commonly confronted legal issues in engineering contract - 17-11-2012.pdf

SOME COMMONLY CONFRONTED

LEGAL ISSUES IN

ENGINEERING CONTRACTS

by:

L.V.SREERANGARAJU BE, M-Tech, L.L.B, ML, FIE, FICA, FSIArb, FIGS

(Former General Manager, KPCL)

Advocate, Techno-legal advisor and Arbitrator Date: 17th November 2012 L

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Seminar on “Construction Contracts :Legal Subtleties”

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School of Construction Management Excellence

Employer

Architects/ Consultant

Contracts for Works

Lump Sum or Item Rate

Percentage or

EPC / BOOT

Outsourced Subcontracted

Structural Services Electrical

PHE

Fire HVAC

Interior

Civil

Electrical

PHE

Fire HVAC

Interior

Landscaping

Landscaping

Completion

Project Contract Relations Initiation


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Types of Contract

1. Item rate contract: The BOQ for items and the rates in their contracts variations in

quantities and regulated as per contract. 2. Lump sum contract: No variation and the total cost is fixed for their scope. It’s varies

it becomes variation. 3. Percentage contract: The items and rates are both specified and a percentage above or

below these rates is to be quoted. This depends on variations are permissible as per contract.

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4.EPC Contract: This is an Engineering Procurement and Constructions Contract. The design responsibility, performance warranty liabilities rests with the contractor. 5.Costplus Contract: In this type of contract the cost of each commodity raw materials, overheads etc., are accounted and a percentage of these costs is the contractors entitlement. 6.BOO Or BOOT: Contracts are in which, in addition to the EPC contract, the contractor is authorized to collect revenue from completed project and set it of against his investment. The investment is done by the contractor and his return on investment is assured by the revenue collection mode from the project. The construction period is vital for successful revenue earning in the project.

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Types of Contract


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Formation of contract

What is a Contract? Provisions of the Indian Contract Act,1872 An offer or proposal

Acceptance of the offer (promisor) for a valid consideration forms the contract. Every promise and every set of promises, forming the consideration for each other , is an agreement; s.2(e) Promises which form the consideration or part of the consideration for each other, are called reciprocal promises; s.2(f) An agreement not enforceable by law is said to be void; s.2(g) An agreement enforceable by law is a contract;2(h)

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Communication and Acceptance

Communication when complete ?

As against the proposer, when it is put in a course of transmission,

out of the power of the acceptor.

Against the acceptor, when it comes to his knowledge of the proposer.

Revocation before communication or acceptance

Acceptance must be absolute. Sec.7 absolute and unqualified; conditional acceptance is only counter offer. Contact may be express or implied. Sec.9 promise made in words and accepted. L

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Consideration Sec.2(d)

At the desire of a - The promisor, the Promisee or any other person, - has done or abstained from doing, - does or abstains from from doing. - promises to do or abstain from doing.

Such act or abstinence or promise is consideration. An agreement without consideration is void and NOT enforceable by law.

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"All Contracts are agreements but not vice versa” All agreements are contracts, if they are made by

Free consent of parties Parties must be competent to contract There is a lawful consideration Lawful object And are not declared void by the act


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When a contract is formed? An enforceable contract requires only an offer and an unqualified acceptance for a legal consultation. The acceptance of a tender by an Employer through a Letter of Acceptance (LOA) for the amount of the contract and acceptance of the LOA by a Contractor constitutes a valid enforceable Contract. The requirement of signing an agreement is only a formality and not a strict legal requirement under the law. A distinction between LOA and Letter of Intent (LOI) is made by the Supreme Court holding that LOI is only an intention and is not an award or acceptance. Any conditional acceptance either in LOA or in the acceptance of LOA fundamental to the object would be only a counter offer and a counter proposal and hence the contract is not enforceable. L

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• Reciprocal Promises – Sec 51 of ICA Promisor not bound to perform, unless reciprocal promisee ready and willing. • Order of Performance – Sec 52 - As per Contract. - As per the nature of the transaction •Liability of party preventing performance; should compensate – Sec 53 • Time as essence of contract - Section 55 of Indian Contract Act: Failure to perform in fixed time- Non performed part voidable at the option of promisee.

Performance of Contract

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Principles of contract operation: • Tender offered is valid for the period specified. • EMD shall be fortified if withdrawn with in the validity. • Acceptance must be with in the validity period • Seek extension of validity if unable to accept with in the validity . • Accept the offer: Issue L.O.A. Letter of Award - Not L.O.I.

• Sec 73 Compensation of Loss or damage – Direct Loss • Sec 74 Compensation for Breach of Contract where penalty is stipulated – Pre estimate of damage Compensation not to exceed the amount agreed or penalty stipulated.

Consequences of breach of Contract.

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Contract Management

contract : An agreement enforceable by law

Indian Contract Act-1872

management (Co-ordination of)

Time

Quality Safety

Procedures

Decision

Enforcement

Payments

Professional Ethics

Personal Ethics

Design Standards

Construction Methods

Construction Materials

Contractual

Standards

Departmental

Long Term

Construction

Serve the purpose


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• As agreed or as may be refixed. • Adhere to the schedule/ mile stones. • Conduct review meetings as per contract. • Issue notices timely. • Apportion responsibility for delay. • Re-fix time based on site conditions, increased value of work and EXTRAS. • Ensure all obligations are met with. • Perform Reciprocal Promises-

Drawings Site Handing over Supply of Materials Authorize variations Prompt payments

Time management:

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What is Breach of Contract? Breach is non fulfillment of an agreed promise under the contract such as, Not handing over the site by the Employer as per Contract. Non furnishing the BG by the Contractor / Not releasing the mobilization advance. Not making payments as per the contract for work done. Not confirming to the schedule of work by the Contractor and reciprocal promise of issuing the drawings by the Employer. Not completing the works as per milestones as per contract. The breach of Contract by any party entails the other party to seek compensation.

Breach of contract Sec.73 & 74 of ICA

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What are the Consequences of Breach? Sec.73 - compensation for breach is payable as damages for the breach in the usual course of contract. No such compensation is payable for a remote cause and not the party knew when contract was made – Proof of damage suffered is required. The entitlement for compensation is only for damage caused which naturally arose in the usual course of business from such breach. Sec.74 is relating to compensation for specified sum such as liquidated damages and penalty stipulated under the contract – even in this case the measure of damage stipulated by way of penalty should be reasonable compensation not exceeding the penalty stipulated –

Maula Bux Vs Union of India 1969-SCC-2-554

Breach of contract Sec.73 & 74 of ICA

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What are the Constitutional requirements for a contract

with State or Govt.?

Article 12:- Defines ‘State’.

- Govt. Central/State. - Local Authorities.

- Also applies to Public Sector units and companies owned by Govt.

Article 14:- State shall not deny to any person

equality before law and equal protection of the laws.

U.P.S. Bridge Corporation V/s BDA 2005(5) Kar.LJ.112(DB) The Division Bench of Karnataka High Court held that the action of BDA in

terminating the contract for the construction of the fly over on the Airport road, Bangalore awarded to the appellant therein was unconstitutional. It was also held therein that the STATE cannot act against the constitution.

Constitutional Provisions

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What are the Constitutional requirements for a contract with State or Govt.? Article 299: All contracts shall be expressed to be made by the President or Governor • Such power to be exercised only by authorized person. • If requirement of Article 299 is not met with Government is not bound by the contract. •This cannot be ratified. •Officer executing would be personally responsible and bound Writ remedy: Article 32-Supreme Court. Article 226- High Court. Writ remedy is available only after the alternate legal recourse is exhausted.

Constitutional Provisions

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VARIATIONS IN A CONTRACT

Variations clauses are included in a contract with respect to the items or works so as not to render the contract voidable under the law. Types of variations: Additions:- quantity increase Alteration:- change from the BOQ Extras:- not covered under the contract but necessary to be done. Even in Turnkey projects / Lumpsum Project – a clause for variation is desirable and accordingly provided. The contractor should obtain a written instruction from the engineer unless the variation is simply an increase or decrease in the quantities stated in the bill of Quantities. L

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Valuation of variations – Specific clauses for determining the value of the Variation are included, even specifying the limits of variation; for ex: Valuation based on a) price setout in the contract b) rates derived from the price in the contract applicable to the varied work. c) suitable rates in consultation with the agreement. Variation exceeding 15 percent. a) individual quantities vary beyond 25% b) the cost of such items as per the BOQ shall be 0.5% to 2% of the contract price.


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What is abnormal variation and what is its impact on the integrity of contract? Variations in a contract are included because of lack of proper estimates and finalization of designs prior to a contract, but such variation should not be abnormal. A contract may provide that the rates should hold good upto say 15% or 20% or 25% variation from the BOQ quantities. In such case there is no change in rate is permissible for such specified variation. If the variation is beyond the specified limit then there is a scope for re-fixing the rate for the quantity of the item. There are certain contracts which specify that the rate for the item shall be adjusted if the variation is beyond the limit, so specified. In such an event the mute question is whether the rate should be increased for the whole quantity or the increased quantity. This depends upon the clause agreed under the contract. Therefore the correct proposition should be properly provided stating that the excess quantity beyond the agreed variations only shall be liable for adjustment of its rate.


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The Supreme Court has held in Case of Harcharan Singh Arora Vs Union of India approved the observations of SINGLETON J.; “I find myself unable to agree with the submission of Mr. Rewcastle that, under the contract as varied by the deed of variation, the contractors would have been bound to continue making alterations and additions, if ordered, for years and years, without any extra payment of way of profit. That would have let to manifest absurdity and injustice, as MATHEW J. said in Bush Vs. Whitehaven Trustees. There must be a limit”. In the case of it specified that variation is ±25% of the contract. The Apex Court was dealing with the matter of variations that would affect the integrity of the contract and held that “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” – National Fertilizers Vs Puran Chand Nangia.


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Further the Apex Court held that “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 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” – National Fertilizers Vs Puran Chand Nangia.


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Most of the contracts specify “Time shall be deemed to the essence of contract”. The contract also includes a clause for Extension of Time (EOT) in the event of a) The amount or nature of extra or additional work, or b) Any cause of delay attributable to the employer such as delay in handing over

possession of land, issue of drawings, payment etc, or a) Exceptionally adverse climatic conditions, or d) Any delay, impediment or prevention by the employer, or e) Any delay not attributable to the Contractor. For any delay attributable to the Contractor the contracts provide for levy of

penalty / liquidated damage / delay damages / Mile stone penalty etc., as the case may be.

Time as the essence of contract and extension of time

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The question whether time is essence of contract was dealt by the Supreme Court looking into the various provisions of contract in the case of Hind Constructions Vs State of Maharashtra and held that “Even where the parties have expressly

provided that time is of essence of contract such a stipulation will have to

be read along with other provisions of the contract & 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 a

fundamental; for instance, if the contract were to include clauses providing

for EOT in certain contingencies or for payment of fine or penalty for every

day or week the work undertaken remains unfinished on the expiry of the

time provided in the contract such clauses would be construed as a

rendering ineffective the express provision relating to the time being of the

essence of contract”.

Therefore the provisions of clauses specifying EOT and levy of Penalty / LD for

delay would render even the specific provision in a contract that time is the

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Under such circumstances it is necessary to analyze the delays and take appropriate actions Viz.; (i) Contractor’s delay :- no EOT, no compensation. LD / penalty becomes applicable. (ii) Neutral delay :- such as force-majeure. Only EOT is given without any compensation. (iii) Wholly due to the employer :- Contractor is entitled for EOT and compensation. It is essential to re-fix the time schedule and make the time essence of contract for performance during the contract, so as to make the time is the essence of contract.

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Liquidated damages ( LD ) Clause.47 Liquidated damage may be specified at 5% to 10% of the contract price. Default of the contractor for not completion should be established based on delay. LD is a pre-estimate of damage. It does not mean this amount is always payable but it is the upper limit based on proof of damages as per supreme court decision. Reduction in LD is also permissible based on section wise taking over, if so provided.

LIQUIDATED DAMAGES

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Many Govt. Departments or Employers either contractually provide for the Contractor giving a No Claim Certificate (NCC) or No Demand Certificate (NDC). Some times even without such NCC or NDC insisted. If a NCC / NDC is given voluntarily by the Contractor his right to claim would extinguish. If NCC/NDC is given at the insistence of an Employer for granting extension / for release of amount due to the Contractor / for release of security deposit / for making final bill etc. The fact whether the NCC/NDC is given voluntarily or not is to be determined by the Arbitrator/Court.

EFFECT OF NO CLAIM CERTIFICATE

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If NCC/NDC is not voluntary, the claims of Contractor are not barred as per Supreme Court in the case of Chairman & MD NTPC Ltd., Vs Rashmi Constructions. This decision of the Supreme Court is relied in the case of Ambika Constructions Vs Union of India where the court held that “Having regard to the decision in Rashmi Constructions it can no longer be set that such a clause in the contract would be an absolute bar to a Contractor raising claims which are genuine, even after submission of such no claim certificate”.

EFFECT OF NO CLAIM CERTIFICATE

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The Bank Guarantee is defined under Sec. 126 of Indian Contract Act.

Surety - Bank Principal Debtor - Contractor Creditor - Employer

It is a separate and independent contract between surety & Creditor. BG could be CONDITIONAL or UNCONDITIONAL.

BANK GUARANTEE

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Stay for encashment of Bank Guarantee → Conditional BG’s not Generally granted in case of except when

a) Fraud is pleaded and prove; and b) If encashment is allowed it would result in irretrievable

harm and injustice or irreparable injury to one of the parties concerned – Federal Bank Ltd., Vs V.M. Jog Engineering Ltd., relying upon Dwarakish Super Industries Ltd., Vs Prem Heavy Engineering works Pvt. Ltd.,

→UnConditional BG’s stay granted till the conditional event in the Bank Guarantee Contract is fulfilled - HCC Vs State of Bihar.

BANK GUARANTEE

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PAYMENT OF INTEREST

Interest is a measure of damage due to non-fulfillment of obligations. Payment of Interest is Governed by the Interest Act, 1978. Liability as a debt must be ascertained and the demand should be made. The interest is payable as per the Agreement if it provides so. If there is a prohibition in the agreement interest cannot be allowed. As per Sec. 4(1) of the Interest Act: Interest shall be payable by virtue of any enactment or other rule of law or usage having course of law – Arbitration & Conciliation Act is a special enactment where under Sec. 31(7) the law provides the payment of interest on the award amount. Hence, interest payable as per law. L.V

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Possession of the site and access to site.

Furnishing the drawing and details.

Payment for the work done at the right time.

Site decisions not to cause delay

Remove obstructions and hurdles due to delayed decisions.

Time extension for additional and varied work .

Required mobilization of men, material& machinery at site

Strictly adhere to the time schedule for performance

Notify regarding variation or extras immediately.

Maintain standards of quality for all the work during construction

Perform all obligations under the contract without failure.

Test all equipments as per contract.

Make correct estimates

Issue the drawings as per schedules

Ensure the safety in designs .

Authorize Bills.

Authorize variations

Authorize time extensions.

Monitor the progress and advice the client

Avoid midcourse changes.

EMPLOYERS OBLIGATIONS

CONTRACTORS OBLIGATIONS

CONSULTANTS OBLIGATIONS


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T O R T I O U S L I A B I L I T Y.

Arises due to: Negligence- Mis feascence- non feascence

Nuisance- Act to hurt anyone-Public or private. Fraud Strict liability- inescapable. L

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GROUND LEVEL

UNDER GROUND

COAL MINES

BOUNDARY

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BOUNDARY

GROUND LEVEL RESERVOIR

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BOUNDARY

GROUND LEVEL RESERVOIR

UNDER GROUND

COAL MINES

BROUGHT UNNATURALLY BY A LAND OWNER

THIS UNNATURAL THING ESCAPES TO ANOTHERS LAND

THE ESCAPED THING CAUSING MISCHIEF.

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T H A N K Y O U

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commonly confronted legal issues in engineering contract - 17-11-2012.pdf

Documents

percentage contract

construction contracts

epc contract

type of contract

constructions contract

costplus contract

lump sum contract

item rate contract