MODULE 5

Contract Conditions

THE LAW OF CONTRACTS

The law of contracts in India is contained in the Indian Contract Act, 1872, which lays down
the general principles relating to formation, performance and enforceability of contracts and
the rules relating to certain special types of contracts such as indemnity, guarantee, bailment,
pledge and agency. The Act is, however, not a complete and exhaustive law; some of the
special contracts such as those relating to partnership, sale of goods, negotiable instruments,
insurance, etc. are dealt with by separate legislations. However, the general principles of
contract law are the basis for such special contracts too.

Essential elements of a Contract: From the foregoing discussion, the essential elements of a
contract may be enumerated as under:

1. Minimum two parties – At least two parties are necessary to form a contract because one
person cannot enter into a contract with himself. To form a contract, one party has to make
an offer ad the other must accept it. The person who makes the ‘proposal’ or ‘offer’ is
called the ‘promisor’ or ‘offeror’, the person to whom the offer is made is called the
‘offeree’ and the person who accepts the offer is called the ‘acceptor’.
2. Offer and acceptance – There must be an ‘offer’ and an ‘acceptance’ to the offer, resulting
into an agreement. Both ‘offer’ and ‘acceptance’ should be lawful.
3. Intention to create legal obligation – The parties must intend to create legal obligation. In
commercial agreements. an intention to create legal relations is presumed, unless the
parties have expressly agreed to otherwise.
4. Lawful consideration – An agreement is legally enforceable only when each of the parties
thereto gives something and gets 25 something, that is, consideration. Consideration may
be past, present or future, but it must be ‘lawful’, that is, it must not be illegal or fraudulent
or immoral or opposed to public policy, or must not imply injury to the person or property
of another.
5. Competent Parties – The parties to a contract must be competent, that is of the age of
majority (over 18 years), of sound mind and not disqualified from contracting by any law
to which they are subject. Thus, a minor, lunatic, idiot drunkard. etc., cannot, except for
some special cases, enter into a valid contract
6. Free consent – All the parties give their free consent, to form a valid contract. Consent
means that the parties must agree about the subject-matter of the agreement in the same
sense and at the same time. Consent is said to be free unless it is induced by coercion,
undue influence, fraud, misrepresentation or mistake.
7. Lawful Object – The object of an agreement must not be fraudulent or illegal or immoral
or opposed to public policy or must not imply injury to the person or property of another.
8. Not Expressly Declared Void – An agreement expressly declared to be void under sections
24 to 30 of the Act or under any other law, is not enforceable and is, thus, not a contract.
For example, an agreement in restraint of trade or wagering agreements, are not
enforceable.

Construction Contract Management

9. Certainty and Possibility of performance – The terms of a contract must not be vague or
uncertain. If an agreement is vague and its meaning cannot be ascertained, it cannot be
enforced. The terms of a contract must be such as are capable of performance. An
agreement to do an impossible act is void and not enforceable at law.
10. Legal Formalities – Generally, a contract may be oral or in writing. However, certain
contracts are required to be in writing and may even require registration. For instance, an
agreement to a pay a time – barred debt must be in writing; an agreement to make a 26 gift
must be in writing and registered. In such cases, these additional formalities must be
complied with.

DEFINITION OF TERMS CONNECTED WITH CONTRACTUAL PROBLEMS

1. Agreement – Every promise and every set of promises, forming the consideration for
each other, is an agreement. When one person conveys to another his proposal, and
that other person assents thereto, the proposal is said to be accepted. A proposal when
accepted becomes a promise.
2. Contract – An agreement enforceable by law is a contract. In other words, a contract is
an agreement made with an intention to create a legal obligation i.e. a duty
enforceable by law.
3. Offer or Proposal – When one person signifies to another his willingness to do or to
abstain from doing anything, with a view to obtaining the assent of that other to such
act or abstinence, he is said to make a proposal.
4. Acceptance – When the person to whom the proposal is made signifies his assent
thereto, the proposal is said to be accepted. In other words, acceptance is the
manifestation by the offeree of his assent to the terms of the offer.
5. Consideration – When at the desire of the promisor, the promise or any other person
has done or abstained from doing, or does or abstains from doing, or promises to do or
abstain from doing, something, such act or abstinence or promise is called a
consideration for the promise.
6. Consent – Two or more persons are said to consent when they agree upon the same
thing in the same sense.

IMPORTANT CONDITIONS OF CONTRACTS CONNECTED WITH

CONTRACTUAL PROBLEMS

The members of the construction team should be fully aware of their rights and
obligations under the contract. they should be thoroughly conversant with the precise
provisions and true importance of each clause in the contract agreement.
Following are in important conditions of contract:
a. Time of completion.
b. Delay and extension of time.
c. Penalty
d. Compensation for delay in completion of work.
e. Liquidated damages.
f. Debitable agency
g. Valuation of variations

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 h. Settlement of disputes
i. Force of nature and natural disasters
j. Price escalation
k. Termination of contract

A. Time of Completion: The Contractor is required to complete the work within the
agreed time of completion which is specified in a suitable unit of time (year, month,
week etc) depending upon the nature and scope of work. The contractor is also
required to maintain a proportionate progress of work.
B. Delay and Extension Time: Delay in completion of work not attributed to the
contractor should be brought to the notice of the owner by the contractor in writing,
within the time specified in the contract, for seeking extension of time. The owner will
satisfy himself that the delay is not on account of a lapse on the part of the contractor
before granting suitable extension of time.
C. Penalty: It is a fine imposed on the contractor for nonfulfillment of his contractual
obligations such as failure to maintain required progress of work, delay in completion,
poor quality or work, bad workmanship etc.
D. Compensation for delay in completion of work: The contractor is liable to pay
compensation to the owner for delay attributed to him in completion of work. The
amount of 28 compensation may be stated as a percentage of the estimated cost of
work for each unit of time delay. The maximum limit of compensation may be 10% of
the contract price.
E. Liquidated Damages: It is a fixed stipulated sum payable by the contractor on account
of penalty for delays and does not bear any relationship to the real damage to the
owner. It is generally high and fixed per day for excess period over the specified in the
contract for completing the work.
F. Debitable Agency: Whenever the contractor fails to fulfil his contractual obligation in
respect of progress or quality of work even after giving due notice by the owner, it
becomes necessary to appoint a debitable agency which works at the cost and risk of
the contractor. This agency is in the form of labour or other contractor to fulfill the
contractual obligations of the main contractor. The expenses incurred are charged
from the bill or security of the original contractor.
G. Valuation of Variations: The valuation of variations is based on change orders issued
in writing by the owner. Generally, the variation in individual items of work should
not be more than 25% and variation in total cost should not exceed 10%.
H. Settlement of Disputes: Efforts should be made to resolve disputes amicably between
the owner and the contractor through mutual discussions and negotiations. Arbitration
clause may be incorporated in the contract to settle disputes not resolved through
mutual discussions and negotiations.
I. Forces of Nature and Natural Disasters: Natural disasters are acts of nature, such as
unprecedented floods / rainfall, earthquake, hurricanes, typhoons, fire etc. These
disasters along with occurrence of riots, civil commotion, revolt etc. are beyond the
control of the contractor and may lead to financial and time loss. The contractor
should obtain an insurance policy for such risks as can be covered by insurance. In the
event of 29 financial or time loss, the contractor can claim financial compensation

Construction Contract Management

 from the owner for risks which are not insurable and an extension of time for all such
risks.
J. Price Escalation: During execution of the work, labour wages and material prices may
increase as a result of inflation. The contract conditions should therefore, include on
appropriate clause for payment of escalation to the contractor. Generally, escalation
payments is made for increase in the cost of labour materials and petrol, oil and
lubricants (POL) and the percentage of three components are taken as under:
Labour - 30% of contract price
Materials - 65% of contract price
POL - 5% of contract price

The Central Public Works Development (CPWD) adopt the following formulae for
computing escalation.
i. The compensation for escalation for labour is worked out as per the formula
given below:
V = W x Y / 100 x (L1 – L1o) / Llo
V = Variation in labour cost i.e. increase or decrease in the amount in rupees to
be paid or recovered.
W = Value of work done
Y = Component of labour expressed as percent of the total value of work
(30%)
L1o = Minimum daily wage in rupees of an unskilled adult male mazdoor, as
fixed under any law, statutory rule or order as on the last date on which tenders
for the work were to be received.
L1 = Minimum wage in rupees of an unskilled adult male mazdoor, as fixed
under any law statutory rule or order as applicable on the 30 last day of the
quarter previous to one during which the escalation is being paid.

ii. The compensation for escalation for materials is worked out as per the formula
given below:
VM = W x X / 100 x (M1 – M1o) / Mlo
VM = Variation in material cost i.e. increase or decrease in the amount in
rupees to be paid or recovered.
W = Cost of work done.
X = Component of materials expressed as percent of the total value of work
(65%)
MI = All India whole sale index for commodities as
MIo = Published by the Economic Advisor to Govt. of India, Ministry of
Industry and Commerce, for the period under consideration, and that valid at
the time of tenders, respectively.
iii. The compensation for escalation for POL is worked out as per formula given
below:
VF = W x Z / 100 x (FI – FIo) / FIo
VF = Variation in cost of fuel, oil and lubricant i.e. increase or decrease in
rupees to be paid or recovered.

Construction Contract Management

 W = Component of POL expressed as percent of total value of work as
indicated under the special conditions of contract (5%)
FI&FIo= Average index number of wholesale price of group (fuel, power, oil
and lubricants) as published weekly by the Economic Advisor to Govt. of
India, Ministry of Industry for the 31 period under reckoning, and that valid at
the time of receipt of tenders, respectively.

The compensation for escalation is normally worked out at quarterly intervals

with respect to the cost of work executed during that period. k.

K. Termination of Contract:

The owner can terminate the contract in the event of default or bankruptcy of the
contractor and may impose penalty as per the contract agreement. Default on the part
of the contractor includes abandoning the work, failure to maintain required progress,
non-observance of rues / instructions etc. for which the owner may rescind the
contract and impose penalty upto 10% of the estimated cost of work. Due notice must
be served on the contractor before termination of the contract.

CONSTRUCTION LITIGATION

Disputes may arise between the contractor and the owner due to the following reasons.
1. Supply of materials from the owner to the contractor. 2.
2. Handling all the site to the contractor.
3. . Extra works carried out without contract agreement.
4. Delay in the completion of the work.
5. Substandard work or defective work.
6. Payment to the contractor through running bills.
7. Supply of stores, machineries and the rent for the machineries.
8. Recovery.
9. Availability of drawing and other specifications.
10. Measurements of the works.

The Contractor has the following responsibilities:

1. He must ensure safety of materials, men and machinery on the site and should guard
against accidents either to the workers or to the local people. +
2. He must ensure quality of the work as required by the owner.
3. He must complete the work within the agreed time.
4. He must ensure the quality of materials which he is receiving from the owner.
5. The contractor should make proper entry of the instructions regarding change of
specification or deviation from the sanctioned estimate or drawings.
6. He must make proper entry of the materials received from the owner.

When there is a failure in the responsibilities of the contractor as well as in the

responsibilities of the owner, dispute arises and this may in turn lead to litigations.

Construction Contract Management

Jurisdiction of Courts

The courts of the place from where the tender acceptance letter has been issued shall have the
jurisdiction to decide any dispute arising out of or in respect of the contract.

ARBITRATION AND LEGAL REQUIREMENTS

INDIAN ARBITRATION ACT 1940

Disputes may arise between the contractor and the owner because of several factors such as
recovery on account of alleged delays, defective work or excess consumption of materials etc.
The disputes can be settled through litigation in a court of law or, where the contract permits,
through arbitration. Arbitration is the process of hearing and determination of a dispute by an
impartial referee selected or agreed upon by the parties concerned.

The Indian Arbitration Act was enacted in 1940 and provides for arbitration in the following
three cases:
a. Arbitration without intervention of a court: The owner and the contractor
enter into an arbitration agreement in 33 advance or after the dispute has
arisen. The dispute is settled through arbitration according to the Act
b. Arbitration with Intervention: When the owner and the contractor having
entered into an arbitration agreement are unable to proceed further in terms of
the agreement, the court’s intervention is sought for settlement of the dispute.
c. Arbitration in Lawsuits: When a dispute is the subject matter of a lawsuit
pending in a court, both parties may agree to settlement of the dispute through
arbitration in terms of the Act.

The Indian Arbitration Act 1940 does not control the conduct of the owner and the contractor
in deciding the form of the arbitration agreement. The Act does not prescribe the procedure to
be adopted by the arbitrator for conducting the proceedings. The arbitrator thus enjoys
flexibility in the procedure leading to expeditious settlement of disputes. The Act does not
provide for interference with the award given by the arbitrator. The arbitrator is also not
bound under the Act to state reasons in support of the award given by him. The award is,
therefore, final and can only be challenged in a court of law on questions of law and / or
misconduct of the arbitrator.

Advantages of Arbitration

The advantages of settling disputes through arbitration instead of litigation in the courts are
as under:
o Cost: arbitration is less expensive than litigation.
o Speed: disputes are settled much faster (usually within 4 months) through
arbitration as compared to lawsuit in the courts.
o Convenience: arbitration hearings are fixed considering the convenience of the
concerned parties.
o Technical Knowledge: both parties have the distinct advantage of appointing
arbitrator(s) having technical knowledge and expertise in construction.

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 o Informality: arbitration proceedings are conducted in a relatively informal
atmosphere observing certain minimum prescribed legal formalities.
o Proceedings in Private Premises: Unlike proceedings in courts which are exposed
to the general public, arbitration proceedings are held in private premises,
Business interest and reputation of the parties will, therefore, not suffer.
o Finality of Award: the award given by the arbitrator is final. It can only be
challenged on questions of law and / or misconduct or arbitrator(s).

Arbitration Clause

In view of the advantages of arbitration, most of the construction contracts incorporate a

suitable arbitration clause in the agreement. Following are the main provisions of the
arbitration clause.
i. All disputes or claims arising out of or relating to the contract, or the breach thereof, will
be settled through arbitration in accordance with the Indian Arbitration Act, 1940.
ii. The parties may agree to the appointment of a single arbitrator or each party may nominate
an arbitrator and the two nominated arbitrators may mutually select an umpire.
iii. The parties will mutually agree regarding the sharing of arbitration fees and expenses.
iv. The arbitration proceedings will be conducted by the arbitrator(s) in accordance with laid
down procedures at mutually convenient dates and places.
v. In the event of a difference of opinion between the two arbitrators concerning the award,
matter will be referred to the umpire and his decision will be final.
vi. The arbitration award will be final and binding upon both parties.

Some Important Clauses in Contract Conditions.

Time Limit
With respect to any dispute required hereunder to be submitted to Expert Resolution, such
Expert Resolution of a dispute must be commenced within twelve (12) months from
the date on which a Party first gave written notice to the other applicable Party of
the existence of the dispute, and any Party who fails to commence litigation or Expert
Resolution within such twelve (12) month period shall be deemed to have waived any of
its affirmative rights and claims in connection with the dispute and shall be barred from
asserting such rights and claims at any time thereafter except as a defense to
any related or similar claims subsequently raised by the other party. An Expert Resolution
shall be deemed commenced by a Party when the Party sends a notice to the other Party and
to the American Arbitration Association, identifying the dispute and requesting Expert
Resolution. Litigation shall be deemed commenced by a Party when the Party serves
a complaint (or, as the case may be, a counterclaim) on the other Party with respect to the
dispute. For the avoidance of doubt, the foregoing shall not be construed to require
the commencement within any particular period of time of any litigation
involving disputes that are not required hereunder to be submitted to Expert Resolution.

Construction Contract Management

Time Extension

Construction contracts generally allow the construction period to be extended where there is
a delay that is not the contractor's fault. This is described as an extension of time (EOT).

When it becomes reasonably apparent that there is, or that there is likely to be, a delay that
could merit an extension of time, the contractor gives written notice to the contract
administrator identifying the relevant event that has caused the delay.

If the contract administrator accepts that the delay was caused by a relevant event, then they
may grant an extension of time and the completion date is adjusted.

Relevant events may include:

▪ Variations.
▪ Exceptionally adverse weather.
▪ Civil commotion or terrorism.
▪ Failure to provide information.
▪ Delay on the part of a nominated sub-contractor.
▪ Statutory undertaker’s work.
▪ A delay in giving the contractor possession of the site.
▪ Force majeure (such as an epidemic or an 'act of God').
▪ Loss from a specified peril such as flood.
▪ The supply of materials and goods by the client.
▪ Strikes.
▪ Changes in statutory requirements.
▪ Delays in receiving permissions that the contractor has taken reasonable steps to
avoid.

The contractor is required to prevent or mitigate the delay and any resulting loss, even where
the fault is not their own.

Assessing claims for an extension of time can be complicated and controversial. There may
be multiple or concurrent delays, some of which are the contractor's fault and some not. There
are many occasions where contractors contribute to delay themselves by
their performance during design periods, when producing drawings, mock ups and samples or
in inter-facing with sub-contractors.

Crucial in assessing applications for extension of time is the quality of

the information provided and records available.

For more information, see How to prepare a claim for an extension of time.

Construction Contract Management

Claims should be judged against the actual progress of the works, not the programme, and
must demonstrate the link between the breach (cause) and the delay.

The contract administrator may review extensions of time after practical completion and
further adjust the completion date.

Mechanisms allowing extensions of time are not simply for the contractor's benefit. If there
was no such mechanism and a delay occurred which was not the contractor’s fault, then
the contractor would no longer be required to complete the works by the completion date and
would only then have to complete the works in a 'reasonable' time. The client would lose any
right to liquidated damages.

Claims for extension of time can run alongside claims for loss and expense (relevant matters)
however, one need not necessarily lead to the other.

It is very important when deducting liquidated damages to ensure that the

correct contractual procedures are adhered to. 'If the Contractor fails
to complete the Works or a Section by the relevant Completion Date, the Architect/Contract
administrator shall issue a certificate to that effect. If an extension of time is made after the
issue of such certificate, the extension shall cancel that certificate and the Architect/Contract
Administrator shall where necessary issue a further certificate.'

Penalty Clause In construction, the term 'penalty' typically refers to a

financial payment imposed in the event of a breach of contract.

In 'Legione v Hateley' [1983], Mason and Deane JJ defined a penalty as follows:

“A penalty, as its name suggests, is in the nature of a punishment for non-observance of

a contractual stipulation; it consists of the imposition of an additional or
different liability upon breach of the contractual stipulation …”

However, 'penal' clauses, ie those that impose a punishment may not enforceable. Until
recently, it was considered that they must be based on a genuine calculation of
actual damages incurred. In effect therefore 'penalties' were not allowed, albeit the phrase was
still commonly used to refer to the payment of damages or some other liability imposed
upon breach of a contractual stipulation.

For example, liquidated and ascertained damages (LADs) are common in construction
contracts, generally relating to the failure of the contractor to complete the construction
works before the date required by the contract. However, they are generally based on a

Construction Contract Management

genuine calculation of damages, and if they are not, or if they are exorbitant, they may be
considered a penalty by the courts and therefore may be unenforceable.

The new test set out by the Supreme Court recognizes that the contractual party may have a
legitimate interest which can be protected by a contractual penalty, and this interest need not
be a genuine pre-estimate of loss. If that party is able to demonstrate that the penalty clause is
being used to protect that legitimate interest, and it is not 'exorbitant or unconscionable', then
they do not have to suffer a loss, and the predominant purpose of such a clause can be deter
the other party from a certain breach of contract.

Examples of other penalties relevant to construction, not strictly related to breaches of

contract, include:

▪ If landlordsfail to carry out appropriate checks and rent a property to someone who is
not allowed to stay in the UK, they could face a penalty of up to £3,000 per tenant.
▪ Local authorities can serve a legal notice on the person responsible for noise. If
the noise problem persists they may be given a fixed penalty notice or taken
to court and fined up to £5,000.
▪ Renting out a property that does not comply with the minimum energy efficiency
standards might incur a penalty of up to £4,000 for domestic properties and up to
£150,000 for non-domestic properties.

Liability for defects or imperfections and rectification thereof

If it shall appear to the Engineer or to his representative at any time during construction or
reconstruction or during the defects, liability period, that any work has been executed with
unsound, imperfect or unskillful workmanship or that any material or article provided by the
Contractor for execution of thereof the work is unsound or of a quality inferior to that
contracted for, or otherwise, not in accordance with the contract, or that any defect, shrinkage
or other faults have appeared in the Work arising out of defective or improper materials or
workmanship, the Contractor shall, upon receipt of notice in writing in that behalf from the
Engineer forthwith rectify or remove or reconstruct the work so specified in whole or part, as
the case may require or, as the case may be and / or remove the materials, or articles so
specified and provide other proper and suitable materials or articles at his own expense
notwithstanding that the same may have been inadvertently passed, certified and paid for, and
in the event of his failing to do so within the period to be specified by the Engineer in his
notice aforesaid the Engineer may rectify or remove and re-execute the Work and / or remove
and replace with others the materials or articles complained of, as the case may be, by others
means at the risk and cost of the Contractor. In case of repairs and maintenance work,

Construction Contract Management

splashes and droppings from whitewashing, painting etc. shall be removed and surfaces
cleaned simultaneously with completion of these items of work in individual rooms, quarters
or premises etc. where the work in the contract. In case the Contractor fails to comply with
requirement of this condition, the Engineer shall have the right to get the work 62 done by the
other means at the risk and cost of the Contractor. The Engineer shall give three days notice
in writing to the Contractor before taking such action. The Engineer reserves the right to
decide the rates and prices of the works as executed by other means at the risk and cost of the
Contractor. The cost and expenses thereby incurred including supervision charges specified in
the Annexure ‘A’ on the works and also such penalty as the Engineer may impose for such
wrongful conduct of the Contractor (which penalty, the Engineer shall be competent to
impose and against the imposition of which or the amount thereof by the Engineer an appeal
shall lie only to the Commissioner within seven days of the order in that behalf of the
Engineer and the decisions of the Commissioner shall be final and binding upon the
Contractor) may be deducted from any money due or to become due to the Contractor, under
this or any other contract between the Contractor and the Municipal Corporation.

Termination of Contract

If the Contractor is an individual or a proprietary concern and the individual or the proprietor
dies and if the Contractor is a partnership concern and one of the legal representative of the
individual Contractor or the proprietor of the proprietary concern and in case of partnership,
the surviving partners, are capable of carrying out and completing the contract, the
Commissioner shall be entitled to cancel the contract as to its uncompleted part without the
Corporation being in any way liable to payment of any compensation to the estate of the
deceased Contractor and or to the surviving partners of the Contractor’s firm on account of
the cancellation of the contract. The decision of the Commissioner that the legal
representative of the deceased Contractor or surviving partners of the Contractor’s firm
cannot carry out and complete the contract shall be final and binding on the parties. In the
event of such cancellation the Commissioner shall not hold estate of the deceased Contractor
and or surviving partners of the Contractor’s firm liable in damages for not completing the
contract.

Suspension of Work

a) The contractor shall, on receipt of the order in writing of the Engineer, suspend the
progress of the Works or any part thereof for such time and in such manner as the
Engineer may consider necessary for any of the following reasons:- (i) On account of
continued non-compliance of the instructions of the Engineer or any other default on
the part of the contractor, or (ii) For proper execution of the works or part thereof for

Construction Contract Management

 reasons other than the default of the contractor, or (iii) For safety of the works or part
thereof. The contractor shall, during such suspension, properly protect and secure the
works to the extent necessary and carry out the instructions given in that behalf by the
Engineer. b) If the supervision is ordered for reasons (i) and (iii) in sub-para (a) above,
the contractor shall be entitled to an extension of time equal to the period of every
such suspension plus a reasonable time as decided by the Engineer. c) If the
suspension is ordered for reasons of (i) in sub-para (a) above, the Engineer shall have
powers to suspend the payment under the contract. Such suspension of payment may
be continued until default shall have been rectified.

Cancellation contract in full or in part

If the Contractor : a) At any time makes default in proceeding with the work with due
diligence and continues to do so after notice in writing of fourteen days from the
Engineer, or b) Commits default in complying with any of the terms and conditions of
contract and does not remedy it within fourteen days after a notice in writing is given to
him in that behalf by the Engineer, or c) Fails to complete the Works or items with
individual dates of completion, on or before the date(s) of completion, and does not
complete them within the period specified in a notice given in writing in that behalf by the
Engineer, or d) Shall offer or give or agree to give to any person in Municipal
Corporation’s Service or to any other person on his behalf any gift or consideration of any
kind as an inducement or reward for doing or forbearing to do or for having done or
forborne to do any act in relation to the obtaining or execution of this or any other
contract for the Municipal Corporation, or e) Shall obtain a contract with the Municipal
Corporation as a result of ring tendering or other non-bonafide methods of competitive
tendering or f) Being an individual or a fir, any partner thereof, shall at any time be
adjudged insolvent or have a receiving order or order for administration of his estate made
against him or shall take any proceedings for liquidation or composition (other than
voluntary liquidation for the purpose of amalgamation or 78 reconstruction) under any
insolvency act for the time effects or force or make any conveyance of assignment of his
effects or composition or arrangement for the benefit of his creditors or purport so to do,
or if any application be made under any Insolvency Act for the time being in force for the
sequestration of his estate or if a trust deed be executed by him for his creditors, or g)
Being a company, shall pass a resolution or the court shall make an order for the
liquidation of his affairs, or a receiver or a manager on behalf of the debenture holders
shall be appointed or circumstances shall arise which entitle the Court or debenture
holders to appoint a receiver or a Manager, or h) Shall suffer an execution being levied on
his goods and allow it to be continued for a period of 21 days, or i) Assigns, transfers,
sublets (engagement of labour on a piece work basis or labour with materials not to be

Construction Contract Management

 incorporated in the work, shall not be deemed to be sub-letting) or attempts to assign,
transfer or sublet the entire works or any portion thereof without the prior written
approval of the Commissioner, the Commissioner may, without prejudice to any other
right or remedy which shall have accrued or shall accrue thereafter to the Municipal
Corporation by written notice cancel the contract as a whole or only such items of work in
default from the contract. The Commissioner shall on such cancellation have powers to -
a) take possession of site and any materials, constructional plant, implements stores, etc.
thereon and / or b) carry out the incomplete work by any means at the risk and cost of the
Contractor. On cancellation of the contract in full or in part the Engineer shall determine
what amount, if any, is recoverable from the Contractor for completion of works or part of
the works or in case the works or 79 part of works is completed, the loss or damage
suffered by the Municipal Corporation, in determining the amount, credit shall be given to
the Contractor for the value of the work executed by him upto the time of cancellation, the
value of the Contractor’s material taken over and incorporated in the work, and use of
construction equipment belonging to the Contractor. Any excess expenditure incurred or
to be incurred by the Municipal Corporation in completing the works or part of the works
or excess loss or damages suffered or may be suffered by the Municipal Corporation as
aforesaid after allowing such credit shall be recovered from any money due to the
Contractor on any account and if such moneys are not sufficient the Contractor shall be
called upon in writing to pay the same within thirty days. If the Contractor shall fail to
pay required sum within the aforesaid period of 28 days, the Engineer shall have right to
sell any or all of the Contractor’s unused materials, constructional plant, implements,
temporary buildings, etc. and apply the proceeds of sale thereof towards the satisfaction of
any sums due from the Contractor under the contract, and if thereafter there be any
balance outstanding from the Contractor, it shall be recovered in accordance with
provision of the contract. Any sums in excess of the amounts due to the Municipal
Corporation and unsold materials constructional plant, etc. shall be returned to the
Contractor, provided always that if cost or anticipated cost of completion by the
Municipal Corporation of the works or part of the works is less than the amount of which
the Contractor would have been paid had he completed the works or part of the works,
benefit shall not accrue to the Contractor. Without prejudice to the generally of the
foregoing, the amount deposited by the Contractor as security deposit shall be absolutely
aforesaid to the Corporation for such failure, or breach or determination of contract.

Construction Contract Management

Deviation, Extra Items and Pricing

In the case of extra item(s) (items that are completely new, and are in addition to the items
contained in the contract), the contractor may within fifteen days of receipt of order or
occurrence of the item(s) submit market rate claim rates, supported by proper analysis which
shall include invoices, vouchers etc. and Manufacturer’s specification for the work failing which
the rate approved later by the Engineer- in- charge shall be binding and the Engineer-in-Charge
shall within prescribed time limit of the receipt of the claims supported by analysis , after giving
consideration to the analysis of the rates submitted by the contractor, determine the rates on the
basis of the market rates and the contractor shall be paid in accordance with the rates so
determined, failing which it will be deemed to have been approved Deviation, Substituted Items
In the case of substituted items (items that are taken up with partial substitution or in lieu of
items of work in the contract), the rate for the agreement item (to be substituted) and substituted
item shall also be 35 Deviation, deviated Quantities, Pricing determined in the manner as
mentioned in the following para. (a) If the market rate for the substituted item so determined is
more than the market rate of the agreement item (to be substituted), the rate payable to the
contractor for the substituted item shall be the rate for the agreement item (to be substituted) so
increased to the extent of the difference between the market rates of substituted item and the
agreement item (to be substituted). (b) If the market rate for the substituted item so determined is
less than the market rate of the agreement item (to be substituted), the rate payable to the
contractor for the substituted item shall be the rate for the agreement item (to be substituted) so
decreased to the extent of the difference between the market rates of substituted item and the
agreement item (to be substituted). In the case of contract items, substituted items, contract cum
substituted items, which exceed the limits laid down in schedule F, the contractor may within
fifteen days of receipt of order or occurrence of the excess, claim revision of the rates, supported
by proper analysis for the work in excess of the above mentioned limits, provided that if the rates
so claimed are in excess of the rates specified in the schedule of quantities, the Engineer-
inCharge shall within prescribed time limit of receipt of the claims supported by analysis, after
giving consideration to the analysis of the rates submitted by the contractor, determine the rates
on the basis of the market rates (as per invoice, vouchers from the manufacturers or suppliers
submitted by the agency and duly verified by Engineer in Charge or his representative) and the

Construction Contract Management

contractor shall be paid in accordance with the rates so determined. The prescribed time limit for
finalizing rates for Extra Item(s), Substitute Item(s) and Deviated Quantities of contract items is
within 45 days after submission of proposal by the contractor without observation of the
Engineer-in-Charge.

Contractor Liable for Damages, defects during defect liability Period

If the contractor or his working people or servants shall break, deface, injure or destroy any part
of building in which they may be working, or any building, road, road kerb, fence, enclosure,
water pipe, cables, drains, electric or telephone post or wires, trees, grass or grassland, or
cultivated ground contiguous to the premises on which the work or any part is being executed, or
if any damage shall happen to the work while in progress, from any cause whatever or if any
defect, shrinkage or other faults appear in the work within twelve months (six months in the case
of work costing Rs. Ten lacs and below except road work) after a certificate final or otherwise of
its completion shall have been given by the Engineer in- Charge as aforesaid arising out of defect
or improper materials or workmanship the contractor shall upon receipt of a notice in writing on
that behalf make the same good at his own expense or in default the Engineer-in-Charge cause
the same to be made good by other workmen and deduct the expense from any sums that may be
due or at any time thereafter may become due to the contractor, or from his security deposit or
the proceeds of sale thereof or of a sufficient portion thereof. The security deposit of the
contractor shall not be refunded before the expiry of twelve months (six months in the case of
work costing Rs. Ten lakhs and below except road work) after the issue of the certificate final or
otherwise, of completion of work, or till the final bill has been prepared and passed whichever is
later. Provided that in the case of road work, if in the opinion of the Engineer-in-Charge, half of
the security deposit is sufficient, to meet all liabilities of the contractor under this contract, half
of the security deposit will be refundable after six months and the remaining half after twelve
months of the issue of the said certificate of completion or till the final bill has been prepared and
passed whichever is later.

Construction Contract Management

Liquidated damage

Contracts generally include a clause making provision for the contractor to pay liquidated
damages (LD, sometimes referred to as liquidated and ascertained damages - LADs) to
the client in the event that the contract is breached. In building contracts, liquidated
damages usually relate to the contractor failing to achieve practical
completion (i.e. completing the works so they can handover the site to the client) by
the completion date set out in the contract. They are often calculated on a daily or weekly rate.

Liquidated damages are not penalties, they are pre-determined damages set at the time that
a contract is entered into, based on a calculation of the actual loss the client is likely to incur if
the contractor fails to meet the completion date. They might include; rent on
temporary accommodation, removal costs, extra running costs, and so on. They are generally set
as a fixed daily or weekly sum, although there may be a more complicated formulae where
the works are phased, where may be partial possession and so on. It is important that the method
of calculation is precisely and formally documented.

If the contract prevents the client claiming liquidated damages, or if actual losses are
significantly different to those that were estimated at the time the contract was entered into, then
the client may pursue a claim for unliquidated (i.e. actual) damages through
the courts. Unliquidated damages are damages, the exact amount of which has not been pre-
agreed, and are typically determined by the courts.

For more information, see Unliquidated damages.

As liquidated damages are not a penalty, they must have been based on a genuine calculation
of damages when they were set. If they are not genuine, they may be considered a penalty by
the courts and so will be unenforceable (see Dunlop Pneumatic Tyre Co Ltd v New Garage and
Motor Co Ltd), although this is unlikely as the courts are very reluctant to interfere
in contractual agreements negotiated freely by two commercial parties of similar standing.

Calculations might include, amongst other things:

▪ Loss of rent
▪ Loss of income
▪ Fees
▪ Storage costs.
▪ Rental costs.
▪ Fees and fines imposed by third parties.

Construction Contract Management

 ▪ Finance costs.

There be a causal link between all the losses the contract foresees are likely to be suffered, and
the breach of contract, i.e. the damages flow naturally from the delay and must not be 'remote'.
The principle of 'remoteness' is established in the case of Hadley v Baxendale in 1854.

Liquidated damages can be beneficial for the client, as the remove their obligation to prove
actual losses in the event of delay occurring. They can also be beneficial to the contractor as they
limit their liability to a known amount in the event of delay.

However, in some circumstances, the parties to the contract will wish to exclude liquidated
damages. In this case, they should not simply insert 'nil' as the rate of liquidated damages, as this
can imply that the loss for unliquidated damages is also nil. Instead, they should make clear
that unliquidated damages apply, or delete the clause for liquidated damages.

Unliquidated damages

Unliquidated damages are damages that are payable for a breach of contract, the exact amount of
which has not been pre-agreed. This is in contrast with liquidated damages which are a pre-
agreed when the contract is entered into.

Construction contracts generally include a provision for the contractor to pay liquidated
damages (or liquidated and ascertained damages, sometimes referred to as LADs) to the client in
the event of a breach of contract - typically failing to complete the construction works by
the completion date set out in the contract.

Unliquidated damages are a form of compensation which is said to be ‘at large’, that is, the
amount is not predetermined with the contract is entered into, but is determined by a court (either
a judge or jury) after the breach has occurred.

The advantage of unliquidated damages is that it allows for the recovery of losses that may have
been impossible to foresee or to estimate with any certainty before the breach.

The disadvantage is that it leaves the client having to prove their actual losses in the event of
a breach, which can be very complex, and it leaves the contractor with an unknown liability.

The client must also prove that losses flow naturally from the breach and are not 'remote'.

In standard form construction contracts, parties will sometimes insert ‘NIL’ or ‘n/a’ for
the rate for liquidated damages, if they do not wish to claim liquidated damages, however, this

Construction Contract Management

can imply that losses for unliquidated damages are also nil. If parties wish to
exclude liability for liquidated damages, they must state this clearly in the contract to avoid
ambiguity, either stating that unliquidated damages apply, or deleting the clause altogether.

Construction Contract Management