Important clauses for contractors in the contract -delay in payments

In the next few articles I’ll be writing about the clauses which are to be included in the contract to benefit the contractor. These clauses will help in avoiding litigation later

The first clause that should be included is a clause for suspension of work by the contractor in case of delay in certification of payment or making of payment to the contractor. Delayed payment by the owner is one of the major reasons for projects getting delayed . The contractor is not the owner’s financier ,he is the one who has taken the responsibility to complete the work in time specified in the contract and according to the specifications mentioned in the contract. He can do that if the owner keeps up with his responsibility of paying at the time specified in the contract.

A clause should be included in the contract that in case the owner’s  representative delays certifying the bill beyond the period specified in the contract then the contractor with a notice period of 2 days will suspend the work. The contractor will be entitled to both extension of time and delay damages on account of this suspension.

Similarly a clause that on account of non payment of contractors bills within the time specified he will be entitled to suspend the work with a notice of suspension. Here too the contractor will be entitled to both extension of time and delay damages on account of suspension of work.

Also the contract should include an interest payment clause on delayed payment in addition to the above clauses.

Signing a contract in which there are no remedies for delayed payment is asking for trouble and litigation. If the contract has no remedies for delayed payment then be sure to add the above mentioned clauses to avoid litigation and delayed contracts 

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Breach of contract

In construction contracts, if one of the parties fails to perform the obligations that he had promised to perform, then this may constitute a breach of contract on his part.

The following are examples of breach of contract by owner:

A. Delay in handing over possession of site

B. Delay in release of drawings and design

C. Delay in making payments

D. Delay in shifting of utilities

Whereas, some examples of breach of contract by contractor are as follows:

A. Not completing the work on time

B. Not mobilizing enough men and machinery

C. Abandoning the work

Sections 37, 51-54, 73 and 74 of the Indian Contract Act also deals with breach of contract.

Section 37 of the Indian Contract Act mandates that every party to a contract must perform or offer to perform their part of the contract unless they are discharged of the obligation.

Section 51 states that when a contract consists of reciprocal promises to be simultaneously performed, no promisor  needs to perform his promise unless the promisee is ready and willing to perform his reciprocal promise.

Section 52 provides that where the order in which the reciprocal promises are to be performed is expressly fixed by the contract, they shall be performed in that order and when the order is not fixed by the contract, they shall then be performed in the order required by the transaction.

Section 53 stipulates that when a contract contains reciprocal promises and one party to the contract prevents the other party 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 he may have sustained in the consequences of the non performance by the other party.

Section 54 provides that when a contract consists of reciprocal promises, such that one of them can not be be performed or that it’s performance can not be claimed till the other has been performed and the promisor of the promise last mentioned fails to perform it, such a promisor can not claim the performance of a reciprocal performance and must make compensation to the other party to the contract for any loss which the other party may sustain by non performance of the contract.

Section 55 mandates that when a party to a contract promises to do a certain thing at or before a certain specified time or certain things at or before specified times and fails to do any such thing at or before the specified time , the contract or so much of it that has not been performed becomes voidable at the option of the promisee ,if the intention of the parties was that time should be essence

Effect of failure when time not essence – if it was not the intention of the parties  that time should be the essence of the contract, then the contract does not become voidable by the failure of to do such a thing on or before the specified time, but the promisee is entitled to compensation for any loss occassioned to him by such failure.

Sections 73 and 74 of the Indian Contract Act provides for compensation in case of breach of contract. Section 73 provides for unliquidated damages while Section 74 provides for liquidated damages.

Section 73 states that when a contract has been broken, the party who suffers 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 cause of things from such a breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it,such compensation not to be given for any remote or indirect loss or damage sustained by the breach.

Section 74 stipulates that when a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such a breach,or if the contract contains any other stipulation by the way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract, reasonable compensation not exceeding the amount so named or as the case may be, the penalty stipulated for.

There also exists material and non material breach of contract. A non material breach of contract is not a very serious breach and is a minor breach and will not affect the contract. For example, if the contract specified green colour cables and yellow colour cables are used instead and such change doesn’t have any adverse effect on the contract either financially or with respect to time involved, then this type of breach constitutes a non material breach.

A material breach, on the other hand, is one which affects the performance of a contract. It is usually the failure to perform an essential condition or multiple conditions of the contract. This breach seriously affects the performance of the contract and excuses the non breaching party from performing his part under the contract and entitles him to terminate the contract and claim damages from the breaching party.

Thus, to sum up, a breach of contract is a violation of the terms of the contract wherein the non breaching party is given the right to terminate the contract or claim damages owing to the beach

Time at large

What is time at large in construction contracts? In a construction contract when the intended date of completion is over and no new date for completion is set then time is said to be at large.

Another example of time being at large is when the intended date of completion is over and the contract doesn’t have any mechanism for time extension.

In some contracts when the intended date of completion is over and the contractor requests for an extension of time but the owner doesn’t respond immediately or confirm the new date or when the owner confirms the extension of time retrospectively after the completion of of work then also time is said to be at large.

If the contract completion date is over, the employer can not enforce a new completion date without the consent of the contractor. The new completion date has to be mutually agreed. If this is not done then also time will be rendered at large.

In contracts where there is no mechanism to provide for an extension of time due to employer related delays,then also time for completion will be rendered at large and in such cases liquidated damages can not be recovered from the contractor. Also if the contract stipulates that the extension of time should be approved within a certain date or time and it is not done then time is said to be at large.

When time is at large and there is no fixed date of completion then the contractor is supposed to complete the work in reasonable time.

When time is at large liquidated damages or penalty clauses cease to exist. This is because there is no fixed date from which liquidated damages can run and the employer looses his right to recover them . An employer then can only recover general damages from the contractor. Recovery of general damages is not easy as the employer has to prove in court that he has actually suffered losses and only then will the court award those damages.

Unforseen ground conditions

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One of the major risks associated with construction contracts are unforseen ground conditions or differing site conditions.

Some of the types of unforseen ground conditions are hazardous materials at site, hard rock met at shorter depths, unanticipated ground water, underground utilities which are not shown in drawings or surveys provided by owner

World wide most construction contracts recognise two types of differing site conditions. They are known as type 1 and type 2 changed conditions

A type 1 condition is one in which the conditions encountered by the contractor at site are materially different from those indicated in the contract. In order to succeed in a type 1 claim the contractor must prove that he relied on the information provided by the owner while pricing his bid . Borehole results, core samples, drawings, surveys provided by the owner in the contract are examples of information provided by the owner. An example of a type 1 condition is, where rock is encountered where soil is indicated in the contract.

A type 2 conditions are unknown physical conditions at site, which are of an unusual nature and differ materially from those ordinarily encountered and generally recognised as inherent in work of similar character. To succeed in a type 2 claim the contractor must show that he did not know about the physical condition, the condition could not have been anticipated from inspection or general experience and the conditions varied from conditions met in similar type of works. Example of a type 2 condition is of a contractor discovering rock in a area where rock is normally not encountered

The US supreme court in the case of Weeks Dredging v. US held that six tests needed to be established for differing site conditions claim

1) information provided by the employer must indicate conditions which are different from those actually encountered at site

2) the contractor’s interpretation of information provided by the employer should be that of a sufficiently experienced contractor

3) the contractor must have reasonably relied on the information provided by the employer

4) conditions met at site must be physically different materially from the conditions present in the information provided for particular location of the project

5) failure on the part of the contractor to foresee the condition encountered should be reasonable

6) the contractor must have incurred additional time or costs as a direct result of conditions indicated and actually encountered

It is very important for contractors to read the contract documents and see who assumes the risks of unforseen ground conditions. The contractor must keep all documents of assumptions made regarding ground conditions while bidding for the work.

Whatever the conditions mentioned in the tender it’s for the contractor to make a thorough investigation of the site,use photos and reports in the pre bid survey and document this report. The pre bid survey report should also consist of ground conditions for similar works in the same region

Check the time period in the contract to report unforseen ground conditions ,does the contract require the contractor to continue with work on the occurrence of a unforseen ground condition or can the work be halted till the issue is resolved?

Finally it’s up to the contractor,if he signs a contract in which he takes the responsibility of the risks of unforseen ground conditions,then he should be prepared for losses and litigations that come with agreeing to such clauses

Encashment of bank guarantees

Another case in which a stay of encashment of bank guarantees was given by the Supreme Court is the Gangotri Enterprises v. North Central Railway case.

Gangotri enterprises were awarded the construction of the new Agra etawah railway line construction in August of 2005. The work could not be completed on time. The work was terminated by the railways in August of 2009. Gangotri enterprises alleged that the railways did not hand over land on time and drawings for minor bridges were not supplied causing a delay in the works. The railways after the termination of the contract awarded the work to another contractor.

Meanwhile in August of 2006 north central Railways had awarded another work to Gangotri enterprises in Anand vihar. Gangotri enterprises had submitted a performance guarantee for this work. This work was completed in September of 2009 and final bill was settled and paid to Gangotri enterprises in December of 2012

North Central railway in an internal circular in 2011 asked for withholding all dues of Gangotri enterprises due to non-completion of new Agra etawah bg line works. The accounts department of the railways wrote to the bank to encash the bank guarantees given for the Anand vihar works.

Gangotri enterprises invoked the arbitration clause in the New Agra etawah bg line works and approached the court in January 2012 under section 9 of the arbitration act to stay the encashment of the bank guarantees. Gangotri enterprises argued that the northern central Railways had no right to encash the performance guarantees of the Anand vihar work’s which was a completely separate contract and that they had completed the Anand vihar work’s and the final bill was also paid. The district judge gave a stay on the encashment. In March of 2012, the arbitration tribunal was formed. The railways once again approached the bank for encashment maintaining that the stay was only till the formation of the tribunal. Gangotri once again approached the court under section 9 of the arbitration to stay the encashment. This time the district judge did not grant the stay, the High court also agreed with district judge and refused to stay the encashment. Gangotri enterprises approached the supreme court.

The supreme court referred to the union of India vs Ramana case while deciding the case. In the Ramana case, it was held that a “sum due” is that which there is an existing obligation to pay. Which is currently payable and due. The court held in the Ramana case that damages can only be decided by a court, for that the court must first decide if the party is liable for damages and then only proceed to assess damages if any. Till then there is no liability. A claim for breach of contract is not a sum due presently

The court held in this case that the arbitration proceedings for the new Agra etawah railway line contract were yet pending.

The sum claimed by the railways was not for the contract the bank guarantee was given

That the sum claimed by the railways is in the nature of damages which is not yet adjudicated in the arbitration proceedings and this sum has still not become due which means that the sum claimed is still not an admitted sum or any sum awarded by any court and finally the guarantee given was a performance guarantee for another contact

Based on the above reasons the Supreme Court stayed invocation of the performance guarantee.

After this judgement, I thought that encashment of performance guarantees would not be that easy in future cases, but that didn’t happen in a string of case’s which had come to court for a stay on encashment of performance guarantee and had cited this case, the stay was not granted. The court held that each case was different and an unconditional guarantee could not be stayed. The court maintained that in the Gangotri case stay was granted because the performance guarantees were for another contract which was completed.

Then what about the part of the judgement in the Gangotri case which the court held that a “sum due” is that which there is an existing obligation to pay? Isn’t a claim for encashment of performance guarantees, a sum in the form of damages? That sum or amount which has not been admitted and not awarded by any arbitrary tribunal or court. Unless it is decided that the breach of contract has been committed by the contractor and the owner is entitled to the damages on this account, how can a claim on encashment of performance guarantee be allowed? This is what the court clearly spelt out in the Gangotri judgment but unfortunately, judgements of various courts in cases which cited this case, don’t conform to this judgement instead go back to the view that an unconditional guarantee is a contract between the bank and the beneficiary and that the bank should not be concerned about any dispute between the owner and the contractor and pay the beneficiary on demand.

The Gangotri judgment is surely an outlier in similar cases.

Fidc, in general, opposes unconditional guarantees or on-demand bonds. The view is that they are one-sided and will create confrontation.

In government contracts, it is usually not possible to ask for a change in the format of bank guarantees but in the private sector, it’s important for contractors to submit conditional bank guarantees which can be invoked only on non-fulfilment of the conditions mentioned in the guarantee.

Bank guarantee

Bank guarantee facilities are nowadays a must for every construction company. Bank guarantees are needed during the tendering stage for earnest money deposit, mobilization advance and in some contracts for performance guarantees

A bank guarantee is a contract of guarantee and is defined in section 126 of the Indian contract act as “a contract to perform or discharge a liability of the third person if he makes any default.” The person who promises to perform or discharge the liability of the third person is the surety. In this case, the person for whom the bank guarantee is issued is called the principal debtor and the person to whom the bank guarantee is given is called the creditor.

Bank guarantees can be conditional or unconditional. A conditional bank guarantee is one which can be invoked only once the condition mentioned in the guarantee is fulfilled. An unconditional bank guarantee is one where the bank has to pay the beneficiary in whose favour the bank guarantee has issued on demand irrespective of any pending dispute.

The courts in India have ruled that only on two conditions can an unconditional bank guarantee be stayed.

The first is when there is a clear fraud of which the bank has notice and fraud of the beneficiary from which the beneficiary seeks to benefit

The second is when irretrievable injury would occur if a stay was not granted.

There have been many cases where the Supreme Court has declined to stay bank guarantees citing the unconditionality of the guarantee. However, there are two important cases in which stays have been granted – Hindustan construction case v. the State of Bihar and M/S Gangotri Enterprises Ltd vs Union Of India & Ors.

In the former case, Hindustan constructions approached the court for a stay on the mobilization advance guarantee and the performance guarantees. The company maintained that the mobilization advance guarantee was a conditional one. The court held that invocation should be strictly in terms of the guarantee or it would not be valid. The court held that even though in the guarantee the bank has used the expression “agree unconditionally and irrevocably to guarantee payment to executive engineer on demand without any right of objection” but these expressions are immediately qualified by the following paragraph” in the event the obligations expressed in the said of the above-mentioned contract is not fulfilled by the contractor, giving the right of claim to the employer for recovery of part or whole of mobilization advance”

The condition clearly refers to the original contract between HCC and the State of Bihar and States that if the obligations expressed in the contract are not fulfilled by HCC, only then the state of Bihar will have the right to recover mobilisation advance. Only then the bank would pay the amount to the executive engineer. The court maintained that due to this clause the bank guarantee was a conditional one and only if HCC doesn’t fulfil its obligations under the above-mentioned clause then the guarantee could be invoked. The court maintained that the lapses were on the part of the state of Bihar, based on documents produced in court and stayed invocation.

The second guarantee was a performance guarantee given by HCC. HCC contended that the invocation of this guarantee be stayed as the letter to invoke the guarantees were given by the executive engineer and the guarantee was issued in the favour of the chief engineer

The state of Bihar argued that in the general conditions of contract the word employer has been to mean the governor of Bihar acting through his representatives the chief engineer or his authorised representative. The words “engineer in charge” has to be defined separately to mean superintending engineer or engineer appointed from time to time by the “employer” and notified in writing to the contractor as “engineer”. The state of Bihar contended that executive engineer would be covered not only by the definition of “employer” but also by definition of “engineer in charge ” as set out in the contract.

The court did not agree with the argument of the state and held that bank guarantee is a separate, distinct and independent contract. It is independent of the main contract between HCC and the state of Bihar. Since there is no definition of the chief engineer in the bank guarantee nor it is provided that” chief engineer” would also include the executive engineer, the bank guarantee could only be invoked by none other than the chief engineer. The invocation of the bank guarantee was not as per terms of the bg and was stayed.

To conclude Bank guarantee invocation will not be stayed by courts unless they are unconditional guarantees or on the conditions of fraud or irretrievable injury. Mere citing of fraud will not help but it has to be proved

It would help the contractors if they can add a clause in the bank guarantee similar to the to the HCC guarantee clause where it is mentioned in the guarantee can be invoked only if conditions of the contract are not fulfilled by the contractor. In a contract we had submitted a guarantee for mobilization advance where it was stated in the guarantee”this bank guarantee can only be invoked if the work is completed as per the contract value and the mobilization advance is fully not recovered”. this kind of bank guarantee becomes conditional and the invoking can only be done on fulfilment of conditions mentioned in the guarantee

I’ll write about the Gangotri case in my next post

LOSS OF PROFITS Loss of profit damages are claimed by contractors in construction projects. What is loss of profit? In extended contracts due to the fault of the owner, it is the profit that the contractor would have earned in other projects had the contract been completed on time. Due to the fault of the owner, the contractor has to stay on the project for a longer time and forego the profit that he would have earned from a different project. The second case where the contractor can claim loss of profit is when the contract is terminated for no fault of his or the termination is not as per the contract.A landmark case when it comes to breach of contract and loss of profit is Hadley v. Baxendale. The judgement in this case states that the party committing the breach is responsible for all the losses that both parties could have foreseen but is not liable for any losses that that the breaching party could not have foreseen on information available to him. The facts of the aforementioned case are as follows: Hadley owned a mill in which the crankshaft of one of the machines broke down due to which the operation of the mill came to a standstill. Hadley then entered into a contract with Baxendale to deliver the crankshaft to an engineering company for repairs on an agreed date. However Baxendale failed to deliver it on time. As such, Hadley sued baxendale for loss of profits and damages claiming that due to the delay by baxendale in delivery to the engineering company, the mill had to remain closed for a longer time than expected which resulted in loss of profits for a longer time. The court held that in order to recover damages from a party who has committed the breach the other party or the non breaching party has to communicate all special circumstances to the breaching party. In the instant case, Hadley had not told Baxendale that if the crankshaft was not delivered on time to the engineering company his mill would be closed for a longer period than expected, he had just asked for the crankshaft to be delivered on a particular date. Baxendale was not aware of the special circumstances surrounding the case and was not aware that his delay in delivering the crankshaft would result in Hadley’s mill being closed for a longer period and Hadley would undergo loss of profit. Damages are limited to those that arise naturally from a breach and those that are contemplated by the parties at the time of the agreement.There are lots of cases in which quotes have pronounced judgements on this issue. Let us have a look at a few important cases.In AT Brijpal Singh v. State of Gujarat, the court allowed loss of profit claimed by the contractor and while referring to the book, Hudson’s building contract, observed that in a major contract subject to competitive bidding on a national basis, the evidence given in litigation on many occasions suggest that it office overheads and profits between 3:00 to 7% of the total price of the contract which is added to the tender. The court awarded 15% loss of profit as the court had earlier awarded the same amount to another portion of the same road in the vicinity.In the MSK projects case, the Supreme Court while reiterating the AT Brijpal Singh judgement held that a loss of profit claim can not be disallowed on the basis that there was no proof that the contractor actually suffered losses. The court reiterated that what would be the measure of profits would depend on the facts and circumstances of each case than for the court to go into each minor detail.After these two above mentioned cases in most other cases involving loss of profit the Apex court has declined the claims of loss of profits where it has not found enough evidence in support of the claim. Some of the cases are discussed below.Bharat coking coal v. LK Ahuja – in this case the arbitrator awarded 15% of the contract value as loss of profits in addition to claims on escalation of labour and materials along with interest for delayed payments. The supreme court stated that it found it difficult to accept that in addition to escalation of labour and materials,15% as loss of profit could be awarded. The court held that what was to be established was that in case the contractor had preceived the amount due then as per the contract he could have utilised the same for some other businesses where he would have earned profit, unless such a claim was raised and established by the contractor, claims for loss of profits could not be granted. McDermott International v. Burns Standard – in this case the arbitrator held that even though no direct evidence was provided by the contractor he would be entitled to damages as per Hudson’s formula. There are 3 formulas used for calculating loss of profit and overheads they are 1) Hudson2)Emden 3) EichleyI’ll write about the advantages and disadvantages of each of the formulas in another blog. Now coming back to the McDermott case, the trial court did not agree with the arbitrator and disallowed the claim. The supreme court agreed with the views of the trial court and held that the Arbitrary tribunal proceeded on the misconceived notion that Hudson’s formula must be applied despite absence of evidence. The contractor has not produced any evidence in support of its claim and therefore no loss of profits could be paid. Ahulawalia contracts v. Union of India – the apex court held that no doubt the arbitrator should consider loss of profit claims and not refuse it, but there should be some material evidence in support of it. Loss of profits claims are turned down by courts for want of proof for alleged damages or loss being suffered on account of prolongation or termination of contract. Contractors have to keep mentioning in their correspondence with owner, their idling of men and machinery due to fault of the owner and the losses they are suffering due to the idling of these resources, also the extended stay of men and machinery due to prolongation of contract by the owner should be mentioned and the fact that if not for the prolongation of the contract these men and machinery would be deployed in some other project of the contractor.Even in arbitration if contractor has loss of profit claim it would be prudent on his part to document the claim in detail in his plea or argument with details of correspondence made with owner, list of men and machinery, material at site, watch and ward staff, head office overheads, longer period of insurance and bank charges. He should also give details of the nature of practice in similar trade when calculating loss of profit. The more details and evidence the contractor provides for in his claim for loss of profit, the easier it is for him to convince the court of the eligibility of his claim. The courts will not pass a loss of profit claim just because there is a breach by the owner, proof for losses or damages sustained is a must.

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Unilateral appointment of arbitrator-1

In my last blog I had written that it was no longer possible for companies to unilaterally appoint arbitrators after the 2015 amendment to the Arbitration and Conciliation Act, 1996 (“Act”), particularly by insertion of the fifth and seventh Schedule of the Act. We discussed the judgement of the Supreme Court of India in the Perkins Architects vs HSCC to support this view.

However, pursuant to the Apex Court’s decision in the above matter, another judgement on unilateral appointment of arbitrators was delivered by the Supreme Court in the case of Central organization for Railways vs ECI Spic.

In the instant matter, on account of termination of the contract by the Central Organization for Railways, ECI invoked arbitration in accordance with the General Conditions of Contract (GCC), seeking appointment of arbitrators. In this regard, Clause 64(a) under the GCC provides that where the applicability of Section 12(5) of the Act was to be waived, the Arbitral Tribunal would consist of a panel of 3 serving officers of the railways or two serving officers and one retired officer from the railways.

On the other hand, under Clause 64(b) of the GCC, where the applicability of Section 12(5) was not waived the tribunal would consist of three retired railway officers, the general manager would send a list of retired railway officers and the contractor would choose two officers as his nominees. The general manager would pick one of the two as the contractor’s nominee and would choose one  more retired railway officer to be the railways nominee and the third member of the tribunal would be picked from the panel of retired officers by the general manager to act as a referee to the two arbitrators so chosen. 

In this instance as ECI had not waived off the applicability of section 12 (5) of the Act, clause 63(b) applied. Therefore, in accordance with this clause, the general manager sent a list of four retired officers asking ECI to choose two among them.  ECI did not do so but approached the Allahabad High Court under Section 11(6) of the Act to appoint an arbitrator. ECI submitted that with the 2015 amendment of the Act and by virtue of Section 12 (5), retired railway officers were not eligible to be members of the Arbitral Tribunal. The High Court ruled in favour of ECI and appointed a sole arbitrator, following which the railways organization approached the Supreme Court on appeal.

Dismissing the appointment made by the High Court, the Supreme Court asked the parties to appoint arbitrators as per clause 63(b) of the agreement. The Court referred to it’s judgement in the case of Trf vs Energo, wherein it had mentioned a different situation where both parties have an advantage of nominating an arbitrator of their choice, that the advantage of one party in appointing an arbitrator would get counter balanced by equal power of the other party in appointing it’s choice

As such, the Court held that it can not be said that just because a person is a retired officer from government or any public sector undertaking, he would be treated ineligible to act as an arbitrator. Bias can not be attributed to such senior officers. The court was of the opinion that the very reason for empaneling such senior officers is to ensure that the technical aspects of the disputes are suitably resolved by utilising their expertise.

This judgement is completely opposite to the judgements in the Trf case and the Voestalpine vs DMRC case. In both Trf and DMRC it was held that anyone who had direct interest in the contract was not eligible to act as an arbitrator nor was he authorised to appoint arbitrators. In this case however the general manager would choose the contractors representative from the two chosen by the contractor, the general manager would also appoint the arbitrator for railways and he would also choose from the panel one more person who would act as presiding officer. Further, in the Voestalpine vs DMRC case the two arbitrators chose the presiding officer and the Court asked DMRC to constitute a panel of 30 or more officers and include members outside DMRC also. In light of the above, should the ruling of the Supreme Court in this matter be considered as precedent in future disputes, it would contravene the principle of balanced power that is given to both parties in appointing an arbitrator.

Unilateral appointment of arbitrators

In most government contracts which have an arbitration clause the arbitrator is usually the head of the organization or some officer of the organization who is appointed by the managing director or the general manager, whoever heads that government organisation. For example BEML had an arbitration clause which named the technical director of BEML or Railways have a clause saying that some officer of the railways will be the arbitrator. This is grossly unfair to the contractor as no employee of any government organisation would like to antagonise his organisation by giving an award in favour of the contractor. These officers would be partial to the government

The supreme court has recently come out with a significant decision in the case of Perkins against Hscc a government organisation , where it has ruled that such unilateral appointment of arbitrators is not legally valid 

The gist of the case is that Perkins architects entered into a contract with HSCC . Certain disputes arose between the parties and Perkins invoked the arbitration clause in the agreement and asked the MD of HSCC to appoint an arbitrator. Clause 24 of the agreement between the parties required the opposite party to appoint an arbitrator within one month of demand from the first party . Perkins sent a letter asking for appointment of arbitrator within 30 days of demand. The MD who was supposed to appoint the arbitrator did not do so . But after a month later the chief general manager appointed a sole arbitrator . Perkins went to court under section 11 (6)  and read with section 11(12) (a) of the arbitration act to appoint an arbitrator as the MD had failed to appoint an arbitrator within the stipulated period of 30 days.

Perkins submitted to the court – 

That the MD was the sole authority to appoint an arbitrator,he did not do so within prescribed period of 30days from demand of Perkins

But chief general manager appointed the arbitrator ,such appointment was not as per agreement

An independent and impartial arbitrator should be appointed 

The court while relying on the Trf vs Energo judgement held that by virtue of the amendment of the arbitration act and insertion of the fifth and seventh schedule in the act , the MD of HSCC who had a direct interest in the project was ineligible to become a arbitrator or appoint his representative as a arbitrator. The submission was that a person who himself was disqualified and disentitled could also  not nominate any other person to act as an arbitrator . The court held that it is inconceivable in law that once a person who is statutorily ineligible ,can nominate another person . The court dismissed the appointment of the arbitrator appointed by HSCC and appointed a new arbitrator in his place.

This decision will greatly help contractors in contracts where such unilateral appointment of arbitrator clauses exist. It will lead to impartial and independent arbitrators being appointed and healthy dispute resolution . So if any contracts contain arbitration clause saying that MD or CGM will be arbitrator or they have the power to appoint an arbitrator ,then these arbitration agreements are invalid , you can ask them to appoint an impartial arbitrator acceptable to both parties or you can approach the court to appoint an impartial arbitrator. But if the clause allows the MD to appoint one arbitrator and the contractor to appoint one and then both parties appoint the third ,then what ? I’ll touch upon this in my next blog .

Delay damages in construction contracts

The no damages for delay is a clause mainly used in government construction contracts in India. This clause is used to protect the owner from claims or damages due to delay caused by him . This clause entitles the contractor to only a extension of time for delays by the owner and no escalation in rates or damages will be paid to him.

The courts have given varied judgements on this issue . While some have upheld this clause and reiterated that once a contractor has signed a contract containing this clause ,he will not be entitled escalation or damages for delay by the owner. The supreme court in the case of Ramanath international construction vs union of India upheld the no damages for delay clause but in Asia tech ltd vs union of India held this clause only prevented the union of India from awarding any damages for delay but did not prevent the arbitrator from awarding damages

Recently the Delhi High court in the case of simplex concrete piles vs union of India held that this clause was in breach of section 23 of the Indian contract act as this violates section 73 and 55 of the Indian contract act which deals with breach of contract in case of delay by the owner . The court held ” that which denies benefits of section 73& 55 would violate section 23 of the contract act and was against public policy”

What does section 23 of the contract act say-what considerations are lawful and what not .
It is forbidden by law or of such nature that if permitted ,it would defeat the provisions of any law or is fraudulent or involves or implies to injury to the person or property of another or the court regards it as immoral or opposed to public policy in each of these cases ,then the consideration or object of such an agreement is said to be unlawful . Every agreement which the object or consideration is unlawful is void
So it is clear from provisions of section 23 that where the consideration or object of an agreement is unlawful the said agreement is void . The consideration or object of an agreement is unlawful if it is forbidden by law.
Two provisions of section 23 which hold no delay for damages clause is unlawful are
1) the first part that a clause in the agreement is unlawful and void when the same is opposed to public policy
2) the second part that such a contractual clause is void if by allowing it ,it will defeat the provisions of law .

Regarding public policy which has been a controversial subject and a matter of varied discussions in the supreme court. In the case of the seventh day Adventist vs M A University and another it was held that public policy is a changing concept and it is not static but dynamic . It changes from time to time and the courts have the power while interpreting this doctrine to judicial legislation called “interpretation” to further public interest , equity, good conscience and justice.

A law which is made for public policy can be waived by an individual , however when the law includes public interest/policy element such rights from law can not be waived because the same becomes a matter of public policy/interest. He further goes on to quote the bench of Delhi High court in the case of Ircon international vs Nbcc which dealt with a final and binding clause in the agreement to support his argument that no rights can be waived when public policy is involved. The contract between parties must be in obedience to the law and not in derogation of it . The judge in the simplex case goes onto further say that breach of contract is covered by section 73& 55 of the contract act and these are the heart and foundation of the basis of the Indian contract act and clauses like no damages for delay tend to disentitle aggrieved party of benefits of section 55&73 and therefore would be void and violative of section 23 of the Indian contract act .
The supreme court in its judgement in G Ramachandra Reddy vs union of India held that a clause in the contract can not prevent the award of damages although same are otherwise payable by law
To sum up based on this judgement of the Delhi High court a no delay for damages clause can be challenged on the basis that it violates section 23 of the Indian contract act because it prohibits entitlement to rightful damages of a person is clearly hit and void by virtue of section 23