effect "The contraclor shall not assign the contract or any part thereof or any benefit or interest therein or there under without the written consent of the owner", and if the contractor purports to assign his right to payment under the contract to someone, the assignment will be ineffective.15 There is a difference between the assignment and subcontract. By 'assignment' is meant: "The act of transferring to another all or part of one's property , interest or rights."16 'Subcontract' on the other hand means: "A contract subordinate to another contract, made or intended to be made between the contracting parties, on one part, or some of them, and a third party (i.e. subcontractor). The term 'subcontractor' means one who has contracted with the original contraclor for the performance of all or a part of the work or services which such contractor himself has contracted to perform.17

13.2.1 Prior Approval when necessary - An Illustration Prior approval of either the engineer or the employer will be necessary only if the condition so stipulates and not otherwise. An illustration with make this clear. A Clause in a contract read as follows : "7.1. The contractor may subcontract any portion of work, up to a limit specified in Contract Data with the approval of the Engineer but may not assign the contract without the approval of the Employer in writing. Subcontracting does not alter the Contractor's obligations." The contract in the case was terminated and the contractor blacklisted allegedly for breach of the above clause. The Single Judge upheld the action and an appeal against the said Judgement was filed before the Division Bench of the Madrs High Court. It was observed:18 "A cursory reading of Clause 7.1 would suggest that the concept of 'subcontracting' was not abhorred in this contract agreement. That was very much a concept in consideration and a presumable one also. In fact, subcontracting could be done to theextent of 50% of the work and that is the admitted position. However, a plain reading thereof would suggest that the contractor could subcontract the portion of the work up to a limit specified in the contract with the approval of the Engineer. The second deduction from the language is that the contract 15 16 17 18

Helstan Securities Ltd v. Hertfordshire County Council, Q.B.D. (1978) 3 AD ER 262. Black's Law Dictionary, 6th ed. Pp.119. Black's Law Dictionary, 6th ed. Pp.324-325. M/s. P.T. Sumber Mitra Jaya, Appellant v. The National Highways Authority of India, New Delhi, AIR 1998 Mad. 221.

could not be assigned without the approval of the Employer in writing and lastly, any subcontracting does not set the contractor free from the contractual obligations. The meaning is, therefore, clear: "1. In the first place, there is no user of the words 'prior approval' either in respect of the subcontract or in respect of the assignment of the contract. "2. Then, there is a definite difference in the concept of subcontracting of the portion of the work and assigning the original contract itself. While for subcontracting only the approval of the Engineer is required, for assignment of the contract itself, the approval of NAHI that too in writing, is necessary. "There is undoubtedly a dichotomy in the concepts of 'subcontracting' and 'assignment of the contract'. It is, therefore, obvious that for such subcontracting, there would be no need of the approval of NHAI though unfortunately, the parties have understood otherwise. " We have already pointed out that the learned single Judge also deduced that firstly there was an agreement between the appellant and M/s. CECON and that the said agreement was without the prior approval of NHAI. Even presuming that there was any such agreement, in our opinion, there was no necessity of having a prior approval of NAHI as per the express language of clause 7.1. That could at the most be an agreement for subcontracting which would be undoubtedly an agreement different from the 'assignment' of the contract itself. The approval of the Engineer was necessary for subcontracting the work while the approval of the employer i.e. NHAI in writing was necessary for the assignment of the contract. .. Learned single Judge has also not addressed the question from these angles which, in our opinion, were the necessary angles emanating from the language of clause 7.1. Instead, the learned single Judge has gone on to record a finding that it was an admission on the part of the appellant that the appellant had entered into a contract without the prior approval and that resulted in the breach of the clause. In view of the specific language we cannot agree with the learned single Judge. On this issue, the question that would still remain is whether the exercise on the part of the appellant in getting some work done (admittedly 4 % of the total work) and for that purpose entering into a contract with CECON without 'prior approval' would amount to the non-adherence of the conditions of the contract. In our opinion, that by itself will not amount to the non-adherence of the contract. The finding of the learned single Judge as also the finding arrived at by NHAI on the issue of subcontracting thus are erroneous."

13.2.2

When Third Party can Sue on Contract

It is interesting to see the effect of the employer assigning the right under his contract with the contractor to a third party. It remained the law, although much criticized, that a third party could not sue for damages on a contract to which he was not a party. The general position was that if a plaintiff contracted with a defendant to make a payment or confer some other benefit on a third party who was nol a parly lo the contract; the plaintiff could not recover substantial damages from the defendant for breach of that obligation on the part of the defendant.19 The plaintiff could prima facie recover only for his own loss. However, to this general principle there were a couple of exceptions. First, where the plaintiff made the contract as agent or trustee for the third party and was enforcing the rights of a beneficiary, in the fiduciary relationship. The second exception, the rule in Dunlop v. Lambert

(1839) 6

CI. & F

600,

19 Woodar Investment Development Ltd v. Wimpey Construction UK Ltd (1980) I WLR 277.

which provided "a

remedy where no other would be available to a person sustaining loss which under a rational

in

legal system ought to be compensated by the person who caused it" This rule was applied 20 a case by the House Lords Court of Appeal, applied the above rule in a case 21 decided on June facts case given the illustration below.

28

of in 1994 . The 1994. The of the

are

in

(2)

ILLUSTRATIONS (1) In a suit for recovery of agency commission, the plaintiff was agent of defendant No. 3, an Italian company, in India. Defendant No. 1 was a Public Sector Undertaking and is a unit of defendant No. 2. Brief resume of facts pleaded by the plaintiff in respect of its claim were like this :Defendant No. 1 floated a global tender for purchase of two Hydraulic Crankshaft Grinding Machines on 24-9-1986. Plaintiff gave an order dated 22-9-1986 for two machines. Later defendant No. 1 sought some clarifications and also the amendment in terms if four machines were purchased instead of two. In original offer the plaintiff had offered that agency commission would be 15% of FOB value of order. By letter dated 7-3-1987, plaintiff offered discount of 5% on commission if entire order was placed on plaintiff and 100% cornrnission was paid on receipt of shipping documents. By letter dated 10-8-1987, defendant No. 1 wrote to plaintiff that requirement was raised to four Grinder Machines, and the plaintiff should submit reduced price bid accordingly. By letter dated 14-8-1987 plaintiff did the needful and informed defendant No. 1 that price of machine will be same and be multiplied by four in place of two and discount of 5% on agency commission of 15% would be valid if (i) entire order is placed on plaintiff and (ii) 100% agency commission released on presentation of shipping documents. By letter dated 9-11-1987, defendant No. 3 informed defendant No. 1 that plaintiff would not accept any amount less than already offered by them, as their work involved lot of expenditure. Defendant No. 1 thereupon placed order dated 25-4-1988 addressed to defendant No. 3 on plaintiff at Delhi who in turn forwarded it to defendant No. 3 at Italy only for two machines. In the dispute involving non-payment of. commission it was pleaded on behalf of the defendants that there was no privity of contract between the plaintiff and the defendants no. 1 and 2. It was held by Delhi High Court: 22 ".. Since the order was placed for supply of machines vide 10% of the FOB price of the machines was deducted by defendant No. 1 from the price of machines given to defendant No. 3 and in that order defendant No. I was required to pay directly to Indian agent and, therefore, the privity of contract between the plaintiff and defendants Nos. 1 and 2 Hows from the term of the order itself coupled with the actual deduction of 10% of F.O.B. from the price of machines by defendants Nos. 1 and 2 while forwarding the price thereof to defendant No. 3. (2) D. B. Council wished to build a new recreational center and to avoid financial constraints for the requisite borrowing, MG Ltd entered into building contract for the construction of the center with W for the benefit of the Council. Collaterally to the building contracts, a covenant agreement recorded that M.G. Ltd as employer would pay W and the Council would reimburse M.G. Ltd who in turn assigned to the Council all rights it had against W. The Council claimed that there were serious defects in the center due to bad workmanship or other breaches by W and that expenses of 2 million pounds would be incurred to remedy the defects. The Council obtained a deed of assignment from M. G. Ltd of all rights and causes of actions, which M. G. Ltd might have. The trial judge decided that M. G. Ltd having no proprietary interest in the 20 St. Marin's Property Corp. Ltd v. Sir Robert McAlpine Ltd. 1994 AC 85. 21 Reported in the Independent' 29 June 1994. 22 M/s. Continental and Eastern Agencies, Plaintiff v. M/s. Coal India Limited and others, AIR 2003 Del 387.

center and no obligation to the Council for the quality of W's workmanship, had suffered no damage or loss from the defects, and could transfer no claim for substantial damages to the Council. The Council, it was held, was precluded by the privity of contract rule from claiming the damages it suffered. The Court of Appeal held that the Council, as assignee, had a valid claim against W for more than nominal damages for breach of contract and the damages should be assessed on the normal basis as if the Council had been the employer under the building contract.

13.3

AGREEMENT TO SUBCONTRACT

It may be noted here that all the essentials of a valid contract must be fulfilled before there exists a contractual relationship between the parties to a subcontract. For example, in one case the tender notice of the general contract provided that if the contractor intended to sublet part of the work, he should submit the name of the proposed subcontractor in his tender. The general contractor wrongly specified the name of a subcontractor whose bid was higher than the one who was intended to be named. It was held that there was no contract between the general contractor and the subcontractor whose name was specified in the tender. In the said case, the school Board inviting tenders also had authority and did consent to the substitution of the name of the subcontractor to whom the general contractor intended to award the subcontract. As already stated, the main contractor can enter into an agreement with the subcontractor, prior to tendering, that on the basis of his success in getting the main contract he would, in turn, get the work done by the subcontractor. Such a contract is binding and breach thereof will entitle the injured party to compensation.

ILLUSTRATIONS

(1) In a case an oral agreement was entered into by two contractors, according to the terms of which one wasnot to tender for the general contract but to supply the steel necessary for the work and erect the same. The second contractor was to submit the tender for the general contract and il" successful lo sublet the steel work to the other contractor. The contractor who

submitted the lender for the general contract was awarded the same. He, however, sublet the steel work to a contractor other than the one to whom Ire had agreed to sublet it. The contemplated original subcontractor brought an action to recover damages for breach of contract and obtained a recovery. Although this judgment was reversed on appeal and a new trial ordered because the evidence did not justify the large judgment obtained; the right of the subcontractor to receive compensation for the breach of the alleged contract was not affected23 (2) The general contractor about to submit a tender entered into a written agreement with

another contractor according to the terms of which it was provided that in the event of the general contractor getting the contract, the other contractor would perform certain parts of the work at agreed specified prices. The general contractor was awarded the contract. However, when called upon to perform the part of the work called for by the subcontract, the subcontractor refused to do so. The general contractor, then subcontracted that part of the work to another subcontractor at a price in excess of the original subcontract. The general contractor brought the action to recover the excess cost from the original subcontractor and he obtained recovery. 24

23

Darlington Borough Council v Wiltshier Northern Ltd., 28th June 1994.

24 North Weston Eng. Co. v. Ellerman et al N.W. 2d, 879.

13.4 PROVISIONS OF GENERAL CONTRACT HOW FAR APPLICABLE TO SUBCONTRACT It is in the best interest of the general contractor that all the material terms and conditions, to which his own contract with the owner is subject, are included in the subcontract. Otherwise the provisions of the general contract may not apply to the subcontract. ILLUSTRATIONS (1) A contract contained the provision, which empowered the owner to cancel the contract

upon the engineer certifying that the progress of work would be delayed. The contractor while subletting part of the work did not stipulate that the subcontract should be dependant upon continued existence of the general contract. The general contract was terminated for slow progress before the subcontractor had completed his work. There was no criticism of the progress of the subcontractor's work. In a suit that followed it was held by the Court that the subcontractor was prevented from performing his contract by the termination of the general contract; and because the general contractor did not protect himself against such a contingency, the subcontractor could recover the benefit of his contract, less the reasonable cost of completing his work.25 (2)

A subcontract contained a provision according to which the subcontractor was to perform the work at such time or times and in such manner and in such quantities as might be required by the general contractor to meet its time schedule. The subcontractor brought an action against damages for the loss caused by delays. It was claimed by him that the general contractor failed to comply with the provisions and specifications of the general' contract. Had 9

Pitcher Steel Corpn. V. P. T. Cox Const. Co., 42 N.Y.S. 2d. 225, 226. App. Div 347.

he followed those provision the delay would not have been caused. The Court, while denying the subcontractor a recovery, held that the provisions of the general contract had no application to the subcontractor who was not a party to the contract that contained the provision in question. The court further observed that the reference made by the subcontract to the plans and specifications of the general contract was only for the purpose of defining the work. The provision as to how the work was to proceed prevailed. 12 A contract for construction of a tunnel sewer for a city through the mountain, was sublet to subcontractors who were miners. The subcontract provided for the tunneling to be done according to the dimensions and specifications as set forth in the contract between the city and the main contractor. It was held that these words would undoubtedly require to dig out the tunnel as per the dimensions shown, and any other provision affecting the physical characteristics of such tunnel no doubt would be applicable to and binding upon the subcontractors. It was further held: The reference to specifications as expressed in this context does not import into the subcontract, sweeping and extraordinary powers exercised by the city engineers. 13

(3)

(4) A subcontract did not include a term in the general contract giving the owner a right to require the dismissal of the subcontractor. It was held by the Court that the subcontractor if so dismissed may sue the general contractor for breach of contract or on a quantum merit.14 (5) In a case the subcontractor undertook to carry out work in accordance with certain specifications in the main contract. One of these provided for disputes to be setded by arbitration. The subcontractor sued for his work, and the contractor pleaded that the matter was 25 Soley v. Jones, 208, Mass. 561, 95

94 (Mass 1911).

covered by the arbitration clause. It was held that the arbitration clause was incorporated only to the extent of matters of dispute between the main contractor and his employer, and was not incorporated as regards matters between the contractor and the subcontractor.13

13.5 ITEM OF WORK NOT IN SUBCONTRACT Where a general contractor decides to split up his contract into separate items and subcontract these items, care must be taken by him to provide for all the items included in the general contract.

ILLUSTRATION hi one case, the general contractor for a road job subcontracted certain definite items of work to a subcontractor. The basis of payment to the subcontractor was agreed unit prices. The subcontractor refused to do certain work which was not included in the subcontract and for which the unit price was also not fixed. The general contractor did that work and _____________ ' 12 13 14 15

Arrow Steel Metal Works v. Bryant & Detwiler, 61 N.W. 2 d„ 125, Supreme Court of Michigan, 1953. Smith and Montgomery v. Johnson Bros. Co. Ltd Ontario High Court (1954) I DLR 392 Channeller Bros Ltd. V. Boswel, 1936 All ER 179 C.A. Goodwins, Jarding & Co. v. Brand 7F (C.T. Court of Sessions) 995; Also see the Portsmouth, (1912 A.C.I) .

brought an action against the subcontractor to recover the cost of performing that work. The contractor relied upon the provision in the subcontract that the subcontractor is bound by the terms, plans and specifications of the general contract. Reversing the judgment of the trial Court which had allowed the general contractor a recovery, the Court held'6:"A mere reference to the general contract and the provision in the subcontract that the subcontractor is bound by the terms, plans and specifications of the general contract cannot enlarge the terms or conditions of the subcontract which by its terms is limited to certain definite items at a specified unit price per unit of quantity"26 13.6

RELATIONSHIP BETWEEN OWNER AND SUBCONTRACTOR

Usually there is no contractual relationship between the owner/employer and the subcontractor; in which case neither party has any right of action against the other. However, a general contract may provide that payments of subcontractors shall be made direct to them, and no necessarily through the general contractor. It may be noted that such a provision is valid and not affected even by the bankruptcy of the general contractor. A subcontractor is entitled to receive the payment certified by the engineer or architect, before the trustee in bankruptcy is entitled to collect the amount due to the bankrupt.27 The owner can make direct payment to the subcontractor, due under the general contract, only when the general contract contains an express stipulation to that effect. Even contrary to the express stipulation in the original contract, if the owner subsequently agrees to consult and pay to the subcontractor directly, he would be estopped from denying it. ILLUSTRATION In a case the petitioner, the principal contractor, secured a contract to set up a super Thermal Power Station with right to award subcontract. The respondent No. 2 obtained a subcontract from the principal contractor. The respondent No. 2 associated respondent No, 1 for carrying 26 Inland Eng and Const. Co. v. Maryland Casualty Co. et al 290 p. 367, 76 Utals 435. 27 In re Wilkinson, Exprte Fosler, (1905), 2 K.B., 713.

out the subcontract. A tripartite agreement was executed between the parties. The agreement inter alia provided that both the respondents shall be "contractor" for die purpose of the agreement and that respondent No. 2 shall be the sole representative of the subcontractors in dealing with the principal contract, during execution, however, some differences on the submission of bills arose between the respondents 1 and 2. Respondent 1 protested that the bills submitted were not properly and correctly prepared and payment received from the petitioner was not shared by respondent 2 with respondent 1. The petitioner with a view to sort out the differences, convened and held a meeting with both the respondents, and after deliberations it was agreed between the parties that in view of the differences between respondents 1 and 2 by way of departure to the prevalent procedure of submission of claims by and payments to respondent 2 alone, the petitioner required the claims in category III to be submitted both by respondents 1 and 2 along with the explanations and statements to enable the petitioner to examine, discuss and finalizeihe same and this arrangement was lo continue lill differences between the respondents were settled between ihem. However, in spite of departure in the procedure relating to payment of bills adopted in term of the relevant clause in the tripartite agreement, ihe petitioner made final payment of ihe bills lo the respondent No. 2.

It was held,28 that considering the changes in policy, procedure and practice, thus brought about by the petitioner themselves and agreed to by all concerned, the petitioner could not settle accounts with respondent No. 2 or to have made any payment in consequence without further specific reference to and approval by respondent No. 1. Another situation in which, despite the general rule of lack of privity, the subcontractor's liability to the owner can arise if during the course of negotiations warranties are given or representations made by the supplier or subcontractor on the faith of which the owner instructs the main contractor to place his order with the supplier of the subcontractor. ILLUSTRATION In Shanklim Pier Co. Ltd v. Detel Products, 29 the director of a paint firm had interviewed the managing director of the Pier-owners and later their architects and made representations as to the suitability of his company's products for the protection of the Pier from corrosion. On the basis of the said representation the owner directed the main contractors to order the firm's paint. On the paint proving defective, the Pier owners sued the paint manufacturers, alleging that the representations were warranties as to the suitability of the paint given in consideration of the Pier-owners causing their contractors to order the paint. It was held that the contention was correct and the paint manufacturers were liable. This case can be said to have been decided on rather strong facts. In practice statements made in brochures or at meetings with architects might, depending on the circumstances, he held to amount to mere representations.

13.6.1

No Privity of Contract

It needs to be emphasised again that no privity of contract between the owner and the subcontractor can arise out of a subcontract between the main contractor and the subcontractor. This will be so even in the cases of nominated subcontractors.30

28 M/s. Rolls Royce Industrial Power India Ltd., Petitioner v. M/s. Urmila and Co. Pvt. Ltd. and others, AIR 1998 Del. 411. 29 Shanklim Pier Co. Ltd v. Detel Products (1951) 2 KB 854. 30 Concrete Constructions Co. Ltd v. Keidon & Co. Ltd 1995 (4) S. A, 313 (South Africa).

ILLUSTRATION The Food Corporation of India entered into a contract with M/s India Machinery Co. the main contractor who in turn gave the work to a subcontractor who was the Petitioner in the High Court, There was delay in execution of the work and the F.C.I cancelled the contract and called for fresh tenders. Notice was issued to the main contractor by the FCI. No notice was issued to the petitioner. The petitioner filed a suit against the FCI contendingthai the contract should not be cancelled and fresh contract should not be entered into with others. He claimed an injunction. The trial Court rejected the stay application and that order was confirmed in appeal. In revision it was held by the Rajasthan High Court:31

"1 am of the view that the court below has rightly held that there was no privity of the contract, between the employer and the subcontractor to a great extent and it is not a case of substitution of subcontractor, but it is a case of creating a right of the agency and the subcontractor cannot be treated as a substitute of the main contractor. Even if it is assumed for the sake of arguments that there was privity of contract and there is a case of substitution of contract between the petitioner and the Food Corporation even then the petitioner cannot get any benefit of 0.39, Rule I and 2, of the C. P C. and is not entitled lo get injunction."

13.7 NOMINATED SUBCONTRACTORS The system of nominated subcontractor(s) springs from the owner's desire or need to control the quality of specialist work at the competitive price. An ordinary main contractor, who may not be able to carry out specialist work, will generally find it difficult in tendering a competitive price for the specialist work. Thus, it may seem that the practice enables the owner to have control over the price. For such items of work, the main contract generally includes provisional and PC. Sums.

13.7.1 Provisional and P.C Sum items "Provisional sums" provided for in the Bill of Quantities are to mean sums provided for work or for costs which cannot be entirely foreseen, defined or detailed at the time of preparation of contract documents. Certain fixtures, specialist works, or finishing items or the like which are not finally decided by the owner at that stage but which may eventually be required to be incorporated in the work are covered by such provisional sums. "Prime cost sums", on the other hand, mean sums provided for work or services to be executed by a nominated subcontractor or for materials or goods to be obtained from a nominated supplier. In nearly all the modem standard forms, provisions are made for release of money to the contractor from the provisional/PC sums, depending upon the expenses incurred on the work actually carried out. Additions or deductions to the contract sum is thus to be regulated by such provisions. For example according to FIDIC (1992) conditions, right is reserved enabling the engineer to issue instructions to carry out the work or for the supply of goods, materials, plant and services by: (1) either the main contractor or (ii) a nominated subcontractor. 31 Raj Kumar v. Food Corporation of India, AIR 1990 Raj. 64 (67).

The payment is to be made in accordance with Clause 52 in the case of the former and Clause 59.4 in the case of the latter. Thus it will be seen that in the FIDIC form, the term "Provisional sum" is used to represent prime cost as well. Clause 59.4 provides that the main contractor will be entitled to, besides the actual cost incurred, a percentage rate of the actual cost incurred to cover all the other charges and profit. The contractor is expected to quote this percentage rale in the Appendix at the time of tendering.

13.7.2 Responsibility of Main Contractor for Nominated Subcontractor's Work It is absolutely necessary, in the case where the subcontractor is nominated that terms be incorporated in the main contract in sufficiently precise words which wSkhelp determine the

exact extent of the main contractor's obligations to the owner for the work of nominated subcontractors. As already stated, in such cases, the subcontractor's are contracting directly with the owner and as such the owner as also his architect/engineer relied on the subcontractor's skill and judgment. If any undertakings or warranties are given by the subcontractor the same need to be imported into the contractual relationship between the main contractor and the subcontractor. The possible difficulties likely to arise due to nominated subcontractor's work and the liability of the main contractor are attempted to be eliminated in the FIDIC standard form The said 1992 amended form (Clause 59.1) incorporates the usual provision. "All specialists, merchants, tradesmen and others executing any work or supplying any goods - - be deemed to be the subcontractors to the contractor - - - and are referred to - - - as nominated subcontractors". However, it provides in Sub-clause 59.2 that the contractor shall not be under any obligation to employ a nominated subcontractor if the subcontractor declines to save harmless and indemnify the main contractor from and against (i) all claims, proceedings, damages, costs, charges and expenses whatsoever arising out of or in connection with any failure to perform as agreed by the subcontractor; including any matter of design or specifications, included in the subcontract; and also (ii) any negligence by the nominated subcontractor, his agents, workmen, servants, or misuse of any temporary works, etc. In the absence of proper care in drafting provisions of the main contract, difficulties are bound to arise and the case below and in Art. 13.7.3 also 13.7.6 are illustrations of such difficulties. E.LUSTRATION

J contracted with W for the erection of a multi-storied building. The contract was in JCT 63 form. L was nominated subcontractor for the piling work. L purported to complete the piling work by 20 June 1966 and left the site. J carried out further construction work thereafter. It was.discovered that many piles were defective, either due to use of poor materials or as a result of bad workmanship. Remedial works were carried out by L. In theprocess the main work was delayed over 21 weeks. J claimed an extension of time under Clause 23(g) which provision 21 Reference to clauses is of FIDIC 1992 amended edition.

entitled J lo an extension of time on the ground of "Delay on the part of nominated subcontractors or nominated suppliers." The owner contended that there is delay only if, by the subcontract date, the subcontractor fails to achieve such completion of his work that he cannot hand over to the contractor. In the case il was contended further that so long as, by the subcontract date, the subcontractor achieves

such apparent completion that the contractor is able to Lake over, notwithstanding that the work so apparently completed may in reality be defective; this may involve a breach of contract but does not involve delay. It was held that J was not entitled to an extension of time. It was observed32 "—if such an interpretation were imposed by the words used, it would have to be accepted whatever (short of completely frustrating the contract) the consequences might be - - the parties must abide by what they have agreed to and it is not for the courts to make sensible bargain for them . - - Why should the word 'delay' be used? Why not frankly exonerate the contractor for any delay in completion due to any breach of contract or failure, eo nomine of the subcontractor?". These observations are worthy of being suitably incorporated in the subcontract, it is submitted.

13.7.3 Consequences of Repudiation by Nominated Subcontractor It cannot be very uncommon that for one reason or another the contract between the main contractor and the nominated subcontractor is terminated before the subcontract work is completed. The problem is what is to happen in that event. There can be three possibilities: (a) The owner may make a new nomination, and bear the loss to the extent the price in the second subcontract exceeds the price in the first subcontract. (b) The owner may delete the subcontract work and give an instruction to that effect by way of variation. (c) It becomes the right and duty of the main contractor to do the prime cost work itself at the price fixed in the subcontract. This is so on the basis that the main contractor must be held to have undertaken that the nominated subcontractor will complete the work and breach by the subcontractor will be the breach by the main contractor. To avoid the problem, the agreement must incorporate express provision for such an event. In the absence of an express provisions, it is likely to be held that it is implicit in the contract that the owner comes under duty to renominate. 33 However, if the subcontract is wrongfully terminated by the main contractor, the main contractor would be in breach of his contract with the owner and will be liable to pay damages including any loss to the owner.

13.7.4

Delay Caused by Nominated Subcontractor

Where the nominated subcontractor withdraws, there are likely to be delays divisible into two parts. First part comprise of delay arising directly from withdrawing, and second, duelo failure of Ihe owner lo renominate a replacement with reasonable promptness. The owner is clearly responsible for ihe second pari. The responsibility of ihe first part will depend upon the terms of the contract. In one case it was held thai the main contractor will be responsible for the first part of Ihe delay. 34 II is advisable lhal the main contractor should object to renomination if the second subcontractor is not willing to agree to completion schedule as per the original contract.35

13.7.5

Defective Work by Nominated Subcontractor

Under the terms of most standard form contracts, the main contractor is responsible to the owner for defective work, if any, by the nominated subcontractor but will have an action against the subcontractor. In certain circumstances, the owner may also have a direct action 32 City of Westmin ster v. J. Jarvis & Sons Ltd and Peter Lind Ltd., House of Lords, (1970) 7 BLR 64. 33 North - West Metropolitan Regional Hospital Board v. T. A. Bickerton & Sons Ltd., House of Lords, (1970) I All ER 1039. 34 Percy Bflton Ltd v. Greater London Council, House of Lords, (1982) 20 BLR 1. 35 See. Fairclogh Building Ltd. v. Rhuddlan Borough Council, C.A. (1985) 3 Con L.R. 38.

against the nominated subcontractor, either in contract, or if collateral warranty has been executed and in an exceptional case in tort if the nominated subcontractor is guilty of negligence. ILLUSTRATION EMI were the main contractors and BICC were the nominated subcontractor for erection of a television mast 1250 ft high. The mast was erected and handed over to IBA (the owner) in November 1966. It collapsed in March 1969. IBA sued both EMI and BICC and EMI sued BICC. The trial Court held the cause of the collapse as negligence in design. It was held that EMI had impliedly undertaken that the mast was reasonably fit for the purpose for which it was erected. BICC were held to be in breach of their subcontract with EMI. BICC were held to be liable in tort to IBA as they had been negligent in assuring them that the design was satisfactory. The assurances, which were given two years after the letting of the contracts, did not amount to a direct contract between BICC and IBA.36 13.8

LIABILITY OF SUBCONTRACTOR UNDER INDEMNITY CLAUSE

As a point of law, a prime contractor is liable for the acts of his subcontractor. However, when the contract between the prime contractor and the subcontractor includes a stipulation under the terms of which "the subcontractor agrees to protect, defend, indemnify and hold harmless (prime contractor) from any damages, claims, liabilities, or expenses whatsoever arising out of or connected with the performance of the contract," the subcontractor will be liable, if he were to be the party primarily responsible for an injury. ILLUSTRATION In a case the dispute involved liability for a pedestrian who allegedly was injured on a public sidewalk that was torn up and made unsafe by the subcontractor. The pedestrianfiled a claim against the owner, the prime contractor and the subcontractor. The subcontract included an indemnity clause similar to the one referred to above. The prime contractor filed a claim against the subcontractor under the indemnity provision contained in their contract. It was held that the subcontractor was responsible for damages although the prime contractor might be guilty of negligence as a point of law. The prime contractor had the right under the indemnity clause, only because he was not guilty of the primary negligent act that caused the injury out of which the liability arose. It was also observed that in construing the indemnity provision, the word

negligence does not have to appear.37

13.9 RIGHTS OF MATERIALS SUPPLIERS Where a general contractor promises to pay for materials and labour furnished to a subcontractor with a view to assure the performance of the subcontractor, such a promise is enforceable.38 ILLUSTRATION In a case the materialman stopped delivering materials to the subcontractor because of the subcontractor's failure to pay for materials already delivered. The general contractor thereupon promised to pay for all materials already delivered and to be delivered in the future. A plea 36 Independent Broadcasting Authority v. EMI Electronics and B.I.C.C Construction Ltd House of Lords (1980) 14 BLR I. 37 Walter L. Couse & Co. v. Hardy Corp. 274, So. 2d., 322 (1973). 38 Curtis Mfg. & Asbestos Co. v. W. B. Bates Construction Co. Inc. 94 A 2d., 550, Supreme Court of New Hampshire (1953).

that materialman was already under the obligation to supply the agreed materials, under his contract with the subcontractor would not invalidate the general contractor's promise. 39 It may appear so but the general contractor's promise in the above illustration was not without consideration. The materialman's promise to deliver the material in spite of the breach of the subcontract (by the failure of the subcontractor to pay for materials delivered) constituted the consideration to support the general contractor's promise.

39 Naples v. Mc Cann, 95 A.2d. 158, Supreme Court of New Jersey, Appellate Division (1953).

Chapter 14

Contract between

_____ Owner and Architect/Engineer 14.0

J

INTRODUCTION

Most construction work's fall under one of the two categories, namely, public works or private works. Generally public works are executed by the engineering and architectural staff in the employment of the public bodies. However, it is not uncommon, that the public bodies, though having their own engineering and architectural staff, seek professional advice or help from the independent architects or engineers. In the case of private works, barring works of minor nature such as for repairs or maintenance or construction of small buildings, for which the owner relies upon the contractor to guide him as to what should be done, large building and engineering contracts are usually entered into by an owner with a contractor after designs and specifications are prepared by an architect or engineer for and on behalf of the owner. Even in the cases of "package deals" or "industrialized buildings", the owner may avail of the services of a professional architect or engineer though usually limited to consultative advice. The advice sought by an owner from his architect or engineer may in the first instance be limited to preparation of sketch designs, preliminary drawings and estimates of the works to be carried out with a view to ascertain the practicability and suitability of the works, and to obtain necessary permission from the statutory bodies like the Corporation, etc. Only when the owner is satisfied that he wishes the project to proceed and all statutory permissions have been obtained, is he likely to require contract drawings and specifications with Bills of Quantities to be prepared and tenders invited or otherwise work entrusted to a contractor. After the work is entrusted to a contractor, working drawings including RCC designs, etc are supplied to him. Generally the work of structural design is entrusted to a structural engineer either directly by the owner, or by the architect. Usually the architect or engineer will also be required by his employer to supervise the work and to certify the payments. The role that an engineer or architect plays in a construction contract may be four-fold. He is a skilled servant if in the employment of the owner, secondly acts as an agent of the owner, thirdly, if the contract between the owner and the contractor contains stipulations which make him play the role of quasi-arbitrator or finally as an arbitrator. The relationshipthat exists between the owner and the engineer or architect stems out of the contract of the agency. The general law relating to the agency regulates the responsibilities of an engineer or architect in his function as an agent of the owner. These provisions are considered in this Chapter. 14.1

PROVISIONS OF THE INDIAN CONTRACT ACT

Sections 182, 185 to 187 188 to 210

Art. No. Art 14.2 Art 14.4

14.1.1 Provisions of Standard Form Contracts

Form (1) P.W.D (2) C.P.W.D (3) M.E.S (4) Railways (5) FIDIC (6) FIDIC 1999 Edition (7) GOI-MoP&I-2001. 14.2

Provisions CI. 30 CI. 24, 25 (Excepted matters) CI. 70 (Excepted matters) CI. 20, 21,63 (Excepted matters) CI. 2.1 to 2.6,67.1 CI. 3.1 to 3.5 CI. 2.4.

CONTRACT TO BE IN WRITING

A Contract of the agency between the owner and the engineer or architect may be created expressly in writing or implied by words, conduct or necessity. The following provisions of the Indian Contract Act need to be noted. SECTION 182 "Appointment and Authority of Agents - An "agent" is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such an act is done, or who is so represented, is called the "principal" SECTION 186 The authority of an agent may be expressed or implied. SECTION 187 Definitions of express and implied authority - "An authority is said to be express when it is given by words spoken or written. As authority is said to be implied when it is to be inferred from the circumstances of the case; and things spoken or written, or the ordinary course of dealing, may be accounted circumstances of the case." Illustration A owns a shop in Serampore, living himself in Calcutta, and visits the shop occasionally. The shop is managed by B, and he is in the habit of ordering goods from C in the name of A for the purpose of the shop and of paying for them out of A's funds with A's knowledge. B has an implied authority from A to order goods from C in the name of A for the purpose of the shop. It is thus clear that the law does not, in general, require the agency contract to be inwriting. However, it is in the best interest of the engineer or architect lo insist upon a written contract, for a number of reasons. For example, an oral conlracl may not leave both parlies with ihe same understanding of its terms and conditions. ILLUSTRATION In one case, a young architect failed to have a written agreement with the owner. Before the work was completed the owner discharged the architect because of difficulty which arose between the two. In his action to recover the fee for services rendered, the architect testified that the owner had expressly agreed to pay him well for his service. The owner, on the other hand, testified that the architect had solicited the job, saying that it would be a great help to him in starting out in his business and had offered to provide his services free. Though the case was decided in favour of the architect, there was the risk of losing a case under comparable circumstances.40

40

Chapel v. Clark, 117 Mich 617, 76, NW 62 (Mich 1898).

14.2.1 Cosideration not necessary It needs to be noted that for an agency contract no consideration is necessary. Section 185 of the Indian Contract Act reads: " No consideraiion is necessary in order to create an agency." One more important reason for insisting on a written contract is that in case of the owner's death, it would be difficult for the engineer or architect to prove the understanding arrived at between him and the deceased owner. Thirdly, in many instances the Statute law requires that the contract, to be binding must be in writing and by a deed. For example, in most instances contracts with Corporations must be made under the seal of the Corporation if they are to be binding.

14.3

CONDITIONS OF APPOINTMENT

The terms of the appointment govern the rights and obligations of the parties. The appointment of an architect or engineer for a particular construction project or for a period of time is often made usually by exchange of letters with or without incorporation of the terms of engagement or of scales of fees in the Standard Forms prepared by the national Associations of Architects like 1.1.A or R.I.B.A or A.I.A. Care should be taken, where terms of the incorporation by reference are intended to make it clear whether they apply only to the amount of remuneration or whether the conditions of engagement as a whole, including the arbitration clause are intended. A mere request to act as arbitrator or engineer in relation to a project, without specifying at the outset the services required of the architect or engineer may lead to doubt or dispute as to what are the respective rights and duties of the parties. It is, therefore, desirable that, conditions of appointment should be formulated in greater detail and incorporated in the agreement. These should include: (1) What other consultants, designers and specialists are to be retained and if by the owner directly or by the architect. (2)

(3) (4) (5) (6)

(7)

(8) (9)

(10) (11)

Whether an independent quantity surveyor and/or Clerk of works is to he employed and if so what terms and for what services. The use and ownership of drawings and designs. Special services like preparing perspective drawings and scale models, etc. The authority of the architect/engineer to negotiate or contract with contractors and subcontractors. The architect's or engineer's power in letting the contract and to order variations and deviations and bind the owner once the contract has been made. The duration of the appointment and the terms on which the services, if continued beyond the agreed period, would be rendered. The position in the event of death, retirement, or incapacity of the architect or engineer. Scale of professional charges, stages of payments, payment on abandonment of the works by the owner, drastic modification in approved drawings, etc. Termination of agreement by either party. Provisions for settlement of disputes by reference to arbitration or otherwise.

In this connection it may be noted that in the absence of a clear agreement as to the purpose of the appointment it will be presumed that when an architect was first employed to prepare plans and estimates and advice on the project or get necessary sanctions, it would not necessarily follow that the owner required his services in letting the contract, if there was to be one, or in supervision of the work. In fact till the stage of accepting a tender and signing the contract has been reached, the

architect is likely to be employed almost on a day-to-day or assignment-to-assignment basis. It can be said that till this stage the project is of exploratory or tentative character. For example, in the event of the lowest tender received being higher than the budget provision of the owner, the project is likely to be abandoned or drastically modified. An appointment in explicit terms for a particular project cannot be determined until the purpose for which the appointment was made has been achieved. In a premature termination without cause other than the owner's mere volition, the architect would be entitled to a reasonable remuneration (in the absence of agreed fees or remuneration as per the terms of agreement for the services rendered) and also to damages for the loss of remuneration which he had been prevented from earning until the work was finished.41

14.4

THE SCOPE AND EXTENT OF ENGINEER'S AND ARCHITECT'S AUTHORITY

As already mentioned, the engineer or architect, under his contract with the employer, acts in the capacity of the agent of the employer. As a result of this relationship, questions frequently arise as to the owner's liability for the acts of the engineer or architect towardsthe contractor or the orders given by the engineer or architect to the contractor. The best way to avoid such disputes is to make provisions in the conlracl lo meel those eventualities, which often give, rise to disputes.

For example, Clause 3.1 in FIDIC 1999 Edition expressly stipulates that the engineer shall have no authority to amend the contract or to relieve either party of any duties, obligations or responsibilities under the contract. Where FIDIC conditions are adopted for major projects in India, the contract generally includes COPA (Conditions Of Particular Applications) which provide that the power to grant extension of time or sanction extra item rates in excess of the stipulated limit will be exercised only after approval by the employer. The knowledge of provisions of the Indian Contract Act that may be applicable to these aspects include the following provisions: SECTION 188 Extent of agent's authority - "An agent having an authority to do an act has authority to do every lawful thing which is necessary in order to do such act. "An agent having an authority to carry on a business has authority to do every lawful thing necessarily for the purpose, or usually done in the course of conducting such business. Illustrations "(a) A is employed by B residing in London to recover at Bombay a debt due to. B. A. may adopt any legal process necessary for the purpose of recovering the debt, and may give a valid discharge for the same. "(b) A constitutes B, his agent, to carry on his business of a ship-builder. B may purchase timber and other materials, and hire workmen for the purpose of carrying on the business." SECTION 189 Agent's authority in an emergency - "An agent has authority, in an emergency, to do all such acts for the purpose of protecting his principal from loss as would be done by a person of ordinary prudence, in his own case under similar circumstances. Illustrations

41

Thomas v. Hammersmith B. C. 1938 All E.R. 203.

"(a) An agent for sale may have goods repaired if it be necessary. "(b) A consigns provisions to B at Calcutta, with directions to send them immediately to C, at Cuttack. B may sell the provisions at Calcutta, if they will not bear the journey to Cuttack without spoiling." An Engineer or architect is well-advised to limit his acts and directions within the scope t of his authority expressly given to him by the owner. If he executes his authority without the knowledge of the contractor and causes the contractor to provide materials or labour or to make additions or alterations, without the authority of the owner, he is liable to an action for breach of warranty, if the owner objects to payment thereof.42 In brief, it may "be concluded that the engineer or architect should not issue to the contractors instructions that are a material departure from the contract documents without ihe owner's written approval. Similarly, the engineer or architect should not appoint a substitute or delegate his authority without the express or implied consent of the owner. He may appoint assistants but he must always retain complete control of and personal responsibility for their work. In Ihis respecl Ihe following self-explanatory provisions of the Indian Contract Acl need lo be noted: SECTION 190 "When agent cannot delegate - An agent cannot lawfully employ another lo perform acts which he has expressly or impliedly undertaken to perform personally, unless by the ordinary custom of trade a subagent may, or, from the nature of the agency, a sub-agent must, be employed." SECTION 191 'Sub-agent' defined - A "sub-agent" is a person employed by, and acting under the control of, the original agent in the business of the agency." SECTION 192 Representation of principal by sub-agent properly appointed - "Where a sub-agent is properly appointed, the principal is, so far as regards third persons, represented by the sub-agent, and is bound by and responsible for his acts, as if he were an agent originally appointed by the principal. "Agent's responsibility for sub-agent - The agent is responsible to the principal for the acts of the sub-agent. "Sub-agent's responsibility - The sub-agent is responsible for his acts to the agent, but not to the principal, except in case of fraud or wilful wrong." SECTION 193 : Agent's responsibility for sub-agent appointed without authority"Where an agent, without having the authority to do so, has appointed a person to act as a sub-agent, the agent stands towards such person in the relation of a principal to an agent and is responsible for his acts both to the principal and to third persons, the principal is not, represented by or responsible for the acts of the person so employed, nor is that person responsible to the principal." SECTION 194 : Relation between principal and person duly appointed by agent to act in business of agency- "Where an agent, holding an express or implied authority to name another person to act for the principal in the business of the agency has named another person accordingly, such person is not a sub-agent, but an agent of the principal for such part of the business of the agency as is entrusted to him. 42 Steel v. Young (1907) S. C. 306.

Illustrations "(A) A directs B, his solicitor, to sell has estate by auction, and to employ an auctioneer for the purpose. B names C, the auctioneer, to conduct the sale. C is not a sub-agent, but is A's agent for the conduct of the sale. "(b) A authorizes B a merchant in Calcutta, to recover the money's due to A. from C & Co. B instructs D, a solicitor, to take legal proceedings against C & Co. for the recovery of the money. D is not a sub-agent, but is a solicitor for A." SECTION 195 : "Agent's duty in naming such person - In selecting such an agent for his principal, the agent is bound to exercise the same amount of discretion as a man of ordinary prudence would exercise in his own case; and if he does think he is not responsible to the principal for the act or negligence of the agent so selected.

Illustrations "(a) A instructs B, a merchant to buy a ship for him. B employs a ship's surveyor of good reputation to choose a ship for A. The surveyor makes the choice negligently and the ship turns out to be unseaworthy and is lost. B is not, but the surveyor is, responsible to A.

"(b) A consigns goods to B, a merchant, for sale. B, in due course, employs an auctioneer in good credit to sell the goods to A, and allows the auctioneer to receive the proceeds of the sale. The auctioneer afterwards becomes insolvent without having accounted for the proceeds. B is not responsible to A for the proceeds."

14.4.1 Implied, or Ostensible Authority An implied or ostensible authority of the architect/engineer arising out of his appointment as such, and the extent to which, without express authority, he can bind his employer in relation to the contractor and third parties is considered as follows: It must be remembered that the architect or engineer, unless there is a contractual provision giving his opinion, decision or certificate finality, has no authority whatever to waive strict compliance with the contract or to bind the employer. Furthermore, even provisions purporting to confer finality can be interpreted as merely giving an additional protection to the owner and not as binding him. 43 In a conventional building and engineering contract, were it is customary to describe the contract work in detail and with precision the correct view will be, it is submitted, that the contractor must do the described contract work, and for this purpose the decision of the architect as to what is sufficient performance of the described contract work is to be binding on both parties. An architect or engineer, in private practice has no implied authority to make a contract with the contractor binding on his employer, or to vary or depart from a concluded contract. For this reason there is a provision usually found in building or engineering contracts under which the owner or more usually his architect is given power to order variations. In the absence of 43 Billyack v. Leyland (1968) 1 W.L.R. 471.

such a provision the owner may not be liable to pay for any additional or varied work which has been done under the architect's instruction unless he had knowledge of the architect's instruction and did not countermand it. However, an order to vary, issued by an architect after compliance of the formalities required under the contract, will bind the owner. The archilecl or engineer has no implied authority lo employ engineering or olher consullanl, so as lo eilher render Ihe employer liable for Iheir lees or entitle Ihe architect to additional payments in

respect of the fees. A complex work might often necessitate such consultants lo be brought in early al Ihe design slage, bul as Ihe design is Ihe architect's duty, such consullanls, il can be said, in effect

carryout part of the engineer's or archilecl's duty. For example, in a case involving the reinforced 44 concrete structure, it was observed by Sir Walker Carter O.R. in Moresk v. Hicks that an archilecl "had ihree courses open to him if he was not able to design the whole of the work himself. One was lo refuse the job; and one was, while retaining responsibility for the design, himself to seek the advice and assistance of a structural engineer, paying for the service out of his own pocket,

but with the satisfaction of knowing that if the advice given was wrong the engineer would owe him the same duty as he owed to the employer."

14.4.2

Ratification by Owner/Employer

Where acts done by the engineer/architect exceed the power and authority expressly or impliedly given to him and are without the owner / employer's knowledge, the owner has an option to ratify or disown such acts. He may exercise his option expressly or impliedly. The following self-explanatory provisions of the Indian Contract Act are worth noting:

SECTION 196 - "Right of person as to acts done for him without his authority. Effect of ratification - Where acts are done by one person on behalf of another, but without his knowledge or authority, he may elect to ratify or to disown such acts. If he ratifies them, the same effects will follow as if they had been performed by his authority.

SECTION 197 - Ratification may be expressed implied - "Ratification may be expressed or may be implicetion in the conduct of the person on whose behalf the acts are done. Illustrations (a) A, without authority, buys goods for B. Afterwards B sells them to C on his own account, B's conduct implies a ratification of the purchase made for him by A. (b) A, without B's authority, lends B's money to C. Afterwards B accepts interest on the money from C. B's conduct implies a ratification of the loan."

SECTION 198 - Knowledge requisite for valid ratification - No valid ratification can be made by a person whose knowledge of the facts of the case is materially defective." SECTION 199 - Effect of ratifying unauthorized act of forming part of a transaction"A person ratifying any unauthorized act done on his behalf ratifies the whole of the transaction of which such act formed a part."

44

(1966), 2 Llyod's Rep. 338.

SECTION 200 - "Ratification of unauthorised act cannot injure third person - An act done by one person on behalf of another without such person's authority which, if done with authority would have the effect of subjecting a third person to damages, or of terminating any right of interest of a third person, cannot, by ratification, be made to have such effect.

Illustrations "(a) A, not being authorized thereto by B, demands, on behalf of B, that the delivery of a chattel, the property of B, from C who is in possession of it. The demend cannot be ratified by B, so as to make C liable for damages for his refusal to deliver. "(b) A holds a lease from B, terminable on three month's notice. C an unauthorized person, gives notice of termination to A. The notice cannot be ratified by B, so as to be binding on A."

14.4.3

Revocation of Authority

The authority of an engineer or architect may be determined in any one of the following ways: (1) By the completed performance of his agreement;

(2) By the expiration of the period, if any, for which the authority was given; (3) By the performance becoming unlawful or impossible; (4) By either party giving notice to the other without prejudice to any claim for damages that either party may have, one against the other, for breach of the contract of employment. The following provisions in the Indian Contract Act, which may have application, are self-explanatory.

SECTION 201 - Revocation of Authority - An agency is terminated by the principal revoking his authority or by the agent renouncing the business of the agency; or by the business of the agency being completed; or by either the principal or agent dying or becoming of unsound mind; or by the principal being adjudicated an insolvent under the provisions of any Act for the time being in force for the relief of insolvent debtors."

SECTION 202 - 'Termination of agency where agent has an interest in subject matter-Where the agent has himself an interest in the property which forms the subjectmatter of the agency, the agency cannot, in the absence of an express contract, be terminated to the prejudice of such interest. Illustrations (a) A gives authority to B to sell A's land and to pay himself, out of the proceeds, the debts due to him from A. A cannot revoke this authority, nor can it be terminated by his insanity or death. (b) A consigns 1,000 bales of cotton to B, who has made advances to him on such cotton, and desires B to sell the cotton, and to repay himself out of the price the amount of his own advances. A cannol revoke (his authority, nor is it terminated by his ms;uiily or death.

SECTION 203 When principal may revoke agent's authority - "The principal may, save as il otherwise provided by the lasl preceding section, revoke the authority given lo his agent al any lime before lhe authority has been exercised so as lo bind lhe principal. SECTION 204 - Revocation where authority has been partly exercised- The principal cannol revoke lhe authority given lo his agent after the authority has been partly exercised, so far as regards such acts and obligations as arise from acts already done in lhe agency. Illustrations "(a) A authorizes B to buy 1,000 bales of cotton on. account of A and lo pay for it oul of A's money remaining in B's hands. B buys 1,000 bales of cotton in his own name, so as to make himself personally liable for the price. A cannot revoke B's aulhorily so far as regards payment for the cotton. "(b) A authorizes B to buy 1,000 bales of cotton on account of A, and pay for it out of A's moneys remaining in B's hands. B buys 1,000 bales of cotlon in A's name, and so as not to render himself personally liable for the price. A can revoke B's authority to pay for lhe colton." SECTION 205 - "Compensation for revocation by principal or renunciation by agentWhere there is an express or implied contract that the agency should be continued for any period of time, the principal musl make compensation to lhe agent, or lhe agent to the principal, as the case may be, for any previous revocation or renunciation of the agency without sufficient cause." SECTION 206 - "Notice of revocation or renunciation - Reasonable nolice must be given of such revocation or renunciation; otherwise the damage thereby resulting to the principal or the agent, as the case may be, must be made good to lhe one by the other." SECTION 207 - "Revocation and renunciation may be expressed or implied - Revocation and renunciation may be expressed or may be implied in the conduct of the principal or agent respectively.

Illustration A empowers B to let A's house. Afterwards A lets it himself. This is an implied revocation of B's authority. SECTION 208 - When termination of agent's authority takes effect as to agent, and as to

third persons - The termination of the authority of an agent does not, so far as regards the agent, take effect before it becomes known to him, or, so far as regards third persons, before it becomes known to them. Illustrations

"(a) A directs B lo sell goods for him, and agrees lo give B 5 per cent commission on ihe price fetched by the goods. A afterwards, by letter, revokes B's authority. B after ihe letter is sent, but before he receives it, sells ihe goods for 100 rupees. The sale is binding on A and B is entitled to live rupees as his commission." "(b) A, al Madras, by letter directs B to sell for him some cotton lying in a warehouse in Bombay, and afterwards, by letter revokes his authority to sell, and directs B to send the cotton to Madras. B. After receiving the second letter, enters into a contract with C, who

knows of the first letter, but not of the second, for the sale to him of the cotton. C pays B the money, with which B absconds. C's payment is good as against A." "(c) A directs B, his agent, to pay certain money to C. A. dies, and D takes out probate to his will. B, after A's death, but before hearing of it, pays the money to C. The payment is good as against D, the executor."

SECTION 209 -"Agent's duty on termination of agency by principal's death or insanityWhen an agency is terminated by the principal dying or becorning of unsound mind, the agent is bound to take, on behalf of the representatives of his late principal, all reasonable steps for the protection and preservation of the interests entrusted to him."

SECTION 210 - Termination of sub-agent's authority - The termination of the authority of an agent causes the termination (subject to the rules herein contained regarding the termination of an agent's authority) of the authority of all sub-agents appointed by him."

14.5 REMUNERATION OF THE ENGINEER AND ARCHITECT The right of the engineer or architect to receive compensation for the service rendered arises either under an express or implied contract. As already stated there can be an agency contract without consideration and as such an owner may be able to prove to the Court that he did not at any time undertake to pay the engineer or architect anything for his services. The engineer or architect can claim compensation only if he can show that there has been some bargain for a consideration either expressed or implied.

14.5.1

Implied Promise of Remuneration

In the absence of an express contract of any kind, however, the presumption is that there was no intention on the part of a practicing engineer or architect to give his services free. In such a case all that an engineer or architect need prove is the fact of his employment. The law will imply an obligation on the part of the owner to pay the reasonable value of his services; unless as already stated the owner can show that in the particular case it was not intended that the engineer or architect should receive remuneration.

14.5.2

Measure of Amount of Remuneration

If a contract between the owner and the engineer or architect contains an express stipulation as to the amount of remuneration payable and the conditions under which it is to be paid, such a stipulation is conclusive on the parties. ILLUSTRATION

A surveyor at the request of the owner, submitted an estimate of the cost of a survey of the land, which according to him would not be less than $80 and more than $100. the owner then directed the surveyor to proceed with the work. On completion of the work, the surveyor submitted a bill for $587.55 the owner refused to pay the amount of the bill and sent the surveyor $100. the surveyor, thereupon, sued the owner for the recovery of the balance which he claimed to be due to him. It was held that the surveyor's compensation was limited to $100 and he was denied any recovery in excess of $100 paid to him. 45

14.6 WHEN REMUNERATION MAY NOT BE PAYABLE 45 SeybcJt v. Baber, 97 a 2d. 907, Court of Appeal of Maryland 1953.

It is up to the engineer or architect to make certain that he will be entitled to a compensation for his services rendered. The following illustrations will help emphasise the care and diligence with which an engineer or architect should enter into a contract with the owner.

14.6.1

Absence of Required License

In localities where statutes require engineers and architects to be licensed, no recovery can be had for the services rendered in the absence of the required license. In one case involving an architectural partnership some of the certificates issued by the firm were signed by an unlicensed member of the firm In a suit by the firm to recover the balance due for the services rendered, it was held by the Court that the firm could not recover for services based on the work of an unlicensed architect.46

14.6.2

When plans are not used

Where services are rendered by an architect or work done on approval, or is in the nature of a proposal, the architect may have no claim unless the design is actually approved or used unless the contract stipulates special provision. ILLUSTRATIONS (1) An engineer undertook to prepare a report including cost estimates and recommendations for a central air-conditioning system in a hotel, in consideration of $4,000. The contract guaranteed an additional fee for plans and specifications only if they were used. The contract further provided that no payment would be made if plans and specifications were not used. The hotel company considered the central air-conditioning plan too expensive, and instead installed room air-conditioners. The engineer was paid $4,000 only, as plans were not used. The engineer's suit for recovery of payment for his plans was dismissed by the court on the ground that the plans were not used 47 (2)

A school board employed an architect to prepare plans and specifications for remodeling and repairing certain school buildings. The architect's compensation was agreed to be 8p e r e c n l mi "all w o r k a p p r o v e d a n d le(." The school hoard reserved ihe right l o d i s e o n l i r i L i c a n y o r all ihe w o r k a l any t i m e , and in that c a s e a g r e e d that the architect's compensation wouid be determined b y the schedule established by the American Institute of Architects. The Architect prepared plans and specifications, and lenders were also received for the work. However, the board did not let any contract for ihe work and on (.his ground refused to pay ihe archilecl any compensation, in an action b y the archilecl lo recover compensation the Court allowed him the recovery according lo the schedule of the American Institute of Architects upon the lowest lender received for Ihe work.48

14.6.3 When Construction Cost is Limited If an engineer or archilecl undertakes lo prepare plans and specifications for a building to cost not more than a restricted amount he may not recover compensation if the drawings and specifications prepared by him are for a building which will cost substantially in excess of that amount. For example, in one case where the cost of construction was 27 per cent more than the limit fixed by Ihe architect's contract, the architect was denied compensation for his services. 49 46 47 48 49

Palmer v. Brown 237 P. 2d 306 De Laureal and Moses v. Pensacola Hotel Co. 168, F. Supp 684, U. S. District Court 1959. Liewelly v. Board of Education of Cicero Stickney High School Tp. Dist. 154, N. E. 889, 324 el. 254 Stevens v. Fanning, 59, III, App. 2d, 285, 207 N.E. 2d. 136 (III 1965).

However, the doctrine of substantial performance is applicable in such cases and the engineer or architect can recover if there is a slight variance between the restricled cost and the actual cost. An architect, who prepared plans and specifications for a $75,000 building as against the restricted cost of $70,000, was allowed recovery of his fee from the owner. 50

14.6.4 Competition Work An architect or engineer who has submitted plans and designs in response to a general invitation in open or limited competition cannot claim any remuneration unless: (a) remuneration is offered to all competitors in the terms of the invitation or, (b) he is able to prove that his plans, etc or any portion of these, have been used by the owner either for the work in question or for any other purpose. 51

14.6.5 Incomplete Services The architect's right to remuneration, when his contract of employment with the owner has been partly performed, and there is a refusal or failure on the part of the owner to complete the employment, would be depending upon the express provisions made in the agreement to cover such an eventuality. In the absence of any specific provision he will be entitled to all sums due at the time of breach and for profits lost by reason of the breach or upon a quantum meruit. 52 14.7 MANNER OF PAYMENT OF REMUNERATION engineering and architectural services contains no stipulation as to the lime and manner of the payment of fees, the engineer or architect will, in general, be entitled to payment by installment as the work proceeds. 53 Where, however, an engineer or architect undertakes lo supervise lhe execution of an entire contract in consideration of a commission on the total cost, he may not be able lo claim any compensation until the work is completed. If a contract for

54

14.8

OWNERSHIP OF PLANS AND COPYRIGHT

An architect ordinarily has no right to the ownership of a plan furnished and, accepted by and paid for by another. Plans forming the essential part of the building contract, unless proved to be the property of the architect, are deemed to be the property of the employer."55 However, the engineer or architect has a lien on them until he receives the final payment of his fees.56 It may be noted that, unless the engineer or architect assigned the copyright in writing or he were under a contract of whole time service, the copy right remains his property and not that of the employer. 57 14.9 50 51 52 53 54 55 56 57

POSITION OF THE ENGINEER AND ARCHITECT

Vaky v. Phillips, 1943 W. 601 (tex 1919) L.P. Landless v. Wilson (1880) 8R (Ct. or Sess 289). Sec. 205 of the I.C. Act in Art 14.4.3. pp. 615 Appleby ,v. Myres (1867), L. r. 2 CP. 651. Johnson v. Gaudy (1855), 26 L. T. (O.S.) 72 Berlingshot v. Lincoln County 257, N. W. 373, 128 Neb. 28. Huges v. Lenny (1839) 5M & W 183. Meikle and others v. Mayfe and others (1941) All ER 144.

The role that an engineer or architect plays in a construction contract may be three-fourfold as already stated. He is a skilled servant if in the employment of the owner. He acts as an agent of the owner. The contract between the owner and the contractor contains stipulations which make him play the role of quasi-arbitrator or finally an arbitrator. 14.9.1 The Engineer Architect as a Quasi-Arbitrator If the contract between the owner and the contractor contains stipulation to the effect that the decisions of the engineer or architect, in respect of claims and disputes relating to the execution or progress of the work or interpretation of the contract documents shall be final and conclusive, the engineer or architect has then the general powers and duties of the arbitrator and to distinguish him from 'arbitrator', his position is generally referred to in the strict sense as "quasi-judicial" or "quasi-arbitral" and he functions as a quasi-judge or quasiarbitrator. Construction contracts generally contain provisions to the effect that the decisions of the architect/engineer shall be final in respect of certain matters as quality of the materials,workmanship, designs, etc. The matters in respect of which the decisions are made final are called 'excepted matters', because the scope of arbitration clause contained in such contracts excludes these matters from the ambit of the arbitration clause. The purpose of these provisions is to avoid the possible delay in reaching final decisions on matters of day to day work and which could be numerous.

14.9.2 Decisions of the Engineer or Architect are final in the Absence of Fraud When parties to a construction contract provide that the estimates and decisions of an engineer or architect shall be final and conclusive, such estimates and decisions have the effect of the award of an arbitrator. In the absence of fraud or such gross mistakes as imply bad faith or failure to exercise an honest judgment, they are conclusive and binding upon the parties. Similar contract provisions have been approved and enforced by the United States Courts and also the Courts in India.

19

14.10 LIABILITIES OF ENGINEERS AND ARCHITECTS Like any other professional, an engineer or architect while undertaking work in his field represents that he possesses the requisite knowledge and skill. If he does not possess the skill he is liable for lack of it and if fails to use it he is liable for negligence. It is stated: "An architect is one who possesses, with due regard to aesthetic as well as practical consideration, adequate skill and knowledge to enable him (i) to originate, (ii) to design and plan, (iii) to arrange for and supervise the erection of such buildings or other works calling for skill in design and planning as he might in the course of his business reasonably be asked to carry out or in respect of which he offers his services as a specialist."

14.10.1 Degree of Care and skill Required

In the preparation of plans and specifications, the architect must possess and exercise the care and skill of those ordinarily skilled in the business. If he does so, he is not liable for faults in construction resulting from defects in the plans, as his undertaking does not imply or guarantee a perfect plan or a satisfactory result, it being considered enough that the architect himself is not the cause of any failure, and there is no implied promise that miscalculation may not occur. Where, however, the architect does not possess and exercise such care and skill he will not only be liable in damages for defects in his plans but he cannot recover compensation for them.58 19 20

United States v. Moorman (1950) 338, U. S 457, 461, 462, 705 C.A 288 94L. Ed. 2561 United States v. Wundedich 1951, 342, U.S. 98, 72, S.Ct 154 96 L Ed 113. Dandakarnya Project v - P. C Corporation, AIR 1975 MP 152; AIR 1973 MP 7.

14.10.2 Duty in Respect of Design Under lhe traditional arrangement, architects and engineers are responsible lo lhe owner for lhe design and suitability of the works for Iheir intended purpose, whereas the contractor is only responsible for bringing the works to completion according lo the design. However, il is not uncommon in lhe present day practice wherein the contractor undertakes lhe responsibility of the

design as well.

14.10.3 Examination and Sub-soil Investigations To produce a successful construction design, in nearly all cases, a sufficient examination of the site with a view to determining the area available for the proposed works, and the-nature of the sub-soil for deciding upon the correct design for foundations or methods of underground working are a necessary preliminary. In a case where an architect is retained to advise, and instructed to build on old foundations, he must employ reasonable tests of the soundness and stability of the underlying structures. If the architect employs others to carry out these investigations he will nonetheless remain liable if he adopts incorrect information furnished to him by others. Further it goes without saying that in normal circumstances an architect or engineer will not be automatically relieved from liability from his plans and designs by obtaining the owner's approval of them, if the defect of design complained is one of construction or of a technical nature. In a case where by reason of the known facts relating to soil conditions, etc there is only one really foolproof type of scheme, and another considerably more economical but involves an element of risk, the architect or engineer is duty-bound to acquaint the owner of the position and leave the decision to the owner. In such a case if the owner were to approve the less safe course, the architect would not be liable.

14.10.4

Cost of Construction - Excess over Estimate

An architect or engineer is not liable for damage if the cost of constructing a building exceeded the expectations and financial liability of his employer, unless the contract of employment contains an upset cost of constructing the structure. However, it is essential that

58 White v. Palley, 247, 396, 119, Or 97.

his plans and specifications comply in all particulars with his contract of employment.59 In practice, at an early stage of the employment, the owner will usually indicate or impose limitation on the cost of the proposed project. In such a case there is an express condition of the employment that the project, as designed, should be capable of being completed within the stipulated or reasonable cost. Even if the owner does not mention it, it is suggested that an architect must design works capable of being carried out at a reasonable cost having regard to their scope and function. Such an implied condition of employment if fulfilled is likely to deprive him of the remuneration for the work done. An archilecl has a great role lo [May in making an estimate. He is expecled lo neither undcr-esiimale nor over-estimate lhe value of the works. He is bound by his conduct lo lhe owner. He can be sued for his negligence. For his misconduct, fees payable to him may be forfeited. He may incur other liabilities not only under the contract but under the Statute.60 ILLUSTRATIONS

(1) In a case, the archilecl estimated that a school building he had designed would cost $1,10,000. He knew that the estimate was for the purpose of preparing a bye-law to raise the necessary fund. The lowest tender was for $1,57,800. He then eliminated 40% of the cubic content of the school, and said the balance could be carried out within the limit. The lowest lender for this modified design was $1,32,900. Under these facts and circumstances, the Court of Appeal of British Columbia held that he had been negligent, and was properly dismissed and liable to pay damages. 24 (2) An architect was instructed lo prepare designs for building not to exceed 4000 pounds in cost; he prepared plans and the tenders were invited; the lowest tender was 6000 pounds. It was held that the architect was not entitled to recover his remuneration for the work done.61

14.10.5 Delay in Supplying Plans If a contract of employment does not contain a definite stipulation as to when plans and details are to be furnished, the law implies that they shall be furnished, within a reasonable time. In one. case, the contract between the owner and the engineer provided that the engineer should render his services al such times as the owner might direct; it was held that the engineer was entitled to a reasonable time after he received the direction to perform his services. "Where both contracting parties contribute to the delay, neither can recover damages unless there is a clear proof as to the appointments of the delay and the expenses attributable to each party".62 It is submitted that, unless an act or requirement of the owner or some circumstances outside the architect's or engineer's control make it impossible, an architect or engineer must, as a matter of business efficacy, impliedly undertake to the owner that he will give instructions, plans, certificates, etc so as to comply with the express or implied requirement of the building contract, which he himself will normally have recommended to the owner. In short, it can be said that an architect is duty-bound to supply plans, instructions, etc under his contract with the owner, at the time for supplying the same under the building 59 23 60 61 24 62

Medical Arts. Bldg v. Ervin 257, P. 2d. 969, Supreme Court of Colorado (1953). M.D.AWHO Sumangal Services Pvt. Ltd.2003(3) Arb. LR 361 (SC). Flannagan v. Matev.(1876) 2 Vict. L.R. (Law) 157. Flannagan (1876) 2 Vict. L.R. (Law) 157. Savagev.v.Mate Board of School Trustees (1951) 2 D.L.R. (2d), 39 Canada. Coath and Goss Inc. v. Unites States,lOl.Ct. 702, 714, 715.

(l u i p i e r - 1 4

< oniraci between Owner and Arcliileet/ljigineer

c o n l r a c l b e t w e e n I h e o wn e r a n d H i e c o n l r a c l o r conlraclor lor claims

14.10.6

')! 7

so as l o a vo i d I h e o wn e r 's l i a b i l i t y t o '. h e

on t h i s c o u n t .

Supervision

An architect or engineer, who has undertaken lo supervise the construction in progress must properly supervise the works and inspect them sufficiently frequently lo ensure that Ihe materials and workmanship conform to the contractual requirements. In a case it was held that the architect's duties "were to give reasonable supervision, and that meant such supervision that would enable him to certify that the work of the contractor had been executed according to contract, and that having failed to give such supervision he was liable in damages to his employer on account of work which he had passed, but which in fact did not conform to the contract." 63 The normal practice of architects is to visit a site for which they are responsible, periodically, say about once a week. For day-to-day supervision, the architect relies upon the clerk of works, usually paid and employed by the owner. Thus, other subordinate persons usually supplement his personal supervision. From the legal point of view, it is submitted, that the architect or engineer will usually be fully responsible to the employer for his own employee's mistakes or errors. Normally he will not be responsible for errors by persons paid and employed by the owner such as clerks of works, resident engineers separately engaged, unless the matter was of a kind that the architect or engineer should have seen or dealt with himself or he failed to give proper instructions to the subordinate Where a work is improperly executed and defects remain in the completed structure the owner can recover damages not only from the contractor but also from the architect or engineer, if the architect or engineer has failed to exercise due care during the progress of the work. The contractor is not liable if he relied on the architect or engineer's instructions 14.10.7

Negligence

By negligence is meant neglect of some care and skill, which one is bound by law to exercise towards somebody. Thus there cannot be a liability for negligence unless there is a breach of some duty. The degree of care, which a man is required to use, will be the care that an ordinary prudent man is bound to exercise. However, if a person professes to have a special skill or who has voluntarily undertaken a higher degree of duty is bound to exercise more care than an ordinary prudent man. Under a contract between an owner and an engineer or architect, the latter is duty bound to exercise such diligence and skill as are exercised in the ordinary and proper course of similar employment for which he may or may not receive payment. The engineer or architect is liable for the consequences of. ignorance or nonobservance of the customs, and practices, of his profession and of failure to observe and comply with statutes and byelaw that affect his work. ILLUSTRATIONS (1) Under a building contract the architect's duty was to supervise the work. The clerk of works, for corrupt purposes of his own, permitted the contractor to deviate from the design and specifications, by laying the ground floor without the necessary precautions against damp and assisted in concealing the deviation. The architect, relying upon the clerk of the works failed to detect the deviation and to have it rectified. As a result of this deviation the dry-rot set in. The defence put forth by the architect that the owner had appointed an unfit improper clerk of works and that damage was due to the negligence and fraud of the owner's servant, 63

Jameson v. Simon (1899) 1 F (Ct. of Sess) 1211.

(l u i p i e r - 1 4

< oniraci between Owner and Arcliileet/ljigineer

')! 7

or alternatively that the owner was bound to employ a fit and proper clerk of works, but failed to do so. It was held that the architect was liable in damages to the employer for negligence.64 (2) The owner had employed an architect to prepare plans and specifications and later on

also to supervise the work of construction of a home on a hill side plot of California. The owner, on the advice of his architect accepted the house as constructed. Shortly after taking possession the owner noticed that floors were sloping and there were cracks in the plaster. It was discovered that foundations had settled at least 5 cm. During the construction the owner had noticed the workmen placing foundation forms on loose earth fill. He had brought this to the notice of the architect who had promised to look into the matter and see things right. In fact, a couple of days later he did inform the owner that things had been fixed up. The owner refused to make the final payment to the contractors. In an action by the contractors to foreclose their lien, the owner counter-claimed against the contractors for negligence. The owner also filed a suit for negligence against the architect. The actions against the contractor was tried first. During the trial the architect admitted that although the plans and specifications called for front foundations to be a minimum of 15 centimeters below the original natural ground level, he had told the men to go ahead when foundations were in fact 45 centimeters above the natural ground level. It was held by the Court that the depth of the front foundation trench was approved by the architect and as such constituted the waiver on the part of the owner (the architect being his agent) of the contractor's failure to follow the plans and specifications in that respect. However, the owner was awarded damages for that portion of the said defects for which the contractors were responsible and neither the owner nor his architect waived. The action involving the architect was tried before a jury. The jury, guided by the expert's estimates of cost of repairs, (which varied from $1846.50 to $17,354) fixed the damages to the amount of the judgment against the architect in the sum of $4,972.55. The judgment was entered and was appealed by the architect. The main contention of the architect was that, as established by the evidence, the contractors and architects were joint tort-feasors and as such.the satisfaction of the judgment against the contractor released the architect as a matter of law. He also urged that the first adjudication against the contractor prevented

64 Leicester Board of Guardians v. Trollope, (1911) 75 J. P. 197.

C h a p t e r - 1C 4 ontract between Owner and Architect/Engineer

597

t h e o wn e r f r o m a n y fu r t h e r r e c o v e r y a ga i n s t t h e a r c h i t e c t , a s t h e s u b j e c t m a t t e r o f b o t h the actions was the same. It was held by the appellate Court that (1)

(2)

The architect and contractors were independent wrongdoers and not joint tortfeasors as there was neither unity of purpose nor concert of action between them. The judgment against the architect and that against the contractors did not result in the owner getting double compensation. "

14.10.8 Issue of Certificates Many building and engineering contracts frequently include express terms that the work, in addition to the compliance with the contract requirements, is to be done to the satisfaction of the engineer or architect and further require the contractor to obtain and produce certificates to that effect. The certificates are of various kinds and generally include: (1) Interim or progress certificates upon which periodical payments or advances to the contractor on account are made. (2) Final certificates, which frequently are certificates both of satisfaction with the work and of the sum due to the contractor upon the final discharge of his obligation. (3) Various other certificates e.g. the contractor is not duly proceeding with the work upon which a special contractual right of determination by the owner may depend; or certificate of practical or substantial completion, upon which the provisions as to payment of retention money, release of security deposit, maintenance of works or liquidated damages for delay may depend. (4) Certificate to the effect that the contractor has committed default justifying termination of his contract, etc. Where under the terms of a contract finality is given to the certificate or decision of the architect or engineer, it may be that the sense of the contract requires that the architect or the engineer act judicially rather than as the agent of one party. Where he is acting in this capacity to determine or value some issue between two or more parties, he is not liable to either party for want of skill, ignorance of law, or negligence. Many architects and engineers misunderstand and exaggerate the effect of this somewhat peculiar status, and appear to consider that it confers upon them an element of discretion, which enables them to give effect to their own opinions or notions of fairness as between the. parties without too particular a regard to the letter of the contract. In some cases on the other hand, many fail to issue certificates, which are by way of condition precedent to invoke an arbitration clause. In this connection it is pointed out that the I.I.A standard form includes a provision that if the contractor is either dissatisfied with the decision of the architect or in the case of withholding of a certificate by the architect, he can invoke provisions of the arbitration clause. Similar provisions are also found in other modem forms. Q u i t e a p a r t f r o m t h e p r o vi s i o n s i n l h e c o n t r a c t w h i c h e n t i t l e t h e a r b i t r a t o r o r C o u r t l o 29 Alexander v. Hammarberg, 103 Cal 2d, 872, 230 P. 2d 399 Cal 1951.

o p e n u p , l o r e vi e w a n y d e c i s i o n o r c e r t i f i c a t e i s s u e d b y t h e a r c h i t e c t , s u c h r e vi e w w i l l b e q u i l e o b j e c t i ve a n d wi t h o u t r e g a r d l o a n y d i s c r e t i o n . I l i s s i mp l y n o l l h e c a s e l h a l p r o vi s i o n s making use of a certifier a s a p i e c e of convenient administrative machinery mean t h a t i t i s thereby desired lo give him a n y discretion. Even provisions making express reference lo his

satisfaction or approval are not drafted in the expectation or desire that he should apply any standard other than thai required b y the contract provisions. Il must b e remembered that the duty of lhe certifier i s to a p p l y lhe provisions of lhe contract exactly and strictly to a situation upon which

C h a p t e r - 1C 4 ontract between Owner and Architect/Engineer

598

h e is required to give his decision or certificate, and any evidence showing thai he had taken any

extraneous or irrelevant matter into consideration will deprive his certificate of validity and, therefore, of finality.

14.10.9 Liability to Third Parties Are architects or engineers and contractors liable to third parties for injuries received as a result of defective design and construction? They are, according to the verdict of a New York Court. ILLUSTRATION An action was brought against the architects and builders of an apartment house to recover damages sustained by an infant who fell from the porch of the apartment. The action was based on the grounds that the porch was so improperly designed and constructed that it was a danger to its users. The defence put forth by the builders and lhe architects was that the injured party being a stranger to the contract had no cause of action. The trial Court sustained this contention and dismissed the action. However, on appeal the judgment was reversed. The appellate Court held thai lhe situation was similar in principal to t h e law that where a contractor builds a defective scaffold, he is liable for damages resulting therefrom, even though t h e injured party was not a party to the contract. 65

Liability For Negligence In Supervision Of Work Where there is no fault in plan or design prepared by an architect, he may still be liable to third parties for negligence in his supervision functions. If he has undertaken supervision works, and if the circumstances are such that he knows or should know in the exercise of reasonable care that dangerous and unsafe conditions exist on the site, he has the right and corresponding duty to stop the work until the unsafe condition has been remedied. If he breaches such a duty he would be liable to persons who could foreseeably be injured by the breach. The architect may be liable in spite of the fact that he has neither the right nor the duty to direct or control the methods or means by which the independent contractor converts the blueprints into reality. To protect himself and the owner, an architect is well advised to have an indemnity clause included in the contract whereby the contractor should indemnify and hold

65

Inman v. Binghamton Housing Authority 152 N.Y.S. 2d 79.

Iidjilcr 14

Contract between Owner and Architeci/iangineer

621

harmless both Ihe owner and ihe engineer or archilecl lo any liligalion, which may lake place. The protection under the clause would be available if any fault occurs during ihe execution of the conlracl and is not brought by design errors or by the architect's failure lo give important instructions.

14.10.10 Architect Liable for Structural Engineer's Fault Can an archilecl avoid liability for faulty design because he had delegaled lhal pari of Ihe work lo an independent consulting engineer? To answer Ibis question the principle of vicarious liability needs to be sludied. Vicarious liability means liability, which is incurred for or instead of, another. Normally and naturally the person who is liable for a wrong is he who does the wrong. But there are circumstances when liability may be attached to a person for the wrongs committed by others. The most common example is the liability of the master for the wrong committed by his servant. Thus an engineer or architect is liable for the acts of his assistants and subordinates if the owner does not directly employ them. Another relevant instance of vicarious liability is the case of an owner and his independent contractor. The general rule, as to an independent contractor, is that for the acts and omissions of an independent contractor, (except those actually authorized) the owner is nol liable to third persons. But to this general rule also there are certain exceptions. Tne following case illustrates one of them. ILLUSTRATION A masonry wall was designed without complying with a city building ordinance. A pedestrian was hurt when it collapsed upon him due to high wind. He sued the architect, the owner, and the contractor. In his contract with the owner, the architect had assumed overall responsibility for designing the building of which the wall in question was a part. A consulting engineer retained by the architect in fact, had designed the wall. The trial Court held the architect alone responsible for the damages to the pedestrian for injuries sustained when the wall failed. The judgment was affirmed in appeal. The appellate Court considered three basic questions. The first question naturally related to proof of negligence on the part of designers of the building. This question was answered in the affirmative on the principle that if the design fails to comply with the city code, such a violation amounts to a statutory negligence. The second question related to establishing a casual connection between the injuries received by the plaintiff and the alleged design defect. Although, it was contended on behalf of the architect that the hurricane-force wind gusts on the critical day were of such unprecedented velocity as to amount to an "act of God", it was held that a proper wall would have stood up to the unusual winds. There was evidential support for the decision on this point. Regarding the third question which is the subject of the present discussion, the architect put forth a plea that, as a professional man, the standard of care applicable to him was to be measured by the practices of the reasonably prudent architect in the same locality. Since it was the custom of the architects in the area to refer engineering work to consulting engineers, it was argued, his only obligation was to select a reliable firm. By doing that, he said, he had fulfilled his duty of exercising due care. was held " that the architect's reliance on local customs among his fellow professionals was misplaced. Selecting a competent engineering only indicated that he himself was not negligent but it begged the question of various liability. It was the architect who contracted with the owner to provide all drawings and specifications necessary for construction of the building. The engineers were strangers lo the owner. Any engineering work incorporated in the plans became a part of the architect's design. Since he assumed the benefits and burdens of designing the building, he assumed the responsibility of meeting the building code design provisions, including the structural engineering requirements. His duty to meet the minimum safety standards of the building code was, therefore, non-delegable. II

firm

600

Building and Engineering Contracts

The Court recognized the general rule governing the owner independent contractor relationship mentioned earlier but noted that there are significant exceptions to it. Even where an independent contractor is employed the owner remains liable when the work involved is "inherently dangerous" or when as a matter of law the owner's duty cannot be delegated. The plaintiff's contention in this case that the owner (here the architect) was under a non delegable duty and as such liable for the acts of the independent contractor (here the consulting engineer) was upheld as already mentioned. It may also be noted that if the plan or design is defective and not the construction, the architect or engineer will be liable irrespective of whether he was retained to supervise the construction or not.

♦♦♦

31 Johnson v. Salem Title Co. 425, p. 2d 519 (1967).

Chapter 15

Limitation 15.0

INTRODUCTION

In this Chapter it is proposed to discuss the principle of limitation of actions, whereby the right to a legal remedy, such as a claim for money due under a contract or for damages for its breach, is extinguished by the passage of time. Limitation is regarded as adjective law, as distinguished from substantive law. It is almost always, if not invariably, statutory. The statutes of limitations are known as statutes of repose or statutes of peace. "All statutes of limitation have for their object the prevention of the rearing up of all claims at great distances of time when evidences are lost ... to prevent persons from being harassed, at a distant period of time." The object is to extinguish stale demands.

What kinds of demands are likely to be raised in building and engineering contracts and what is a period of limitation in relation to each of them as per the Indian Limitation Act, 1963, need to be considered. The general or common causes of action in building and engineering contracts are given in Art. 15.2. The relevant provisions of the Indian Limitation Act are reproduced in Art. 15.3. Illustrative cases are dealt with in Art. 15.4 onwards. 15.1

PROVISIONS OF THE LAW

Article of Limitation Act 13 to 18, 24 55, 70 & 113 J & K Limitation Act Art. 53/86 Art. S. 28 of Indian Contract Act

Art. No 15.3 15.4.1 15.5

15.2 CAUSES OF ACTION IN BUILDING AND ENGINEERING CONTRACTS The rights in relation to building and engineering contracts for the enforcement of which suits may be filed include: (i) For the price of materials sold and supplied. (ii) For the price of work done (labour wages only). (iii) For the price of work done and materials supplied, which in turn may1 include (iv) Claim on contract for completed work. (v) Claim for enhanced rates for work done in view of altered circumstances. (vi) (vii) (viii) (ix)

Claim for extra items not included in the final hill. Deductions made in R. A. Bills - adjustments in the final hill. Payment of final bill. Refund of earnest money/security deposit/retention money including less forfeiture.

(x) (xi) (xii)

Compensation for breach of contract. Any other cause arising out of or in relation to the contract. To refer disputes to arbitration.

15.3 RELEVANT PROVISIONS OF THE INDIAN LIMITATIO N ACT, 1963 The relevant provisions applicable to the above general causes of actions mentioned in Art. 15.2 above are reproduced below: Description of suit Art. No. 13. For the balance of money advanced in payment of goods to be delivered delivered. 14. For the price of goods sold and delivered where no fixed period of credit is agreed upon 15. For the price of goods sold and delivered to be paid for after the expiry of a fixed period of credit. 16. For the price of goods sold and bill delivered to be paid for by a bill of exchange, no such bill being given.

Period of limitation Three years Three years Three years

Three years

Time from which period begins to run ' When the goods ought to be The date of the delivery of the goods When the period of credit expires When the period of the proposed bill elapses

602

Building and Engineering Contracts

7.

For wages in the case of any other person

Three years

18.

For the price of work done by the plaintiff for the defendant at his request, where no time has been fixed for payment.

Three years

Art

Description of suit

Period of limitation

No. 55.

For compensation for breach of any contract, express or implied, not herein specially provided for

Three years

When the wages accrue due When the work is done Time from which period begins to run When the contract is

broken or (where

24. For money payable by the defendant to the plaintiff for money received by the defendant, for the plaintiff's use 70. To recover movable property deposited or pawned from a depository or pawnee 113. Any suit for which no period of limitation is provided else where in this Schedule

Three years

Three years Three years

there are successive breaches) when the breach in respect of suit is instituted occurs or (where the breach is continuing) when it ceases. When the money is received The date of refusal after demand When the right to sue accrues.

15.4 DATE ON WHICH CAUSE OF ACTION ACCRUED ILLUSTRATIONS It is not always easy to establish the date on which the 'cause of action accrued' in a given case. The following illustrations help lay down the guiding principles. ILLUSTRATIONS (1) A block-of flats built in 1962 with defective foundations (which were either not noticed or inspected carelessly by the defendant Council through its inspector), were taken by the plaintiff on long lease. In February 1970 structural movement began, resulting in cracks. The plaintiff brought an action against the council in was h e l d : Th e c a u s e o l " a c t i o n c a n o n l y a r i s e wh e n t h e s l a t e of i h c b u i l d i n g i s s u c h that there i s a present o r i m mi n e n t d a n ge r t o t h e h e a l t h o r s a f e t y o f t h e p e r s o n s occupying it and a n a c t i o n c o u l d l i e . 66 - '! 1972. It

(2) A boiler flue chimney, designed negligently by the defendant, a firm o f consulting engineers, was built between June and July 1969. In due course cracks occurred in the 66 Anns v. London Borough of Merton House of Lords, (1978) 5 BLR 1.

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603

internal lining of the chimney. Action was brought in October 1978. The Trial Court found that the cracks occurred not later than April 1970. I l was not proved that the plaintiffs could with reasonable care have discovered the cracks before October 1972.The action was time barred; if time started to run out when the cracks occurred but not if it only started to run out when the cracks could with reasonable care have been discovered. Referring to the decision in the/illustration (1) above, it was observed: "His Lordship did not say, nor - - did he imply, that the date of discoverability was the date when the cause of action accrued. The date which he regarded as material - -was, of course, related to the particular duty resting on the defendant as the local authority, which was different from the duty resting on the builders or the architects. - -". It was held that the limitation period began when the cracks occurred and that the action was statute barred.67

15.4.1 Recovery of cost of Materials to be used in works - Cause of action Where, in a construction contract, a bill of quantity includes certain items for supply and delivery of materials to the site, and separate items for execution of the work with the use of such materials, the limitation for recovery of the cost of materials supplied, would begin not when the materials were supplied, but when the contract was completed or when the contract came to an end. ILLUSTRATION A contract provided for the supply and consolidation of shingle for a roadwork. It provided separate rate for the supply of shingle and its consolidation, adding, "the contractor agrees to execute the work ... and to complete the work as under: (a) Supply within one month; and (b) Consolidation within one month from the date of supply of roller, and to complete... as per the time schedule given, failing which the contract will be cancelled and work got done departmentally or through some other agency at the cost of the original contractor." It was held68 that "the intention of the parties was that the price of shingle shall not be claimed as of right on the date when it was supplied but rather when the contract was completed or when the contract came lo an end.." It was further held: "Accordingly the plaintiff could file a suit for the recovery of the price of shingle supplied by him or, for the portion of such price remaining unpaid, within three years from the dale the contract was completed: and, if the conlracl proved abortive, from the date it was cancelled to the knowledge of the plaintiff." (Per Mufti. J). There was divergence of opinion between the two Hon'ble Judges on the question as lo which of the two Articles 53 and 86 of the (J & K) Limitation Act, 1995 (Svt) applied to the case; Mufti J. held that Art 53 (corresponding to Art. 15 of the Indian Limitation Act, 1963) applied, while Mian JalalUd-Din, J was of the view that Art. 86 (corresponding to Art. 55 of the Indian Limitation Act, 1963) applied. It was observed that Art. 56 (corresponding to Art. 18 of the Indian Limitation Act) "is applicable to work or labour, be it mental or manual and not to the supply of materials."

15.4.2

Recovery of Cost of Work done

Art. 18 deals with the subject matter of suit for the price of work done, where no time has been fixed for payment. It declares the cause of action "when the work is done". It further 67 Pirelli General Cable Works Ltd v. Oscar'Faber and Partners, House of Lords(1982)21 BLR 99. 68 Ghulam Hassan v. State AIR 1976 J & K 93.

604

Building and Engineering Contracts

qualifies that the plaintiff, at the request of the defendant, must do the work. The period of limitation is three years from the date of doing the work. In most standard form contracts, the time for payment of the final bill is fixed by the agreement and to such cases Art. 18 will not apply. In such cases Art 113 which stipulates three years period of limitation from the date 'when the right to sue accrues' will apply. The right to sue would accrue when the bill was due for payment. The question as to when a bill is due for payment, in construction contracts, is peculiar and not always easy to answer, as will be clear from what follows.

15.4.3

Deductions Made in R. A. Bills -Limitation : When it begins

The Standard form contracts invariably provide for release of payment once every month or at a lesser interval than one month. If payment is not correctly made for the work done, or if wrongful deduction is made, it would appear that the legal proceedings for recovery of the full price of the work done or deductions made must be commenced within a period of three years. If the provision were to be so read there would be a multiplicity of proceedings with each month some new cause of action arising. Giving due consideration to the contract stipulation of treating all running bill payments as advances and to be adjusted in the account to be settled once and for all in the final bill, it is possible to construe that the fresh cause of action would accrue at the time of settlement of the final bill in respect of all disputes in the payment of running account bills, including disputed recoveries made and the period of limitation for them also will begin to run from the date the final bill was due for payment. Thus failure to pay the final bill constitutes a new cause of action and the starting point of limitation for payment will arise from the date of default in the payment of the final bill. It is clear that even if the cause of action lo enforce payment of intermediate or running bills is barred by lapse of lime, the payment of the same can, nevertheless, be enforced as a pari of the payment of the final bill." ILLUSTRATION In a case, the contract work was completed in August 1974 and in the other it was over in 1975, and in the third as early as 1967, but reference to arbitration was made by the parties

after notice was served by the contractor in 1979. On the above facts, it was held:5 "In the instant cases, final bills have not been drawn up and dispute arose when the contractor's claims were not accepted in toto and he was not offered payment according to his satisfaction. Though the work in respect of Miscellaneous Appeals Nos. 29 and 30 of the 1981 had been completed either in 1974 or 1975 and the work in Miscellaneous Appeal No. 62 of 1981 was completed as early as 1967, or so, final measurements had not been effected for many years and when the public officers took measurement which was not to the satisfaction of the contractor, dispute arose. There can be no doubt that dispute would arise in these cases when final measurement was done and the plaintiff's claims were not being admitted in toto. In fact, in each of these cases, as rightly stated — for the contractor, the dispute arose in relation to the work done, which was not being reflected in the final measurement. That being the position, in none of these cases the claim could be barred by limitation."

15.4.4

Recovery of Cost of Extra Work

Extra work ordered to be carried out by the contractor under the provisions of the conditions of contract mutually agreed upon can be said to be the work done at the request of the owner. If the order for the extra work specifies the time limit for its completion, Art. 18 will not be

605

Building and l-'nginccring Contracts

attracted. If it does not, perhaps Art. 18 will be attracted. But here again, in view of numerous requests for executing extra work on several different occasions, it can be said that a fresh cause of action will arise for the recovery of the cost of the work done at the time of the settlement of the final bill. Extra work is indeed supplemental work. When such is the position, the supplementary works must be taken as a part of the main work and the arbitration clause would ordinarily apply to disputes relating to such extra work being supplementary to the main work.69

15.4.5 Claim for Enhanced Rate - Which Article of Limitation Act Applies? Art. 55 of the 1963 Act will cover situations where the enhanced rates are sought by way of compensation for the extra expenses incurred on account of delay incompletion due lo breaches of contract conditions committed by the employer. Where the suit filed is not a suit for 5 6

Executive Engineer, R.E. Div. Dhenkanal v. J.C. Bhudaraj, AIR 1981 Ori: 172. AIR 1981 Ori. 172.

compensation for breach of contract express or implied but it is a suit for enhanced rate because of change of circumstances, and in respect of work not covered by the contract, the claim is not covered by any specific Article under the First Schedule, and must fall within the terms of Art. 113 and il provides a period of only three years.70 Similarly in a suit for payment of escalation 71 cost for labour, Art. 113 of the 1963 Act applies.

15.4.6 Final Bill - Limitation When Begins? Every standard form contract provides for submission of the final bill by the contractor within the period stipulated in the relevant condition for that purpose. The said clause further stipulates the period when the money due under the final bill will be payable to the contractor. For example, FIDIC 1999 edition includes Clause 14 which provides for submission of application for final payment certificate within 56 days after receiving performance certificate along with draft final statement and thereafter if any disputes arise, the same are to be resolved by DRB or by amicable settlement and after resolution of disputes, final statement is to be submitted. The engineer is duty bound to issue final payment certificate within 28 days after receiving final statement. The final payment is to be made within 56 days after the employer receives the final certificate. As such the limitation should begin from the date the money was due and payable but was not so.paid. For a suit for claim of the final bill, Article 113 of the Indian Limitation Act, 1963 applies.72 In practice it is noticed that some cases of settlement of final bills linger for years and with a view to render substantial justice and not to deny it on technicalities, the Court is required to take cognizance of various provisions of the agreement as also of the defaults committed by both the sides. For example, if the completion/ performance certificate is not issued, it can be said that an occasion to submit the final bill by the contractor did not arise. This and other points are covered by the following illustrations. ILLUSTRATIONS 69 70 71 72

M. L. Dalmia & Co. v. Union of India, AIR 1963 Cal 277. Gannon Dunkerly & Co. v. Union of India AIR 1970 SC 1433. State of Bihar v. Thawardas Pherumal, AIR 1964 Pat. 326. State of Bihar v. Rama Bhushan, AIR 1964 Pat 326.

606

Building and l-'nginccring Contracts

(1) Clause (7) of the contract provided that the final bill shall be submitted by the contractor within one month of the date fixed for completion of works, otherwise the Engineer-incharge's certificate of measurement and of the total amount payable for the works accordingly shall be final and binding on all parties. Clause (6) provided that a final certificate of completion of works shall be furnished to the contractor. The government will be entitled to withhold the certificate till the contractor removes certain materials and scaffolding and does some clearing-up operation. In default of the contractor's removing the materials and doing the clearing-up operation, the Government will be entitled to do il itself and lhe contractor is liable to pay the expenses incurred by lhe Government. It follows lhal in cases where lhe contraclor fails to remove materials and scaffolding etc and lo do clearing up operation, the penalty is that the contractor will not be entitled to a certificate of completion and without such certificate the contractor is not entitled to submit his bill for payment. In such cases, it is the duty of the Government, after doing the work departmentally, to give the contractor a certificate of completion. Till such certificate is given, the contractor cannot submit, his bill and get payment and the cause of action for payment, in terms of the contract, does not arise, and no claim for payment can be made by the contractor, even after the completion of work. In the instant case, no such certificate having been given, no claim could be made on the basis of the final bill and the question of time running against the contractor's claim for the final bill cannot, therefore, arise on'that basis. The government, however, prepared a final bill in 1949, which indicated what claim the Government is prepared to recognize and pay. The Government had prepared this final bill without reference to the contractor but did not intimate its decision to the contractor till April 28, 1954. It was held "time cannot, therefore, run before that date. Reference of the dispute to arbitration having been made shortly thereafter, well within 3 years from that date, the amount claimed in the final bill is well within time and is not barred by limitation."73 (2) In a case decided by the Rajasthan High Court, the contractor had accepted payment under the final bill on 10-2-56 after protesting on 23-4-55 and the suit for recovery was filed on 134-59. On these facts it was held that time began to run from 10-2-56 and the suit was barred by limitation."

15.4.7 Suit for Compensation for Breach of Contract The provision of Art. 55 of the Indian Limitation Act are self-explanatory and made further clear by illustrative cases below: ILLUSTRATIONS (1) In the case, State v. P. K. Jain74 involving two contracts for supply of bricks to the State Government by a fixed date, the Government had directed the contractor to suspend the supplies. It was held by the Patna High Court that there was a breach of the contract and the suit for compensation was governed by the provision of Art. 115 and not Art. 120 (corresponding to Art. 55 and 113 of the 1963 Act, respectively). It was based on whether there was a breach of contract, and not whether there was an end of the contract. It was further held that if specific goods are contracted to be delivered at or by a fixed date, it will not be continuing contract and there can be no question of a continuing breach.

73 M. L. Dalmia & Co v. Union of India, AIR 1963 Cal 277. 11 Bhawani Shankar v. State; 1970 Raj. 268. . 12 State v. P. K. Jain, AIR 1981 AIR Pat 280.

Limitation

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(CM

In Dhapai v. Dalla, the Allahabad High Court observed:'3 "A breach of contract occurs where a parly repudiates or fails to perform one or more of the obligations imposed upon him by the contract (vide Cheshire and Fifoot P. 484). If one of the two parties to a contract breaks the obligations which the contract imposes, a new obligation will in every case arise, a right of action conferred upon the party injured by the breach (vide Anson's Law of Contract, p. 412)."

(2)

(3) In the case of a suit against the Government in respect of a breach of contract which was required to comply with the formalities provided under Art. 299 of the Constitution, the Calcutta High Court held that time does not begin to run till the date on which the contract is signed as required by the provisions of law, though the provisional contract and the breach thereof took place prior thereto.75 (4) In a case tenders to supply bricks for construction of roads and buildings were called for on behalf of the defendant and the plaintiff's tenders were accepted. Two separate agreements were executed in connection with two road projects, but no written agreement was entered in respect of the building projects. The contract in respect of the buildings was found to be void for want of compliance with Art. 299 of the Constitution. Bricks, however, had been delivered and the defendants had made part payments. The contracts including the void contract was a case of running accounts with credits and debits being adjusted from time to time. On these facts the Patna High Court held that the cause of action could arise only after giving of refusal to the amount claimed by the plaintiff and as such the period of limitation of three years would run from the date when the plaintiff's claim had been repudiated by the defendant. 76

15.4.8 Claim for Refund of Security Deposit The building and engineering contracts and especially the standard form contracts expressly provide that earnest money, security deposit/retentio'n money shall be refunded after the expiry of a particular period. In such cases the contractor's right to claim the refund accrues immediately on lapse of the period fixed or happening of the event stipulated and will give rise to a cause of action. The suit, if necessary, has, therefore, to be filed within the period prescribed by the Article of the Limitation Act applicable. The Bombay High Court has held in a case that Art. 113 is applicable and not Art. 24 or 70 of the Indian Limitation Act, 1963.77 The Patna High Court has held in a case that Art. 55 applied.78 The Andhra Pradesh High Court has held in a case that Art. 24 applied.79 It will be thus seen that the terms of the contract and the facts andcircumslances of a case will be the 13

Dhapai v. Dalla, AIR 1970 All. 206.

guiding factors in deciding as Lo which Article of Lhe Limitation Act is applicable to the given case.

15.4.9

Limitation For Demand For Arbitration

The limitation for demand for arbitration begins to run from the date on which a difference arises to which arbitration agreement applies.80 Where the agreement stipulated that demand for arbitration shall be made within 90 days of intimation of the final bill by the Government

75 76 77 78 79 80

India Trades Corpn. V. Union of India, AIR 1957 Cal. 153. Hindustan Construction Co. v. State of Bihar, AIR 1963 Pat 254. Shankar v. State; AIR 1970 Bom 8. Union of India v. M/s Gangadhar Mimraj, AIR 1962 Pat. 372. Moid. Dahil Khan v. State of A.P., AIR 1963 AP 216. Oriental Bldg. & Furnishing Co. Ltd v. Union of India, AIR 1981 Del. 293.

608

Building and Engineering Contracts

but after amounts were withheld and payments were made, it was held that limitation for demand for arbitration would run from the date of the last payment.81

15.4.10

Limitation for filing applications under Arbitration Act, 1996

The Arbitration and Conciliation Act, 1996 provides as follows: Section 43 "Limitations (1) The Limitation Act, 1963, shall apply to arbitrations as it applies to

proceedings in Court. (2) For the purpose of this section and the Limitation Act, 1963, an arbitration shall be deemed to have commenced on the date referred in section 21. (3) Where an arbitration agreement to submit future disputes to arbitration provides that any claim to which the agreement applies shall be barred unless some step to commence arbitral proceedings is taken within a time fixed by the agreement, and a dispute arises to which the agreement applies, the Court, if it is of opinion that in the circumstances of the case undue hardship would otherwise be caused, and notwithstanding that the time so fixed has expired, may on such terms, if any, as the justice of the case may require, extend the time for such period as it thinks proper. (4) Where the Court orders that an arbitral award be set aside, the period between the commencement of the arbitration and the date of the order of the Court shall be excluded in computing the time prescribed by the Limitation Act, 1963, for the commencement of the proceedings (including arbitration) with respect to the dispute so submitted." Section 21 of the Act of 1996 declares that "Unless otherwise agreed by the parties, the arbitral

proceedings in respect of a particular dispute commence on the date on which a request for that dispute to be referred to arbitration is received by the respondent." Under Art. 119 of the Limitation Act, 1963, two clauses (a) and (b) provide for 30 days

limitation under the Arbitration Act, 1940 for filing in the Court of an award and for setting aside an award or getting it remitted for reconsideration, from thedate of service of the notice of the making ol' award and of filing of the award, respectively.

Limitation for Filing Application under Section 34 Under the 1996 Act, Section 34 (3) provides that an application for setting aside an award may not be made after three months have elapsed from the date on which the party making that application had received the arbitral award or, if request had been made under Section 33, from the date on which that request had been disposed of by,the arbitral tribunal. The proviso empowers the Court, if satisfied that the applicant-was prevented by sufficient cause from making the application within the said period, it may entertain the application within a further period of thirty days, but not thereafter. An application for condonation of delay under Section 34 filed with affidavit evidence is sufficient for consideration by the Court.82 An application, if filed in wrong Court, in good faith and within limitation, may attract Section 14(2) of the Limitation Act. That Section permits exclusion of time during which the applicant has been prosecuting with due diligence in the Court without jurisdiction.83 For the purpose of filing an application for making the award rule of the Court under the Arbitration Act, 1940, it is not 81 M/s Ram Nath Mehra & Sons v. Union of India, AIR 1982 Del. 164. 82 Transparent Packers v. The Arbitrator -cum-Managing Director, 2002 (2) Arb. LR 637 (SC). 83 HMP Engineers Ltd v. Rallis India Ltd., 2003(3) Arb. LR 452 (Bombay); Anas Abdul Khader v. Abdul Nasar, 2000 (Suppl.) Arb. LR 382 (Kerala).

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(CM

necessary that the application should contain any or all other papers apart from the signed award.84 ILLUSTRATIONS (1) An award was filed on 29.10.1991. Notice was issued to the respondent on 30.10 1991. Notice was sought to be served on the respondent on 6.11.1991 who refused to accept it. Substituted service by order dated 24.12.1991. It was held that the issuance of fresh notice by substitute service would not take away the effect of the deemed notice effected on 6.11.1991. The thirty days limitation would start from 6.11.1991. The second order-dated 24.12.1991 did not make the issuance of the notice by the Court on 30.10. 1991 ineffective.85 (2) An application for setting aside award was filed after more than four months. The application was rejected. Dismissing the revision petition, it was held that for sufficient reasons, application could have been entertained within thirty days after the three months limitation but not thereafter. Section 5 of the Limitation Act is not applicable.86 (3)

The counsel for the petitioner was present in the Court on 5.7.1991 and he was informed of the filing of the award. Though the Court was conscious of the fact a notice was served on 13.8.1991. It was held that when the notice was specificallyordered by the Court, the date of service of notice should be reckoned as the date for the purpose of computation of period of limitation.87

15.5 SECTION 28 OF THE INDIAN CONTRACT ACT Amended Section 28 in the Amendment Act No. 1 of 1997 published in the Gazette of India, Extraordinary, Part II, Section 2 dated 8-1-1997. reads thus :-"Section 28. Agreements in restraint of legal proceedings void,- "Every agreement,(a) by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce his rights; or (b) which extinguishes the rights of any party thereto, or discharges any party thereto from any liability, under or in respect of any contract on the expiry of a specified period so as to restrict any party from enforcing his rights, is void to that extent..." In order to appreciate the need for amendment, it is necessary to refer to the unamended Section 28. The unamended Section 28 of the Indian Contract Act, 1872, read: "28 . Agreement of restraint of legal proceedings void - Every agreement, by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce his rights, is void to that extent. Exception 1 - "Saving of contract to refer to arbitration dispute that may arise This section shall not render illegal a contract, by which two or more persons agree that any dispute which may arise between them in respect of any subject or class of subjects shall be referred to arbitration, and that only the amount awarded in such arbitration shall be recoverable in respect of the dispute so referred. 84 85 86 87

Gurubax Singh v. Punjab Mandi Board, 2004(1) Am. LR 73 (SC). Gurubax Singh v. Punjab Mandi Board, 2004(1) Arb. LR 73 (SC). Union of India v. Som Dutt Gargi, 2004 (1) Arb. LR 278 ( P&H). Chairman, Visakhapatnam Port Trust v. Gurucharan Singh, 4004 (1) Arb. LR 319 ( AP) (DB).

610

Building and Engineering Contracts

Exception 2 - "Saving of contract to refer questions that have already arisen. Nor shall this section render illegal any contract in writing, by which two or more persons agree to refer to arbitration any question between them which has already arisen, or affect any provision of any law in force for the time being as to reference to arbitration ." With reference to the condition of the policy providing shorter period than the period prescribed by law, namely, Section 28 of the Indian Contract Act, before its amendment, the Supreme Court had held thus:"17. From the case law referred to above the legal position that emerges is that an agreement which in effect seeks to curtail the period of limitation and prescribes a shorter period than that prescribed by law would be void as offending Section 28 of the Contract Act. That is because such an agreement would seek to restrict the party from enforcing his right in Court after the period prescribed under the agreement expires even though the period by law for the enforcement of his right has yet nol expired. Bui there could be agreements which do not seek to curtail lhe time for enforcement of the right but which provides for the forfeilure or waiver of the right itself if no action is commenced within the period stipulated by lhe agreement. Such a clause in the agreement would not fall within the mischief of Section 28 of lhe Contract Act.27

However, the law as it now stands after this amendment, not only the curtailment of limitation period is impermissible, but also the extinction of right, if sought to be brought by the agreement within a specified period, which period is less than the period of limitation prescribed for the suit under the contract in question, is also rendered void. In the absence of any specific reference in the amended provision regarding its operation, it is presumed that it is only prospective.28

Limitation

Chapter-15

27 28

National Insurance Company Ltd. v. Sujir Ganesh Nayak and Co., AIR 1997 SC 2049. Continental Construction Ltd. v. Food Corpn. of India, 2002 (Suppl) Arb. LR 192 (Delhi); The Oriental Insurance Company Limited v. Karur Vysya Bank Limited,AlR2001 Mad 489.

Chapter 16

Claims, Disputes and their Resolution by DRE/DRB/Conciliation v ____________ And/or Arbitration ___________

\

j J

16.0 INTRODUCTION -"DISPUTES ARISING OUT OF CONTRACT" A dispute essentially involves a disagreement. A contract, on the other hand means an agreement. "Disagreements arising out of agreements" does sound queer but is equally common and more so in construction contracts. The standard form contracts, therefore, incorporate elaborate provisions laying down the procedure for resolution of the disputes. Generally a dispute results, when one party to the contract denies a claim made by the other party to the contract. With the enormous number of contracts and equally large number of disputes the traditional means of dispute resolution through the intervention of a regular Court of law is thought to be expensive and time consuming. Alternative Dispute Resolution (ADR) methods are evolving and becoming popular day by day. The cheapest and the best mode of dispute resolution method under ADR is amicable settlement by direct negotiations between the disputant parties. Given human nature as it is, more often than not the direct negotiations fail to yield settlements and therefore the need for a third party involvement in the process of settlement sometimes helps. If that also fails, judicial methods like arbitration or litigation in a Court of law need to be followed. The modern standard form contracts, as already stated, include procedure encouraging the parties to a contract to follow step by step the the methods mentioned above till the dispute is resolved. It is proposed to cover the provisions in the standard form contracts for the claims and resolution of disputes in this chapter. The law of arbitration is a vast subject and because a separate treatise by the author is available as an accompanying volume to this book, the exhaustive coverage of the said law, as was attempted in the fourth edition of this book, is dropped and instead stress is laid on pre-arbitration provisions in the construction contracts. If and when the need arises for the reader to resort to arbitration, the book on the law of arbitration by the same author or any other standard treatise may be referred.

16.1

PROVISIONS MADE IN STANDARD FORM CONTRACTS

Provision made in the Standard Form contracts, which are dealt with in this chapter include :

Form (1) FIDIC Form 1999 Edition (2) MoSAPI, Governernenl of India Standard contract Clauses for Domestic Bidding Contracts 2001 Edition

(3) C.P.W.D. Standard Form (4) Slate P.W.D. Maharashtra (Similar provisions are found in other States P.W.D.Forms)

16.2

Provisions : Clause 20 : Clause Nos and 25. : Clause No. : Clause No.

2 25 30.

FIDIC FORM 1999 EDITIO N: CLAUSE 20

The FIDIC Form is commonly adapted in a number of countries including India for major projects let out on international bidding competitions. Incidentally it also incorporates exhaustive provisions for claims, disputes and resolution of disputes. 16.2.1 Clause 20.1 Contractor's Claims Sub-clause 20.1 contains the provisions, which were earlier contained in clause 53 of the 1992 amended edition. The said provisions require the contractor to give notice to the Engineer, as soon as possible and not later than 28 days after the contractor becomes aware of the event or circumstance that entitles, in the opinion of the contractor to any additional payment, under any Clause of the Conditions of the Contract or in connection with the contract. Upon failure on the part of the contractor to give such notice within such period of 28 days, neither the time of completion will be extended nor the contractor shall be entitled to additional payments and the employer shall be discharged from all liability of the claim. In cases where such notice is given within the stipulated time of 28 days, the contractor has to take follow up actions as under: (i) To submit any other notices required by the contract particulars for the claim all as relevant to such event or circumstance.

with

supporting

(ii) To keep such contemporary records as may be necessary to substantiate any claim and/or such other records which the engineer may direct him to maintain without prejudice to the right of the employer to dispute liability. Further the contractor shall permit the engineer to inspect the records or if directed, to submit copies thereof to the engineer. (iii) To submit fully detailed claim within 42 days after the contractor had become aware of the event or the circumstance giving rise to the claim; if the circumstances are of continuing effect, this claim is to be considered as interim and should be followed up with further interim claims at monthly intervals and the final claim within 28 days after the end of the effect. Within a period of 42 days, the engineer is required to give his decision either approving or disapproving of the claim with detailed comments. He may seek further particulars but nonetheless must give his response within lhe lime of 42 days after receiving lhe claim. Each payment certificate lo be issued lo lhe conlractor shall include the amount of the claim upheld by the engineer. The determination of lhe engineer as lo the extent of extension of time or additional payment to be made to the contraclor is to be in accordance with the provisions of

clause 3.5, which inter alia require the engineer to consult both the employer and the contractor in an endeavour to reach agreement. In the absence of such an agreement the engineer has to decide the matter in accordance with the contract and the facts and circumstances of the case. Each party is expected to give effect to the decision of the engineer unless and until it is revised under Clause 20.

16.2.2 The Stipulation as to Time Limit in Clause 20.1 - If Valid? The main reason for stipulating short time limit for raising claims in construction contracts is to enable the opposite party to verify the factual position at the relevant time and take corrective steps. Also for the party raising any claim it is easy to establish the claim by evidence of the relevant time. This basis for limiting the time is also clear from the last paragraph of the said clause the relevant part of which reads as follows: "If the contractor fails to comply with this or another Sub-Clause in relation to any claim, or any extension of time and/or additional payment shall take account of the extent (if any) to which the failure has prevented or prejudiced proper investigation of the claim, unless the claim is excluded under the second paragraph of this Sub-Clause." (Emphasis supplied). It is interesting to compare this provision with the provision of Clause 53. 4 of the earlier 1992 amended edition of the said Form. The said provision under the paragraph heading "Failure to comply" restricted the contractor's entitlement in respect of the claim so as not to "exceed such amount as the engineer or any arbitrator or arbitrators appointed pursuant to Sub-Clause 67.3 assessing the claim considers to be verified by contemporary records" irrespective of the fact whether such records were brought to the notice of the engineer or not. It is submitted that the earlier version was not only simple and clear to understand but also made the provision legally valid. The present version in the 1999 edition, after making provision similar to the earlier version, in the end declares: "unless the claim is excluded under the second paragraph of this Sub-Clause." The second paragraph extinguishes the rights and the liabilities of the parties to the contract, as already seen, if the action is not taken within the stipulated period of limitation which period is less than the period stipulated by the law of limitation. The relevant part of the amended Section 28 of the Indian Contract Act, reads thus:-

"Section 28. Agreements in restraint of legal proceedings void,- "Every agreement,(a) by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinarytribunals, or which limits the time within which he may thus enforce his rights; or (b) which extinguishes the rights of any party thereto, or discharges any party thereto from any liability, under or in respect of any contract on the expiry of a specified period so as to restrict any party from enforcing his rights, is void to that extent..." It is respectfully submitted that the condition in Sub-Clause 20.1 in paragraph No. 2 of the FIDIC Form 1999 is void and of no effect and in turn it renders the last sentence "unless the claim is excluded under the second paragraph of this Sub-Clause" also void.

16.2.3 Reference of Dispute to Engineer in the first instance

Clause 67.1 of the FIDIC 1992 Amended Form stipulates that if a dispute of any kind arises between the employer and the contractor in connection with or arising out of the contract or execution of the wok at any time during the currency of the contract or after termination, the matter in dispute shall, in the first place, be referred in writing to the engineer. Such reference shall state that it is made pursuant to this clause. The engineer is given 8 4 days time to decide the dispute* and notify his decision to the parties. If any party is not satisfied with the said decision, or the engineer fails to give his decision within the time allowed, either party may, on or before 70th day after the date on which the party received the notice of such decision or 70th day after the day on which the period of 8 4 days expired, give notice of his intention to commence arbitration. Failure to give notice by either party to the other with a copy to the engineer, the said decision shall attain finality. In some other variants of similar provisions in contracts, such decision of the engineer or lack of it, empowers the dissatisfied party to approach Dispute Review Expert or Dispute Review Board or Dispute Adjudication Board as the case may be, within the stipulated time limit, failing which the decision attains finality. It needs to be noted that these or similar provisions are mandatory and need to be strictly complied with to invoke further provisions of dispute resolution including arbitration.88 The amended Section 2 8 of the Indian Contract Act, will not be attracted to avail of remedy like arbitration because the right to challenge the decision may not be extinguished but the contractual remedy of dispute resolution is not available. Arbitration being a voluntary forum, the parties are entitled to limit its scope to particular kinds of disputes and if the said contractual remedy is not available, the affected party can always invoke the compulsory forum of a Court of law having jurisdiction to try the matter within the period of limitation prescribed by the Limitation Act. This provision of referring the dispute to the engineer in the first place under dispute resolution clause, makes sense inasmuch as the clause contemplates disputes between the employer and the contractor with the engineer being the third person. In practice it is found to be an exercise in futility because mostly the disputes involve the decisions given by the engineer or his representative called Team Leader in some contracts. When the first time the decision is given there was no dispute between the parties. A dispute comes into existence only when the contractor does not accept the decision of the engineer or his representative. When the dispute so arises the provisions of this clause are mandatory as already seen and require the decision of the engineer to be referred to him again. Invariably, the engineer reaffirms his earlier decision resulting in the wastage of time in the process before the next step in resolution of the dispute is taken. The 1999 updated edition eliminates this reference to the engineer twice over and as such is a welcome change, it is submitted.

16.2.4 Appointment of DRE/DRB/DAB Most standard form contracts in use for major projects incorporate provisions for avoiding time-consuming and expensive disputes, in the first place and to resolve them amicably and quickly in the second place. To this end project ongoing dispute resolution or adjudication process is embodied in the conditions of the contract right at the time of signing of the contract. The parties agree to jointly appoint an expert in the field of contract works as Dispute Review Expert, or three Members forming Disputes Review Board called DRB, who 88

This aspect is considered in greater details in Ait. 16.11 pp. 672.

are mutually agreed by the parties within the time specified to do so after signing of the contract and preferably soon after commencement of the work under the contract. The contract also provides for fees and expenses payable to the Members which are equally shared as also filling of the vacancy due to failure by any party to appoint its nominee Member. The contract generally names an independent body or organization as appointing authority who is to appoint Members for and on behalf of the erring party. The duties of the DRE or DRB include periodical visits (generally one in three months at least) to the site and inspection of the project and holding joint meetings with the representatives of the parties to identify problem areas, if any, and suggest measures to remedy the situation before it turns into a dispute. Also, any party can refer a decision of the engineer not acceptable to it to the DRE or DRB. The DRE or DRB will conduct arbitral-like proceedings and after hearing the parties give recommendations to the parties within a stipulated time limit generally of not more than eight weeks. The parties are bound to follow the recommendations given by the DRE or DRB pending resolution of the dispute, if any, by the mode suggested in the contract. The conditions of the contract do not make the decision of the DRE or DRB final and binding on the parties, if any party dissatisfied with the decision serves notice on the other party, within 28 days after receiving the recommendation/ decision of the DRE or DRB, of its intention to refer the matter to arbitration. If no such notice is given the decision attains finality. Again in such a case a party may not have lost its right to challenge the decision in a Court of law, it is respectfully submitted, though the remedy by arbitration may not be available to the party under the terms of the contract and the Court is satisfied that the matter deserves its consideration. FIDIC 1999 Edition incorporates the provisions mentioned above in Sub-Clauses 20.2 to 20.4. Sub-Clause 20.2 provides for appointment of Dispute Adjudication Board (DAB). Clause 20.3 provides for filling the vacancy due to failure by any party to appoint its nominee on the DAB. Clause 20.4 prescribes time limit of 84 days for the DAB to hear the parties and give its decision. It further provides that neither party shall be entitled to commence arbitration of the dispute adjudicated by the DAB, unless a notice of dissatisfaction with the decision of the DAB has been given in accordance with the provisions of the said sub-clause.

16.2.5 Amicable Settlement Amicable Settlement of a dispute by the parties by direct negotiations, as already stated is the best mode available. However, direct negotiations invariably fail for various reasons. One of the main reasons for failure of direct negotiations, one will be surprised to know, is lack of full and complete understanding by a party of its rights and liabilities vis-a-vis the facts and circumstances of the issue involved. Negotiations are generally conducted in the traditional manner or method known as 'positional bargaining'. It is only when the parties are required to present their respective cases before third persons, that the full facts and evidence relevant to the issues are gathered and an attempt is made to ascertain the law on the point. After the third person gives its decision, the party who lost its case invariably challenges it. However, by that time enough insight is available to the parties to make them see reason and try to settle the matter amicably. At that stage there is more.possibility of the parties reaching the settlement by following "principled negotiations". FIDIC 1999 Edition suggesting amicable settlement at this stage and at an earlier stage can be appreciated in the light of this discussion.

Clause 20.5 of FIDIC 1999 Edition provides for "amicable settlement" after giving notice of dissatisfaction and intention to commence arbitration but before commencement of the arbitral proceedings. The provision allows 56 days time to the parties for this exercise, whether the parties agree to settle or not by stipulating that "unless both Parties agree otherwise, arbitration may be commenced on or after the fifty-sixth day after the day on which notice of dissatisfaction was given, even if no attempt at amicable settlement has been made." In India, in public works contracts, this provision also is virtually rendered redundant because of lack of initiative on the part of the public authorities to take decision, for various, reasons,, including reasons such as audit objection or insinuation of malafides, etc. It is unfortunate that huge amounts of public funds, which otherwise can be saved by amicable timely settlement of disputes, are spent due to this attitude of the public authorities. The Arbitration and Conciliation Act, 1996 has given statutory recognition to conciliation, an effective mode of resolution of disputes, which can come handy for public authorities to achieve savings of public funds if the suggestions made below are adopted. 16.3 CONCILIATION The dictionary meaning of the word conciliation is " The act of bringing into agreement". Conciliation can be defined as a voluntary, non-binding, private, dispute resolution process in which a neutral person helps the parties try to reach a negotiated agreement. The word is some- times used interchangeably with the word 'mediation' . A distinction between the two words is sometimes drawn in terms of the process adopted. This, distinction, however, is not real and the Act of 1996 permits the conciliator, at any stage of the proceeding to make proposals for a settlement of disputes. The Act of 1996 expressly confers confidentiality to all matters relating to conciliation proceedings. Conciliation introduces a powerful new structure and dynamic into any negotiation which facilitates communication, helps overcome deadlocks and emotional blockages, restores the negotiation process, separates the people from the problem and helps separate needs of the parties from wants and reassess their case. This process gets the right people and right information to the table thereby increases the options for resolution of disputes. Above all it keeps the ownership and settlement of the problem with the parties and thereby restores and safeguards relationships. Conciliation, in essence is a process of settlement of dispute by negotiations. It has already got worldwide recognition. The question, when negotiations have failed, how and why does conciliation succeed can now be considered. There are many reasons. The main ones are: (a) Quite often parties think they do not want to settle the matter yet once in a Conciliation environment and with a skilled conciliator they often realize the existence of a common ground. (b) Skill of the Conciliator and improved techniques of negotiations make the parties change their negotiations style from the traditional 'positional' to 'principled" one. The parties are made to ascertain their respective: BATNA (Best Alternative to Negotiated Agreement) and WATNA (Worst Alternative to Negotiated Agreement.).This makes the parties see clearly the advantage of immediate resolution of their dispute.

(c) In addition, relationship.

a

conciliator

is

expected

to

generate

good

working

(d) The last but not the least, the process invariably succeeds because of the four principles

which a conciliator is required to follow and make the parties to follow: (i) (ii) (iii) (iv)

Separate the people from the problem; be soft on the people and hard on the problem. Stress and focus on the interests and not on positions. Invent options for mutual gains by exploring the mutual needs distinguished from wants. Insist on the objective criteria and not on the subjective or positional criteria.

Advantages of conciliation include: saving in costs, speed of disposal, control over the process and the outcome, minimization of deterioration of relationship, creative and forward looking solution, confidentiality, satisfaction and quick compliance. Not all kinds of disputes and matters can be settled by conciliation. Cases Not Suitable for conciliation include: Matrimonial matters, Testamentary matters, Insolvency matters guardianship of lunatic or minor, criminal matters, questions relating to charities and charitable trusts, matters within the purview of MRTP Act, Dissolution or winding up of a company, etc. Risks of Conciliation, according to some include: early disclosure indicating to other party weakness of a case, a party can use conciliation as a delay tactic in which event there is no real cost saving. Settlement if reached is under pressure. Each of this criticism has a good counter- argument in favour of the system.

16.3.1 Commencement of Conciliation The parties to a dispute can commence conciliation at any stage by sending a proposal in writing to the other party. The other party is at liberty to reject the invitation to conciliate or accept it. If the other party rejects the invitation there will be no conciliation. Similarly if the party sending invitation does not receive a reply within thirty days from the date on which he sends the invitation, or within such other time specified in the invitation, he may elect to treat this as rejection and if he so elects he shall inform in writing to the other party. However, if the other party communicates acceptance in writing, not only the conciliation agreement comes into existence but the proceedings also commence.89 The number of conciliators can be one, two or three. When the parties agree upon one conciliator, all parties should agree upon his name. When the number agreed upon is two, one is to be nominated by each party. In the case of three, the third name is agreed upon and he is to act as presiding conciliator. The parties may agree upon an institution or authority or individual who may help the parties to recommend suitable names to the parties.90 The conciliators so appointed may direct the parties to submit written statements supplemented by any documents and other evidence. The statement to be submitted should be short one may be a five or six pages, in the form of a noie a junior officer submits to his senior explaining the case. Further particulars can be asked for during the process. The formal 89 Sections 62 of the Arbitration and Conciliation Act, 1996. 90 Sections 63 and 64 of the Arbitration and Conciliation Act, 1996.

rules of procedure and evidence are not applicable to the proceedings.91 The conciliator(s), after conducting the first joint meeting of all parties and framing the issues, can meeteach party in privacy and ascertain their views, which the party may not disclose in front of the other party. All disclosures before the conciliators are confidential and not to be disclosed to the other party without the permission of the party making the disclosure and that too when the conciliators feel that such disclosure may result in settlement agreement.92 The conciliators are expected to help the parties to reach settlement by providing assistance in an independent and impartial manner. The parties may on their own or at the instance of the conciliators, suggest drafts of settlement agreements for consideration by the other parties at any stage of the proceedings. Such proposals need not be in writing. 93 In the case of public authorities, if conciliator is an eminent person or jurist such as a retired Judge of the Supreme Court or of any High Court and he were to suggest settlement agreement in writing, acceptance of such proposal should not create any difficulty in future for having accepted the settlement. The conciliator may formulate or help the parties to formulate the terms, draw up and sign the settlement agreement. The conciliator shall authenticate the settlement agreement so signed and a copy thereof shall be furnished to each of the parties. The settlement agreement so signed shall be final and binding upon the parties and have the same status and effect as if it is an arbitral award.94 In case the conciliation proceedings fail, the parties should not worry about disclosures made in the proceedings. Section 75 of the Arbitration and Conciliation Act, 1996, declares that the conciliator and the parties shall keep confidential all matters relating to the conciliation proceedings including the settlement agreement, except where the disclosure is necessary for the purpose of implementation and enforcement of the settlement agreement. The success rate of conciliation depends mainly upon the skill of the conciliator and as such the conciliators are advised to undergo training of few days, which is now available in many countries including India;95 A 5. 6 7 8

16.4 ARBITRATION When direct negotiation, third party intervention, or conciliation fails to bring about settlement of disputes, the parties have two forums available, public or private. The former is a Court of law and the latter is arbitration. Section 28 of the Indian Contract Act, as already seen declares "Every agreement,-(a) by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the Sections 65 and 66 of the Arbitration and Conciliation Act, 1996. Sections 69 and 70 of the Arbitration and Conciliation Act, 1996. Sections 67(4) of the Arbitration and Conciliation Act, 1996. Sections 73 and 74 of the Arbitration and Conciliation Act, 1996. The author also trains conciliators through Patil Forum for Dispute Resolution, a S. 25 Company.

ordinary tribunals, or which limits the time within which he may thus enforce his rights is void to that extent." No one can exclude oneself from the protection of Courts by contract. That is why the Court of law is called a compulsory forum. However, the said Section has exceptions, which read: "Exception L — This section shall not render illegal a contract by which two or more persons agree that any dispute which may arise between them in respect of any subject or class of subjects shall be referred to arbitration, and that only the amount awarded in such arbitration shall be recoverable in respect of the dispute so referred. "Exception 2. —Nor shall this section render illegal any contract in writing by which two or more persons agree to refer to arbitration any question between them which has already arisen, or affect any provision of any law in force for the time being as to references to arbitration." Arbitration is thus optional forum subject to an agreement between the parties. The agreement has to be in writing. Section 7 of the Arbitration and Conciliation Act, 1996 reads: "7. Arbitration agreement.—(1) In this Part, "arbitration agreement" means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. (2) An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement. (3) An arbitration agreement shall be in writing arbitration agreement is in (4) An writing if it is contained in— a document signed by the parties; (a) an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or (b) an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other. (5) The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract."

From the provision mentioned above it is clear that to constitute "an arbitration agreement" it is not necessary that there should be a formal agreement or that the terms should all be contained in formal document. If the original agreement does not contain an arbitration clause, the parties can agree for reference to arbitration after the disputes have arisen. The construction contracts and standard forms in general contain arbitration clause. For example, FIDIC Form 1999 edition contains the provision, which reads as follows: "Unless settled amicably, any dispute in respect of which the DAB'S decision (if any) has not become final and binding shall be finally settled by international arbitration. Unless otherwise agreed by both Parties: (a) the dispute shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce,

(b) the dispute shall be settled by three arbitrators appointed in accordance with these Rules, and (c) the arbitration shall be conducted in the language for communications defined in Sub-Clause 1.4 {Law and Language]. "The arbitrator(s) shall have full power to open up, review and revise any certificate, determination, instruction, opinion or valuation of the Engineer, and any decision of DAB, relevant to the dispute. Nothing shall disqualify the Engineer from being called as a witness and giving evidence before the arbitrator(s) on any matter whatsoever relevant to the dispute, "Neither Party shall be limited in the proceedings before the arbitrator(s) to the evidence or arguments previously put before the DAB to obtain its decision, or to the reasons for dissatisfaction. Any decision of DAB shall be admissible in evidence in the arbitration. "Arbitration may be commenced prior to or after completion of the works. \ The obligations of the parties or the Engineer and the DAB shall not be altered by reason of any arbitration being conducted during the progress of the Works." The 1999 edition incorporates provision for reference to arbitration any decision of DAB which had attained finality but has not been honoured by the other party arid direct reference to arbitration where for any reason there is no DAB in place. The prerequisites of reference to arbitration have been held to be mandatory as already stated . 8. Also see Art. 16.11 pp. 672.

In India, when FIDIC conditions are adopted for public works, they are supplemented by COPA (Conditions of Particular Application) which alter or modify the standard conditions and it has been the practice in India to replace arbitration by International Chamber of Commerce to domestic forum of three arbitrators one each to be appointed by the employer and the contractor and the

third presiding arbitrator to be appointed by the two arbitrators. The Standard Contract Clauses for Domestic Bidding Contracts prepared by the Government of India also incorporate similar provision. Certain other public works departments like, Railways, Military Engineering Services and State and Central Public Works Departments include provisions for reference of disputes to a sole arbitrator or a panel of three consisting of its employees. Some forms expressly provide for decision of its employee to be final and binding giving rise to the question as to whether such a provision amounts to arbitration agreement or not. Some forms, which expressly provide for arbitration, also exclude certain matters from the scope of arbitration clause called "excepted matters". These aspects are considered below.

16.4.1 Decision of Engineer to be final and binding on parties to the contract - If amounts to arbitration agreement? Certain State P.W.D. Standard Forms contain a provision reading somewhat as follows: "Direction of Works (or alternatively Decision of the Engineer to be final) -

"Except where otherwise specified in the contract the decision of the Superintending Engineer for the time being shall be final, conclusive and binding on all parties to the contract upon all questions relating to the meaning of the specifications, design, drawing and instructions herein- before mentioned. The decision of such Engineer as to the quality of workmanship, or materials used on the work, or as to any other question, claim, right, matter or things whatsoever, in any way arising out of or relating to the contract, designs, drawings,

specifications, estimates, instructions, orders, or these conditions, or otherwise concerning the works, or the execution or failure to execute the same, whether arising during the progress of the work, or after the completion or abandonment of the contract by the contractor, shall also be final, conclusive and binding on the contractor." The question arises if the above clause amounts to arbitration clause. The plea that it amounts to arbitration found favour with the trial Court as well as the appellate Court, in a case, but was rejected by. the High Court in revision on the ground that it merely conferred power on the Superintending Engineer to take decisions on his own and that it did not authorize the parties to refer any matter to his arbitration. In this connection the High Court particularly adverted to the marginal note to the said clause, which was to the following effect: ' "Direction of work". In appeal a three Judge-Bench of the Supreme Court confirmed the ratio in AIR 1980 SC 5122:96 "After perusing the contents of the said clause and hearing learned counsel for the parties we find ourselves in complete agreement with the view taken by the High Court. Admittedly the clause does not contain express arbitration agreement. Nor can such an agreement be spelled out from its terms by implication, there being no mention in it of any dispute, much less of a reference thereof. On the other hand, the purpose of the clause clearly appears to be to vest the Superintending Engineer with supervision of the execution of the work and administrative control over it from time to time." The relevant clause in another contract read: "15. Whenever any doubt, difference or dispute shall hereafter arise touching the construction of these presents or anything herein contained or any matter or things connected with the said lands or the working/non-working thereof or the amount or payment of any rent or royalty reserved or made payable hereunder the matter in differences shall be decided by the lessor whose decision shall be final." It was held by the Supreme Court that the clause spells out an arbitration agreement.97 From these decisions the test to be applied to decide if a provision amounts to arbitration or not is that the provision, when mentions, dispute, its reference and gives finality to the decision of the person to whom reference is to be made, it amounts to arbitration clause.98 In the case of State of Orissa v. Damodar Das99 the Supreme Court observed that agreement to refer disputes or differences to arbitration must be expressly or impliedly spelt from the clause. The relevant clause 25 of the agreement was as under (at p. 945 of AIR) :"25. Decision of Public Health Engineer to be final — Except where otherwise specified in this contract, the decision of the Public Health Engineer for the time being shall be final, conclusive and binding on all parties to the contract upon all questions relating to the meaning of the specifications; drawings and instructions hereinbefore mentioned and as to the quality of workmanship or materials used on the work, or as to any other question, claim, right matter or thing whatsoever in any way arising out of, or relating to, the contract, drawings, specifications1, estimates, instructions, orders or these conditions, or otherwise concerning the works or the execution or failure to execute the same, whether arising during

96 State of Orissa and another etc v. Sri Damodar Das, AIR 1996 SC 943; State of U.P. v. Tipper Chand, AIR 1980 SC 1522. 97 Rtikmajiibai v, Collector, Jabalpur, AIR 1981 SC479. 98 Also see: Chabbel Dass & Co. v. State of U. P. ffi. 1077 ALL. 143. 99 State of Orissa v. Damodar Das (1996) 2 SCC 216 and Engineering Cant rods

WORK ORDER, 18 WORKING DAYS Meaning of, 346 WRIT Breach of contract for, 216 To restrain breach 561-436 Foreign company by, 567

Interference by high court, Acceptance of tenders in, 79,155,162 Administrative actions in, Arithmetical mistakes in, 193 Blacklisting of tenderers, 207 to 216 Person not submitting tenders 162 Refund of earnest money 572

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